It’s November on the other side of the world, and in Grafton, about 400 miles north of Sydney, Australia, a canopy of jacaranda trees covers the town of 18,000 like a blue blanket. The annual festival celebrating them is wrapping up, tourists are leaving, and petals flutter down to form a fragrant carpet on streets and playgrounds. On the outskirts, another scent hangs heavier.
Under a sign that sports a giant red hammer and the sponsor’s name, Bunnings, customers queue up to grills. Volunteers tend them, which, like the tents and gas, are provided by the big home-improvement store chain. “Cook onions,” the manager suggests. “The smell attracts hungry people.” Today, Happy Paws, a pet-rescue nonprofit, might net several thousand dollars at what’s known as a “sausage sizzle,” community events where civic groups nationwide raise millions. (Imagine a spicy, pale hot dog.) “People absolutely love them,” says Jason Murphy, a millennial in Melbourne who began visiting the events as a kid. “It gives you a community feel.”
Inside a similar store 60 miles down Australia’s eastern Pacific coast in Coffs Harbour, it smells of fresh paint and concrete poured a year earlier. North Carolinians could confuse its blue front with their hometown Lowe’s, down to the words “home improvement.”
Its sign says Masters, though, and Tar Heel customers, who’ve shopped for 71 years at the state’s greatest retail success story, would be jolted by the yellow “store closing” banner hanging limply across the building this morning. As the automatic doors wheeze open and shut, signs flank them warning, “Last 5 days.”
It’s been eight years since Lowe’s Cos. forged a joint venture with Australian retail giant Woolworths Ltd. to dethrone Bunnings, a long-established hardware chain. The announcement came as the U.S. housing market was crashing, while Australia was one of the few major world economies still growing. But in the end, Bunnings’ hammer came down hard, smashing Lowe’s and its now estranged partner and their Hydrox Holdings joint venture.
Woolworths’ losses could total $3 billion to $4 billion, while Lowe’s, currently locked in acrimonious, court-ordered arbitration, will probably write off less than the nearly $1 billion it initially invested in 2009. The first of the 150 planned Masters stores opened two years later, in 2011. By the time Masters wound down last year, hemorrhaging $200 million or more annually, only about 60 stores were built.
At the end of its fourth quarter 2015, Lowe’s wrote off $530 million, and nine months later, the corporation swallowed another $290 million in losses. Now, Lowe’s and Woolworths are fighting over the value of Masters’ carcass. Lowe’s values residual inventory, real estate and other assets at $467 million, possibly much more. Woolworths argues Masters is worthless. The relationship has turned testy, marked by a boardroom confrontation in which Lowe’s accused Woolworths members of “ambushing” it and employing other nefarious tactics. In response, an Australian federal judge hustled the duo into private arbitration.
Officials of the companies decline to discuss the arbitration talks, citing the court proceedings. Even if it takes a $900 million hit, the Masters experience is not a devastating dent for the North Carolina company started by Lucius Lowe in North Wilkesboro in 1921. It had more than $3 billion in earnings in its recent fiscal year, on sales of about $65 billion. With 2,129 stores, the business is now worth more than $70 billion, making it North Carolina’s third-most valuable company behind Bank of America and Duke Energy. The company took only a one-third interest in the Aussie venture and hedged even that with a put option, allowing it to bail out at a set price that two-thirds owner Woolworths had to pay.
“Even from the beginning, the fact that it was a joint venture minimized the Lowe’s risk,” says Alan Rifkin, an analyst who tracks the retailer for New York-based BTIG LLC, a global investment banking, trading and brokerage firm. “It also put a ceiling on their profitability, but they went about it the right way.” Australia, though 9,500 miles away, is an attractive market for American companies because of its common language and an economy that is expected to grow by more than 3% annually over the next two years — faster than the U.S.
Even at Lowe’s scale, however, losing hundreds of millions of dollars is noteworthy, representing a cautionary primer in the pitfalls of global investment as increasing numbers of other homegrown Tar Heel companies ponder foreign expansion.
“The long and short of it is, if you’re a company that’s very competitive in a large country, you have a lot of advantages going global,” says Jan-Benedict Steenkamp, a professor and author on global branding at UNC Chapel Hill’s Kenan-Flagler Business School. He has no direct dealings with Lowe’s, though experiences of other Tar Heel businesses such as Krispy Kreme Doughnuts Inc., based in Winston-Salem, underscore his point. It’s now successful in 31 countries. “But it’s sometimes more challenging for you, the company, to understand that not everybody wants to be like you.”
