Woolies’ move changes the retail game

03/09/2009 - 00:00

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Woolworths has serious plans for its hardware business.

Woolworths has serious plans for its hardware business.

DID the other guy just blink?

That might be a big call in the battle of Australia's supermarket giants but I have to say that, after all the speculation that Woolworths was going to enter the hardware business, I was seriously left wondering by the deal it announced last week.

For those who need reminding, Woolworths plans to enter the domestic hardware market through a takeover of Danks Holdings, via a joint venture with US home improvement retailer Lowe's Companies Inc, which will have a third of the investment vehicle.

Danks supplies the Thrifty-Link business, and others.

It plans to have 150 new sites within five years, starting with the 27 it has secured or is in final negotiations over.

This is a very ambitious project to attempt to close the huge gap to Bunnings' scope of 233 stores, including 160 warehouse-style operations, which it will continue to grow during that period.

Furthermore, the Danks business supplies a range of retailers including small hardware operations. Danks may not welcome the entry of Woolworths into its domain. That may favour independent Mitre 10, which is the biggest hardware player in terms of market share, though its format relies on smaller stores.

But back to that blinking.

Woolies' track record is remarkable and I am not underestimating its ability to do a good job in hardware - I am just observing the meaning of the move.

Woolies itself was in trouble many years ago when Australia had a more diverse range of supermarket operators. At the hands of former Western Australian Reg Clairs, and then Roger Corbett, Woolworths grew to dominate the retail landscape.

As a focused specialist in supermarkets, it left the more diverse retailer Coles in its dust and ultimately forced its once greater rival into a humiliating sell-out to Wesfarmers.

Coles was a basket case but Wesfarmers has form in retail, having taken Bunnings from its early 1990s takeover of the forestry and retail WA business to a significant national player and grabbing Howard Smith's Hardwarehouse business in a decisive strategic move.

This is the first key to Wesfarmers' strategy. It has leapfrogged the competition twice - once in hardware with the purchase of Hardwarehouse, which had a similar warehouse format (and, importantly, in areas where Bunnings was poorly represented at the time) and, then, with the huge purchase of Coles.

Of course there has been much criticism of the Coles purchase, from the size, to the timing, to the ability to turn such a business around. But Coles was a unique set of assets, most notably the huge number of strategic sites it controls.

That will be a major issue for Woolies in hardware. Trying to find 150 key sites and get the planning permission required will be tough.

In the meantime, Woolies looks like it has shifted from its efforts to keep the market's focus on Coles' retail performance. Coles did improve markedly this past financial year but the pressure was still very much on its team to continue this improvement in the face of a concerted response from Woolies, the market leaders.

Suddenly, in its move this week, Woolies has altered that dynamic. The market will now be watching it for results on the hardware front and making comparison to the very successful Bunnings business.

In my view, that takes the pressure off Wesfarmers somewhat. No-one ever expected Bunnings to be without competition, and as the incumbent it will be hard to beat for at least a decade. In the interim, much management time at Woolworths will be spent on learning about hardware, handling a joint venture and meeting market expectations.

It's worth adding that Wesfarmers runs a conglomerate model and has done so successfully for decades. Bunnings and Coles, for instance, are parts of very separate business units. Woolies has less form in this respect, having largely had singular focus on retail without the distinct portfolio management that Wesfarmers engages in.

No wonder Wesfarmers stated that it relishes the advent of new competition.

Transparency issue

THE Australian Securities and Investments Commission proposed takeover of relation of listed companies from the ASX creates an opportunity to shake up some of the opaqueness around the public sector.

One area I would dearly like to see improved is the transparency of shareholdings.

Reviewing the major shareholder lists at the back of the annual report, the ownership is typically clouded by holdings in nominee companies, using the name of a bank of some other relatively impenetrable entity.

Why on earth there is a requirement to disclose these holdings without demanding a genuine name of the holder is beyond me.

In this era of globalisation and intense interest in Australian resources, I also believe that there ought to be more openness about offshore holdings.

While the most famous case is that of Offset Alpine (in which Graham Richardson, Trevor Kennedy and Rene Rivkin were infamously involved), where investors' interests were hidden via Swiss entities, the issue extends to foreign ownership.

Too often foreign share ownership is lost behind a veil of secrecy or logistical difficulty in sourcing information from overseas jurisdictions. In my view there ought to be far more information required from investors who want to hold shares in a listed Australian company.

In addition, listed companies ought to be required to list the percentage of their shares that are foreign owned and what nationalities hold them.

I am not suggesting a major increase in the regulatory requirements for listed companies but I do believe that, with the rise in foreign investment activity, especially from nations such as China where it is difficult to separate state-control from independent investment, this is very relevant information.

In addition, many companies would have to report this as part of the Foreign Investment Review Board approvals procedures.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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