Woolworths to Face Tough Time in Hardware Business

Submitted by Jim Thesiger on 1 October, 2009 - 05:53

According to Merrill Lynch analyst David Errington, Woolworths (WOW) might lose as much as $623 million within five years after kicking off with its new big-box hardware store project which is scheduled to be launched in late 2011. Woolworths and Lowe’s- the US ba'sed hardware company is expected to introduce a chain of warehouse-sized hardware outlets in the market which might challenge the dominance of Wesfarmers owned Bunnings, which is the current market leader in the industry. Placing its stores in suitable sites where it could reach the potential customers is going to be the major challenge for Woolworths, Mr. Errington added. The company has plans to obtain 150 sites by the end of 2015 which is seen as a huge challenge for the company considering the fact that it took 25 years for Bunnings to develop its portfolio of 160 stores.

Mr. Errington also noted that large retail developments are known to be delayed for considerable amount of time due to the local council approvals and planning regulations. According to the estimation of Merrill Lynch, Woolworths hardware stores will possibly lose around $61 million in the first year of its business and the loss could shoot up to as much as $190 million at a yearly basis after five years. Mr. Errington also stated that Woolworths will have to deal with the current market leader- Bunnings in the front where it doesn’t have any competitive advantage. Moreover, Woolworths ambition to come up with better quality service would increase the staff cost and it would also need to fund on the promotional sector to develop the new brand, he added. Mr. Errington also pointed out that the size of the hardware market is about $12 billion which is nearly the half of Woolworths estimation.

Woolworths' response on Errington evaluation

In response to Mr. Errington’s evaluation, a Woolworths spokeswoman stated that the market opportunity was seriously underestimated in this analysis and the barriers that Woolworths might have to deal with were overstated. She also stated that Woolworths business strategy was developed based on solid market evaluation and that the targets set by the company are very much obtainable.