Australia's Bunnings and Masters go head to head in paint price war

The $3 billion paint market is the site of a new skirmish in a price war between Wesfarmers' Bunnings hardware group and the Woolworths-Lowe's Masters joint venture, that is set to escalate.

Bunnings will defend its dominant position as Masters expands its "Australia you've been paying too much" campaign in coming months by discounting other high-volume products.

It is a crucial time for Woolworths and the struggling Masters. Aggressive pricing is a crucial part of the repositioning of Masters by new boss Matt Tyson. He needs to manage margins as he cuts prices, and he won't need to be reminded that as he does, quality control is also going to be crucial: sales of electrical cable by the home improvement group before he took over have embroiled it in one of the most complicated product recalls in Australian history.

It involves electrical cable thought to have been installed in about 40,000 homes around Australia by retailers and wholesalers including Masters. Recall costs could run to $80 million, with Masters and other hardware businesses in the Woolies-Lowe's joint venture shouldering about 40 per cent of the bill.

When Woolies and Lowe's launched their home improvement retailing assault in 2009, the plan was to embed Masters up-market of the Bunnings chain. There was room for two "big box" home improvement retail chains, they reasoned – but the joint venture failed to stabilise start-up losses in the year to June.

Home improvement losses were 24 per cent higher at $169 million before interest and tax overall, and Masters' EBIT loss rose by 12.4 per cent to $176 million.

With the red ink expanding and a plan to break even by 2016 jettisoned, Masters is now expanding its range, and cutting its prices.

The price cuts are not just about winning market share and boosting sales. They are also about repositioning the Masters brand as a price-setter. The Bunnings response to Masters' new paint price cuts and the cable recall debacle highlights some risks.

Masters launched the paint price drop for entry level paint that is known as rental "bond-back" paint on September 26 along with an "Australia, you've been paying too much paint" advertising campaign.

It set a $20 price for four-litre tins for Pascol "Ready to Go" paint that is produced by Wattyl in two popular pre-tinted colours, Cotton White and Antique Cream.

Bunnings' entry-level paint brand is Spring. It is produced by Dulux, and can be colour-mixed in store.

Woolies contends that Bunnings was selling four-litre cans of Spring paint at $33.50 before the move by Masters, and that by October 3 it had cut the price to $17.50. The Bunnings camp says its entry level price for the Spring range was already below $20 in July, at $18.90.

With Masters at $20 and Bunnings now at $17.50, "bond-back" paint prices are anchored, however, and Masters will widen the front. It has not disclosed details, but a series of long-term price drops for other high-volume products are planned.

Masters is believed to have recorded a significant interior paint sales bounce since it cut prices. The direct financial outcome depends on how profit margins are affected, however, and another risk is highlighted by the Australian Competition and Consumer Commission's August 27 announcement of a voluntary recall of electrical cable by 18 retailers and wholesalers.

The recall group includes Masters and other retailers in the Woolworths-Lowe's home improvement division, and does not include Bunnings.

The recalls cover Infinity and Olsent-branded cable sold nationwide as early as 2010 and as late as last year, and were prompted by the discovery that plastic coating on the cable was brittle, raising the risk of short circuits, electric shock and fires.

A regulatory task force that the ACCC is leading has estimated that 40,000 homes may be affected. More homes than that will need to be checked by electricians, to see whether the faulty cable has been installed.

The company that imported the cable has gone broke, and the wholesalers and retailers involved have agreed to meet the costs of inspection, removal and replacement – if the faulty cable is found. Households will have to meet the cost of inspection themselves if the inspections reveal the faulty cable was not installed.

The task force's estimate that the recall operation will cost $80 million assumes an average cost of $2000 per home. The final cost will, however, depend on how much of the cable was installed in difficult-to-access locations, in wall cavities or inside roofs, for example.

Woolworths believes that most of the cable it sold went into less complicated jobs including do-it-yourself projects, but it is still expecting to foot about 40 per cent of an uncertain total recall bill.

In a note on contingent liabilities in its June 30 profit result, it stated that a reliable estimate of the cost "at this time is not possible". Tyson will be very keen indeed to avoid a repeat of the cable recall debacle as he takes Masters further into a price battle with Bunnings.

Source : Malcolm Maiden - SMH.com.au
www.smh.com.au/business/comment-and-analysis/masters-and-bunnings-price-war-takes-on-a-new-hue-20141017-117jan.html