Danks a lot Woolworths

The executives at Wesfarmers, the parent company of Australia’s largest hardware retailer Bunnings, have a new headache as of today.

ladderA favourite of this blog – Woolworths – has announced its long awaited move into the hardware market. It is all a little complicated, and demonstrates various options in a firm’s strategic arsenal. The strategic choice here was an acquisition, via international joint venture, of a significant local player.

The acquisition is of Danks, the nation’s second biggest hardware distributor. Now that last term is important. The firm doesn’t own hardware stores, it just provides all the back office support, including branding and advertising. This has lead to a network of over 1000 independently-owned “buyers” of their services, including several hundred who have adopted common branding such as Home Timber & Hardware, Thrifty-Link Hardware and Plants Plus Garden Centres.

So what will Woolworths do with them? They’ll tap into all of the supply relationships Danks has in place (with producers of ladders, paint, nails etc), and presumably all of the sales data and broader knowledge of Danks staff.

The current claim is that they’ll retain the existing brands and continue to support Danks’ “customers” (i.e. the existing stores). At the same time, they are aiming to launch new (company-owned?) stores to go head to head with Bunnings (and their own “buyers”).

That’s where the joint venture comes into the mix. Woollies are taken 2/3 ownership of Danks, with the rest going to the world’s 15th largest retailer, US hardware chain Lowe’s. This is a pretty conventional model for expansion in Australia. The old Coles and Myer grounds (some of which are now owned by Wesfarmers) undertook similar hook ups to launch K-Mart, Target (amongst other) marques in the 1970s.

WheelBarrowIt remains to be seen with Lowe’s brand will be adopted (as it has been in Canada). What is most significant is Lowe’s experience in competition with the firm of which Bunnings is an unashamed copy – Home Depot. These capabilities will be crucial in transitioning Woolworths into this new space. Alongside that will no doubt come access to Lowe’s extensive range of private branded products, and huge buying power (Lowe’s annual revenues are around 6 times larger than Bunnings – that adds up to some serious bargaining power with suppliers).

So, what’s the upshot?

  1. Australia adds a very large foreign retailer to the mix (although one with little international experience). Costco and Aldi are the only larger retailers operating down under.
  2. Bunnings will finally have a competitor with (potentially) similar buying power, resources and capabilities. The major hurdle to high rivalry may be access to real estate, but big-box hardware stores are more “destination” than most retailing (i.e. folks will bear a journey), and also Woolworths carries some serious clout.
  3. Consumers will get lower prices and more choice.
  4. Smaller scale hardware chains will face even more competition and more pressure to adapt or die…

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One Response to “Danks a lot Woolworths”

  1. Steve Sammartino Says:

    Sounds like a classic ‘Diworsification’ to me to use the parlance of the great investment legend ‘Peter Lynch’.

    Beyond warehousing a distribution efficiencies WW can bring, I can’t see how this will increase the return to Woolworths shareholders, rather dilute it. As Warren Buffett says, if management can’t find a a way to increase returns with retained earnings they should re-distribute them back to shareholders.

    This will be a stinker.


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