Woolworths now wants to dominate hardware like it has gained dominance across other parts of the Australian retailing sector.
It and its US partner, Lowes, plan to build 150 outlets in the next five years, and as a first step they have launched an agreed $87 million bid for Danks Holdings which operates Home Timber and Hardware, Thrifty-Link and Plants Plus Garden Centres.
Danks supplies 205 Home Timber & Hardware stores, 312 Thrifty-Link Hardware stores, 66 Plants Plus Garden Centre stores and 939 independent hardware stores.
It is the country’s second largest hardware retailer after Bunnings.
Woolworths said the bid had been unanimously recommended to Danks shareholders by the company’s board.
Danks says on its website that "Home Hardware concentrates on selling core products such as paint, general hardware, power tools and garden products, together with timber and building materials for the tradesperson, renovator and serious DIYer. Thrifty-Link Hardware group primarily caters for the needs of the convenience hardware store shopper and focuses on personalised, helpful service. Plants Plus is the largest garden centre group in Australia with over 60 stores, and one of the most visible brands in the market."
Woolies, which already dominates groceries, pubs, poker machines, liquor, petrol retailing, general merchandise and consumer electronic is moving into hardware to take on Wesfarmers’s key business, Bunnings.
The news saw investors quit Wesfarmers shares, which fell more than 10% at one stage, before steadying and halving that loss to 5.7%, or $1.51. They ended at $24.80.
Woolies shares jumped nearly 4% at one stage, then eased a touch to close at $28.63, a rise of 62 cents on the day.
Up till yesterday, Woolies shares had only risen 5% this year, against a 19% rise in the broader market.
Woolies’ moves deeper into food, hotels and liquor have already generated concern from existing smaller operators and some members of various governments.
But because hardware is dominated by Bunnings, there won’t be any problem for the move from competition regulators.
Woolworths chief executive Michael Luscombe claimed in the statement to the ASX that the Australian home improvement sector was under-serviced and the company sees an opportunity to bring competition and growth to the sector.
"There is a real opportunity to increase the overall size of the sector and this significant new distribution and retail investment should be positive for both customers and the industry alike," he said in a statement.
The Woolworths and Lowe’s joint venture have offered $13.50 for each Danks share, valuing the company at $87.6 million. They will also pay a 53 cent a share dividend.
Mr Luscombe said "Woolworths was interested in adding choice to the industry and we believe we can improve the pricing, product range and experience for customers," he said.
"At the moment, the sector is dominated by one major big box player, so there is a real opportunity for increased competition in that part of the sector."
Woolworths has targeted 150 new store sites, which could create thousands of new jobs, it said.
Its first home improvement store is expected to open in late 2011.
Woolworths’ joint venture with Lowe’s will see the US company own a one-third share of the new home improvement business and provide the necessary technical expertise for this sort of big box retailing which Bunnings has mastered.
The bid was made a day before Woolworths is due to reveal its 2009 annual profit.
Some analysts have questioned some of the retailer’s recent moves, such as investing the best part of $2 billion in New Zealand for low returns.
Woolies is spending around $2 billion refurbishing its supermarkets across the country to lift sales. It’s considerably cheaper than spending the same money on a group of new stores because renovated outlets produce a more immediate boost to sales and profits.
The move into hardware will take longer to generate returns, even if it is built around the core of the Danks’ chains.
Customers can expect some big and aggressive price cutting from Bunnings as it defends its position.
Wesfarmers yesterday challenged Woolies to ‘bring it on’ and made clear they will not be sitting still.
Apart from its resources business, Bunnings is the single most profitable part of Wesfarmers, with earnings before interest and tax up nearly 12% to $659 million in the year to June 30.
Bunnings has sales of around $6 billion and has been the star performer in the Wesfarmers’ portfolio for the last five years.
For Danks, the bid has come in its 150th year of business.
