Woolworths has given up on its hardware chain Masters – the only real competitor of Wesfarmers-owned Bunnings – leaving a gaping hole in Australia’s hardware landscape.
The only likely buyer for some Masters stores is Bunnings, which already wins, by some estimates, nearly 40 per cent of the industry’s revenue.
Bunnings’ shares could shoot up if the competition watchdog lets it gobble up the best Masters locations. And the consequences for prices could be serious.
Woolworths shareholders lost a lot on Masters. So much that when Woolworths announced they were abandoning Masters, the share price actually went up.
The people most likely to suffer from Masters’ demise are the garden variety consumers. Hardware shoppers who just want a good deal.
With the end of Masters, where will shoppers compare prices? Not Mitre 10 or Thrifty Link. Those places are normally much more expensive.
The Masters effect
Some people believe Bunnings simply sets prices low and doesn’t worry about Masters. But there is enough evidence around to make me doubt that is the case.
Let’s look at a few examples of their items advertised online. Take the price of two 450g rubber mallets I found on their websites on Thursday.
Will Bunnings let prices grow after Masters closes? Really, Wesfarmers – the company that owns Bunnings – would be letting down its shareholders if it didn’t try to maximise profits in the new, easier environment.
The two mallets also tell us another, very interesting story. They are both different brands. That’s because Bunnings own a range of copyrighted brands that they stock exclusively. According to Australia’s official intellectual property database, they have 162 associated trademarks.
You can’t buy that Craftright mallet elsewhere. Which makes Bunnings’ invitation to “find a cheaper price on a stocked item and we’ll beat it by 10 per cent” null and void for a lot of their stock.
What this tells us is that the billion-dollar business that is Bunnings works hard to keep its price beat guarantee, without dropping prices so low it misses out on a profit.
Some brands, of course, are bigger than the jolly green giant. Bunnings can’t avoid stocking famous brands like Sidchrome.
Check out these two socket sets, one from Bunnings and one from Masters. It’s very hard to buy the exact same set at both stores – each store’s sets have a different number of pieces.
The same is true of the Esky. Masters stocks a 27-litre Esky. Bunnings stocks a 26-litre one.
This clever business strategy helps Bunnings keep earnings margins (earnings before interest and tax, or EBIT) of 11.4 per cent.
Compare that to other discount stores owned by Wesfarmers and you get a sense of how successful Bunnings is at maximising margins while seeming cheap: Coles’ EBIT margins are 4.7 per cent. Target’s are just 2.6 per cent.
These examples serve to show that despite its modest size in the market – around 9 per cent – Masters was keeping Bunnings busy, making it work hard, and sometimes even beating it on price.
Without Masters, Bunnings could grow rich and fat. And we’ll have little option but to let it.
Correction: An earlier version of this article compared two paint and varnish removers from Masters and Bunnings and noted the Masters one was cheaper. Bunnings has informed us that their item is different to the Masters item in dimensions that were not listed online. We retract the claim that the items are identical.
* Jason Murphy is an economist and journalist who has worked at Federal Treasury and the Australian Financial Review. His Twitter handle is @jasemurphy and he blogs about economics at Thomas The Think Engine