Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Breakups can be hard. But hanging around to get your due after a failed relationship is almost never a winning strategy.

Lowe's, the second-largest U.S. home-improvement chain, is battling with Australian retailer Woolworths over a failed joint venture.

At issue is the payout to which Lowe's is entitled as the companies terminate a partnership inked in 2009 to build Masters -- a line of Australian home-improvement stores in which the U.S. chain owned a one-third stake. 

Back in 2009, teaming up made sense for both chains. Lowe's sought growth outside the troubled U.S. real estate market. Woolworths was nearing the end of a growth spurt and looking for new revenue streams as its core supermarket business approached saturation. A foray into hardware stores also had the virtue of tweaking Wesfarmers, Woolworths' main rival. 

Coming Apart
Shares in Woolworth's, Lowe's are down 8% and 6%, respectively, year to date
Source: Bloomberg

Lowe's and Woolworths dreamed of opening 150 stores by 2014, tapping a housing market that was booming in Australia even as the rest of the world's real-estate markets crumbled. 

The reality didn't come close. The partners sank nearly A$3.5 billion ($2.7 billion) into the venture, which only grew to about 60 stores. It never reported a profit.

No Contest
Sales per store at Masters never came close to competing with its local rival
Source: Bloomberg, Gadfly calculations

Sales per store failed to crack A$20 million a year, barely enough to keep the lights on for a big outlet. Meanwhile, Bunnings, Wesfarmers' rival chain, fought back to post its best sales performance in years.

If You Come at the King...
Masters' fatal mistake was underestimating the competitive response. Bunnings annual sales growth from stores open at least 12 months
Source: Company reports

Lowe's went through this process thinking it had a get-out-of-jail-free card, in the form of a put option that would force Woolworths to buy its one-third stake back at an agreed price. But that's the rub: In order to sell something at an agreed price, you must first have an agreement. And nine months after Lowe's January decision to exercise its put option, that is sorely lacking.

In the opinion of experts hired by Woolworths, the put option is worth about as much as the Masters business itself: nada. Lowe's sees things differently: Its evaluation put a A$654 million value on the business as of January, when Lowe's called in its chips. 

Boom to Bust
The value of Lowe's put option on its shareholding in the Masters venture reached nearly A$900M
Source: Woolworths annual reports

The dispute has dragged on for months between the two retailers, and it's now threatening the entire process of putting Masters to bed.

Woolworths has struck three separate deals to sell the assets remaining in the business for $1.5 billion -- before accounting for costs associated with winding down the business -- yielding an estimated profit of A$500 million, a third of which would be owed to Lowe's. But the most important of the transactions can only be completed with the blessing of Lowe's, which is still a shareholder. 

That consent hasn't been forthcoming, despite Woolworths CEO Brad Banducci flying to North Carolina to hammer out a deal with his counterpart Robert Niblock. Indeed, as in any bitter divorce, the move appears to have only raised the stakes, with Lowe's trying to get the court to appoint a separate liquidator to wind down the Masters business.

An Australian court on Tuesday temporarily suspended Lowe's motion for a separate liquidator, stuck it with Woolworth's legal costs, and sent the parties to arbitration to resolve their issues. Until then, winding down the business -- and any money squeezed out of it -- will remain in limbo. 

Woolworths has told shareholders it faces about A$3.3 billion in winding-down costs. Lowe's has already written off $530 million of its investment and warned shareholders it could take up to $393 million in additional non-cash losses.  

With so much money spent and so much bad blood spilled, it's time for both sides to let cooler heads prevail. Masters has been a disaster for each company, but they have bigger issues needing their attention. 

Lowe's has to figure out how to integrate Rona, the Canadian home-improvement chain it just bought for $2.4 billion. In the U.S., it lags rival Home Depot in both brick-and-mortar and online sales. 

As for Woolworths, the Masters mess already contributed to the departure of former CEO Grant O'Brien. His successor Banducci has to focus on fixing Woolworths' core supermarket business, which has lost ground to competitors. 

Undefeated
Coles has stayed consistently ahead on sales growth from food and liquor stores open at least 12 months
Source: Company reports
Note: Figures are adjusted for Christmas and Easter holiday sales. Woolworths stopped reporting food and liquor comparable sales in June 2016; the figure shown is for comparable food sales.

Compared to the billions these companies have sunk in the business, the amounts in dispute now are paltry. The collapse of a relationship is never a happy event, but both sides need to put the past behind them and move on.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. The impairment is based on the current valuation of the Masters business. Any money Lowe's gets from the sale of its stake to Woolworths will be booked separately as a contingent gain.

To contact the authors of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net