So it’s official – Australia’s largest retailer, Woolworths, has bought Australia’s only full-line hardware wholesaler, John Danks & Son. Shock! Horror! It’s the end of the world as we know it. Or is it?

You’re probably feeling, as I do, uneasy about the growing concentration of retail power in the hands of just two retail groups, Woolworths Limited and Wesfarmers Limited – the owners and operators of Coles and Bunnings. One in every four dollars spent in retail in Australia goes into the coffers of one of these companies: food, petrol, liquor (and poker machines) and now hardware. What don’t they own? The fact of the matter is that we have a regulatory environment in this country that allows and even encourages consolidation of industries. The ACCC makes a lot of noise but doesn’t seem to do a lot. Never mind that small business is Australia’s largest employer, first to hire staff and last to lay staff off. Big business is good because it’s, well, big. Big business makes a lot of political donations too!

Could governments’ attitude to small business be explained by an aside made to me by a political minder following a meeting a few years ago? Shortly after the GST was implemented I sought and received a private audience with the then senior minister in the Howard Government, Peter Reith, to express concern at the way the GST was rolled out and the costs associated with that roll out for small business. Following the one-on-one Reith’s chief-of-staff tackled me about being too tough on his minister. After a bit of toing-and-froing about who pays whose salary the exasperated minder commented “Who cares about small business anyway – you blokes have been ripping off the system for years!”

Anyway, this is the system we have so we have to live with it. Subject to regulatory approval and Danks’ shareholder approval (a foregone conclusion considering the composition of its share register), Woolworths Limited will take ownership of Danks and so the stage will be set for Australia’s two big retailer groups to slug it out over the third largest sector of retail – hardware. Will it work? Can Woolworths run a wholesale side supplying the independents at the same time as competing against those same customers through the 150 or so mega stores it plans to build? Or is this the death of the independent side of the industry?

The truth is no one knows the answers at this stage. With Woolies yet to open its first store – slated to open in 2011 – it will be three or four years before we will be able to see with any clarity what will happen. The jury is out. However, after 31 years in this industry there are some observations I can make. The first one of these is that the wholesale side of the hardware industry was already in big trouble. On the east coast we have only had two full line wholesalers, Hardex (the old HRA Wholesale Co-operative Ltd) and Danks. Hardex failed in the late ‘90’s – through lack of capital. Danks has survived but not without some pain. It was running on thin margins and was cutting back on the number of warehouse lines stocked (read: increasing capital through lower inventory costs). The increasing cost of promotional activities and lower take up of sale items was putting strain on operations.

The other two major retail groups are M10 and Hardware & Building Traders (HBT). M10 has been struggling for many years now. It has been hard hit by the raids made by the then BBC and later Bunnings as its biggest and brightest shops went to the corporates taking their buying volumes away from the group. In any case, neither of these groups have full line warehouses, HBT not having warehouse facilities at all (although that may well change), thus are not capable of filling the void left by Danks.

And that’s what it is all about folks, volume! How can Danks with its c.$600m turnover or M10 with its less than $2bn turnover match the buying power of the likes of Bunnings with its $3.5 – $4bn buying power (and increasing at double digit growth).

Even the venerable M10 – Australia’s second largest hardware retailer – is at risk. Saddled with debt and annual losses its situation is dire. There are many industry pundits who believe that M10 is unlikely to survive in the medium to long term. Certainly, Woolies looked at M10. They did a due diligence following a confidentiality agreement but walked away. I understand there were two main reasons for this – M10’s financial position and the members’ supply agreements. The fact is that the wholesale side of the independent hardware industry has been languishing for some time. We blew the only opportunity to get it on firm ground back in the 1980s when a golden opportunity to create a mega independent wholesaler was squandered. M10 in those days lacked warehouse facilities. There was some discussion at the time about sharing warehouse facilities between Hardex, M10 and Danks. We could all see the coming storm that was the Home Depot business model. Unfortunately, this attempt to rationalise the industry failed – largely due to the old problem of competing egos. Everyone wanted to be the cock of the roost. Thus we lost the only chance we had to facilitate a healthy independent industry.

My take on these events may surprise some who know me: I am cautiously optimistic. With Danks dropping SKUs the writing was on the wall: Danks was no longer committed to being a full line wholesale operation. The smaller stores were being left to fend for themselves. The way I see it we have long been an industry in decline. When I bought my first hardware store in 1978 there were over 1200 hardware outlets in NSW. Now there are less than 700 but the forecast was for another 25% of the independents to close with the next five years – without Woolies entry into the market place.

The reason for my cautious optimism is linked to the differences between the way Bunnings operates and Woolies modus operandi. Bunnings follows the Home Depot business model with suppliers delivering direct to store whereas Woolies are the masters of logistics – they replenish their stores through a warehouse supply chain. Their take is that it is more efficient to replenish their stores by way of one or two deliveries per day ex-warehouse, each delivery containing ALL the stores requirements, rather than numerous deliveries per day from suppliers. When you contract with Woolies, it is Woolies that sends their trucks to your warehouses to pick up the stock they have purchased – and they charge you freight for the privilege.

Woolworths’ business partner in the new hardware start up is Lowes (guess they won’t get to register that name here) which is the second largest category retailer in the US. Lowes, like Woolies, is an operation that utilises warehousing. Their warehouses typically stock in excess of 100,000 SKUs. That is what I call full line wholesaling! Everything for everyone – and you get to keep all your sales in-house that way with little of no drift to third party wholsale.

From my discussions with senior management at Woolies concerned with Project Jupiter as the hardware initiative is called, I can detect nothing other than goodwill and a commitment to “give it a go” as far as serving the needs of the independents is concerned. They admit they are in for a steep learning curve but they are well aware that part of this means broken quantities etc and better catalogue promotions. They are well aware of the need to tread softly, softly as far as those independents are concerned. I can also see a definite plus for Woolies. Woolworths and Lowes are committed to building about 150 mega stores in areas zoned bulky goods retail. Such areas tend to be peripheral to major cities or situated in industrial areas. Sure, in situating their boxes here, there will be some casualties but their real opposition and target is Bunnings not the independents. We are simply a flea bite to an elephant compared to Bunnings turnover and net profit. However, running a wholesale operation on behalf of their own outlets as well as the independents will help Woolies volumes – especially as the total number of stores they are planning falls well short of Bunnings’ total. Woolies wholesale has the potential to do for Woolies what Blackwoods has done for Wesfarmers/Bunnings. To repeat myself, it is all about volume. I for one am prepared to give them a go. Not that I have a lot of options. Possibly, if we all migrated en masse to M10 we might just give that operation what it needs to survive – in the short term. But possibly not.

What is needed for the relationship to survive and prosper is goodwill on both sides – and transparency. Woolies needs to learn how to accommodate us indies – and that will be difficult – and we need to give them the time to do so. I will finish this article with a story from an old friend. This friend was general manager of a division of a large company selling over a billion dollars a year into just about every food outlet in this country. Over drinks my friend confided that her company generally lost money on sales to the supermarkets. “By the time we pay volume discounts, premium aisle space, long term incentive rebates and co-op advertising we are lucky to make any money and we generally lose out of the majors but we need their volumes to give us the economies of scale to make money out of the rest of the industry. We really make our money out of the independents.”

In the face of Bunnings stunning success I know with whom I would rather be in bed!