On Monday, Woolworths finally announced it would end its five-year experiment in homewares and hardware, Masters Home Improvement. Dubbed ‘Project Oxygen’ internally, Woolworths’ ambitious project to ‘suck the air’ from Wesfarmers Bunning’s behemoth has ended in disarray, losing investors millions and shifting focus from Woolworths’ core business of successful supermarkets.
The retailer announced to the Australian Stock Exchange that it would ‘exit’ Masters Home Improvement and Home Timber & Hardware (also purchased by Woolworths) by either selling the business or winding it up. With further detail thin on the ground, Woolworths will meet with stakeholders to ensure whichever path chosen leaves the company in the best position possible.
Why Masters Failed
Woolworths’ five-year Masters experiment likely failed for a cocktail of reasons, such as high barriers to entry, selling the wrong products, lacklustre customer experience and flawed workplace culture.
High barriers to entry: At the time the first Masters store opened to the public in Braybrook on 1 September 2011, Bunnings already had hundreds of stores Australia-wide. Bunnings stores already occupied the best locations in most towns and cities (thanks to savvy property investment buying undervalued property during the GFC). Faced with a strong brand occupying the best turf, Masters stores were simply curious blue themed accessories to Bunnings’ stronghold on the market.
Wrong products, wrong time: Masters partnered with Lowe’s Companies Inc. (based in the United States) in a joint venture (see below). The joint venture meant products were out of season in the Australian market and Masters failed to understand the seasonality inherent in hardware products (no-one buys lawn mowers in the depths of winter).
Lacklustre workplace culture and store experience: A reportedly flawed workplace culture and the Masters ‘experience’ were also to blame. Bunnings encourages staff to ‘challenge the boss’ and present new ideas. On the flipside, Master’s written policy that all staff were to park tail-in to the kerb is symbolic of a rigid workplace culture. With weekend barbeques supporting local charities and activities for kids, visiting Bunnings is almost a day out for many families. Masters never engendered the same enthusiasm.
It’s impossible to distil how important each of these factors were to Masters’ continuing losses, with a staggering annual loss of $245 million in 2015 alone. No doubt each factor played a role.
What Options Does Woolworths Have?
Woolworths can either sell the Masters Home Improvement business or wind it up.
Selling Masters Home Improvement is an option, albeit an unlikely one. With accumulated losses of over $600 million, selling the brand as a going concern is not an attractive prospect for an industry buyer. It’s much more likely that chunks are broken from the Masters brand and sold individually. Buyers are likely to be more interested in purchasing the already established Home Timber & Hardware brand and big-box retailers, Costco and Ikea would be interested in buying the land Woolworths currently owns for some of its Masters stores.
Voluntary Winding Up
A much more likely option is to wind up Masters. Practically, this means deregistering the company so that it ‘ceases to exist’ (section 601AD(1) Corporations Act 2001 (Cth) (‘Act’)). To wind up Masters, the company needs to go through liquidation – the process of preparing a company for deregistration.
The process of liquidation depends on whether a company is solvent or insolvent. Insolvency is defined as the inability of an entity to repay debts as and when they fall due. Masters is owned by conglomerate (and very solvent) Woolworths and will continue to trade in the near future, so we’ll assume that Masters remains solvent.
Shutting a Solvent Company Down
If Masters is solvent and Woolworths chooses to shut it down, Woolworths has a number of legislative hurdles to jump through, designed primarily to protect stakeholders (investors and creditors). Masters would go through what is called members voluntary winding up.
In brief, the winding up of a solvent company must be agreed upon through Special Resolution of a company (section 491 of the Act). Before the Resolution is held, the majority of Masters directors would need to make a written declaration (using ASIC form 520) to the effect that they have inquired into Masters’ affairs and have formed the opinion that the company is solvent (section 494(1) of the Act), otherwise known as the Declaration of Insolvency. If members decide to wind up the company, members are able to appoint a liquidator using an ordinary resolution.
Voluntary winding up is advantageous because members can choose a liquidator, compared to a company going through compulsory liquidation.
Where to From Here?
Dissolution of Joint Venture: Woolworths entered into a joint venture with Hydrox Holdings Pty Ltd, held by WDR Delaware Corporation, a subsidiary of Lowe’s Companies Inc. Woolworths is hamstrung from doing anything until the 33.3% of Masters owned by Hydrox Holdings is bought. Moving into slightly technical financial terms, Hydrox exercised the put option it held on 33.3% of Masters on Monday, allowing Woolworths to exercise its call option on the shares. The exercise of put and call options will take around two months to complete, as both companies determine the value of the shares.
Selling the business: Woolworths won’t be sitting idle while accountants tally scores. Woolworths will be putting feelers out to determine whether a sale of the business is viable. A sale would be advantageous, allowing Woolworths to recoup some of the staggering losses incurred.
Winding Up: If a sale does not materialise, Masters may be wound up by Woolworths. Woolworths in a statement attached to the Declaration of Insolvency will need to assess the following:
- What property Masters holds;
- Total amount expected to be realised from the property;
- Masters’ liabilities; and
- Expenses involved in winding up.
The declaration must be made before notices are sent out convening the meeting needed for the special resolution, s494(1).
For consumers: Masters is continuing to trade for two months, while put and call options are exercised. Woolworths has not advised whether Masters will continue to trade after this. Garden hoes galore, for the next two months.
What You Need to Know
Masters failed because it faced high barriers to entry and did not have a well thought out market entry strategy. Billions were sunk into the joint venture with very little return. Woolworths will either sell or wind up the company and will need to purchase the 33.3% of shares it does not currently own before it pursues either tack. Bunnings is Goliath in this battle for the backyard, but we’re saved from sympathy by the knowledge that Masters’ David has its own Goliath in its background.
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