Masters’ fall not reflective of industry potential

Sarah Stowe

Despite Masters’ meltdown this week due to competition, the hardware and building supplies retailing industry is expected to grow in the next five years. So is there room for the franchisee?

“Woolworths’ decision to dispatch the struggling Masters chain is indicative of fierce competition,” said IBISWorld Senior Industry Analyst, Spencer Little.

Industry revenue was expected to grow in the next five years, but the operational costs of the business also proved to be a struggle.

‘Substantial operating losses have accompanied this revenue and establishment growth. The significant start-up costs associated with setting up and expanding Masters’, and high wage costs generated by new store openings have affected the profitability of Woolworths’ home improvement segment over the past five years,’ Little added.

Franchise Business spoke to Little about the implications of the decision for the industry, and how it would affect the remaining players in the hardware and building supplies retailing industry.

Little explained that the influential role of Bunnings as the industry’s stable player certainly contributes to the competitiveness of the industry. Price remains the key differentiator of consumer choice, which was the Masters’ plan, but with a cost. That is, keeping up with the cost of overheads and operations.

‘In order to compete with Bunnings, the industry’s well-established major player, Masters entered the industry and sought to compete fiercely on price. As a result, Masters was able to increase revenue and gain market share, but this was at the expense of the firm’s profitability,’ said Little.

The recent Masters’ news has revealed the barriers associated with entering the hardware and building supplies retailing industry over the past five years, especially due to Bunning’s dominance and the swift rise of Masters’.

Little said that businesses interested in entering the industry should be well aware of the initial capital costs or expenses of buying a franchise licence. He also added that prospective players should also consider the challenges of finding an appropriate sized location in the major cities and towns.

‘The dominance of existing players, particularly Bunnings, also acts as an entry barrier, as it can be extremely difficult to remain competitive and profitable in such a competitive industry,’ he said.

When we asked Little what it would take for smaller businesses in the industry to thrive in the industry, he stated it was about expanding store networks and launching advertising campaigns.

‘For example, in 2013-14, 23 independent stores were converted to the Mitre 10 brand, the company adjusted its hardware range to focus on more quality brands and it launched an aggressive catalogue advertising program,’ said Little.

Differentiation is also paramount, so that customers see the value in choosing one retailer over another.

‘Many other smaller independent hardware retailers in the industry have also found success by offering a range of niche and specialised products,’ he said.

However, he asserted that trends in the hardware and building supplies retailing industry is on the rise due to household number growth in the last five years.

‘The industry’s performance has also been boosted by households undertaking DIY home improvement renovations and repairs. An undersupply of affordable housing and rising housing prices has contributed to this growth as many homeowners have been deterred from moving,’ he added.

The hardware and building supplies retailing industry is expected to expand by 6.7% annually over the five years through 2015-16, to peak at $15.9 billion.

There are some key features which distinguish a flourishing franchisee from a struggling one.

Tips for success in hardware and building supplies retailing

A report by IBISWorld outlines six key pointers for success in this industry:

  • Economies of scale (costs saved from producing more): Businesses which are able to save costs whilst increasing output will improve its buying power and keep prices down.
  • Ability to control stock on hand: Sufficient stock controls are needed to reduce inventory costs (costs of items such as property, goods in stock, or the contents of a building) and allow for efficient switch-overs to new product ranges.
  • Sale of goods popular in the market: Stocking the latest products which reflect current consumer tastes can help attract customers.
  • Proximity (closeness in location) to key markets: Franchises that are located in highly-populated and convenient areas are able to increase their customer base and generate more revenue.
  • Effective product promotion: Product promotion is important for distinguishing brands and increasing consumer traffic in hardware stores.
  • Access to highly skilled workforce: It is crucial for retailers to employ highly skilled employees that are highly knowledgeable about products, and are able to provide customers with detailed information about hardware products and building supplies

Read more about The franchise advantage in the handyman sector: industry report