Competition !

Investors got an unpleasant shock this week when Woolworths announced a trading loss of $972 million for the past six months.  Shares in the company briefly touched a twenty dollar low with the realization that dividends are expected to be lower and this is about half from it's former glory days.  This will be sad news for institutional investors who regarded Woolies as a virtual blue chip stock.

The main cause of this near billion dollar loss was the disastrous intrusion into the home hardware and do-it-yourself market with Woolworths " Masters Hardware chain ".   Arch rival Coles was the first to invade the turf of the smaller hardware stores with it's " Bunnings " warehouses and this was brilliantly successful.   Somehow the Woolworths operation failed to fire, resulting in a $ 1.89 billion writedown that did the damage to the groups bottom, line.

In the past, Coles and Woolworths have marched in lockstep.  They invaded the petrol market and established chains of petrol sites linked to discounts offered on presentation of grocery receipts. They are big operatives in the sale of liquor with both stand alone brand retail outlets and liquor stores beside grocery operations.  They are fast becoming a presence in the insurance field and it was only natural that Woolworths would counter the Bunnings hardware operation with a brand of it's own.

It has long been rumoured that all was not well within the ranks of senior management and now a new CEO has been appointed.  Coles has certainly established an edge with grocery sales and Woolworths share of this market has slipped by 1.4%.   There are plans to rejuvenate staff morale and improve store facilities and it is likely that Woolworths will engage in a price cutting promotion to win back customers from it's Coles and Aldi competitors.

This debacle certainly highlights the risks associated with diversification and that comes as electronic retailer Dick Smith finally closes it's doors.  This was a Woolworths acquisition that also failed to fire and was consequently sold to an investment company, which took it public.  It's failure seems to be more a matter of bad timing. The purchasers of electronic goods seem to have moved to either buying from the Internet or from the big brand discounters and these stand alone stores have lost their allure. They became saddled with debt and with a declining clientele.

The pundits will certainly closely examine the tactical reasons why Woolworths hardware operation failed.  It was an exact copy of the Bunnings stores with vast, modern warehouses stocked with the complete range of hardware merchandise and it was extensively advertised, but it never attracted the through-put of customers that Bunnings achieved.   Some may argue that because hardware is a more restrictive market than groceries, perhaps there was not room for two operatives to share that more limited market - and Bunnings had the advantage of being the first to offer their services.

It also looks like the grocery market is shaping up to be much more competitive.  Coles and Woolworths have had the advantage of multi stores and a broad coverage of major suburbs in cities and country towns, but Aldi is expanding and a new German discounter is about to enter the fray. At the same time, the independents have put together a mutual buying operation and have emerged as a competitor with the capacity to take on the grocery chains.   Profit margins for all are now under pressure and this will become unrelenting.

The one certainty from this Masters hardware debacle is that the concept of blindly following any diversification by another competitor has ended.   Shareholders will be very suspicious of expansion plans that involve expertise that may be lacking and management will need to do an indepth investigation of all possible aspects before putting any expansion project to the directors for approval.