Murphy, an economist and former Australian government budget adviser, agrees. “There are no prizes for originality in business,” he says. “Lowe’s and Woolworths paid a huge price for thinking they should do things differently than Bunnings, the market leader.”
The venture began optimistically in 2009. From a stage on the sprawling Lowe’s campus in Mooresville northwest of Charlotte, CEO Robert Niblock boasted that the company would take Australia by storm. Primary competition for the country’s $24-billion-a-year home-improvement industry was stodgy Bunnings Warehouse, named after two brothers who emigrated from England in the 1800s as sawmillers. Its down-to-earth roots and path to growth were similar to Lowe’s heritage in North Carolina, and by the time the Americans arrived, it had accumulated several hundred stores, including smaller ones but trending toward 100,000-square-foot big boxes like those Niblock said Masters would build.
Lowe’s, Niblock said, would confront Bunnings with softer “destination home-improvement stores that offer consumers products and services in an environment that’s comfortable and easy to shop.” Lowe’s and Woolworths refuse to discuss marketing analysis that led Niblock to that conclusion.
“Bunnings always had a no-frills feeling,”says Steve Ogden-Barnes, a lecturer in the Graduate School of Business at Deakin University near
Melbourne. “I went to Masters a couple of times out of curiosity, and they were nice stores with a higher design environment, a softer feel reflective of The Home Depot-Lowe’s differences I saw in Los Angeles when I was there in 2004. It wasn’t compelling enough to jump ship, though. That was the problem with Masters. It wasn’t bigger, cheaper, better, more convenient, more differentiated enough to gain traction.”
If the flaw was sketchy market analysis, which Steenkamp says often dooms overseas expansions, Lowe’s can legitimately shuck some of the blame. In announcing the joint venture, Niblock had cited Woolworths — no relation to the former American variety-store chain — as Australia’s largest retailer, with sales of $50 billion in 2009. If anyone knew Australia, population about 23 million, Woolies should. Its strength, however, had been in supermarkets and liquor stores, though analysts were pestering it about when and where it expected to grow. It picked hardware.
“Bunnings,” adds Murphy, “had found success by being big and dusty and kind of oriented toward men. Masters was cleaner, brighter, more aimed at women and sold white goods in addition to traditional hardware.” There are indications, too, that as the war heated up, Bunnings had a home-field advantage.
Several sources say suppliers loyal to Bunnings stonewalled Masters. “Masters had a higher proportion of less well-known brands,” Ogden-Barnes says. Steenkamp and Daryl Brewster, a turnaround CEO who helped steer Krispy Kreme out of a near-fatal malaise from 2006 until 2008, partly from global growth, say a common flaw is ignoring the distinctiveness of foreign markets.
“We opted for stores that would look just like Krispy Kremes anywhere, but we also allowed them flexibility based on the local country,” including Australia, Brewster says. “Seventy or 75% of the operation ought to look like every other Krispy Kreme anywhere in the world, but that other 25% ought to feel more local.” In Australia, that may suggest a mix of sheep wire and guns, in the view of Cristina Gibson, a management expert at the University of Western Australia in Perth.
Like Americans’ fondness for fix-all duct tape, Australians joke that they rely on No. 8 wire to repair anything. “It represents the ingenuity and resourcefulness of Australians and New Zealanders,” Gibson says of the thin, twistable wire. “Store employees would need to understand that in order to support the client, rather than being all-knowing, overly directive and pushing standardized approaches.”
Masters ignored that. “As a customer, I found Masters didn’t know what it was,” says Andrew Robertson, a financial analyst and business expert for Sydney-based Australian Broadcasting Corp. “When you walk into Bunnings, you instantly know you’re in a hardware store. Without meaning to be sexist, it’s a place where men feel at home.”
Lowe’s “opened stores before we’d determined our optimal assortment mix to best meet the needs of the Australian consumer,” Lowe’s spokeswoman Colleen Penhall told the Sydney Morning Herald last year. That’s not uncommon, says UNC’s Steenkamp.
“A big failure I’ve noted is that companies don’t even do rudimentary market research,” he says. “That’s not to say they could have done better research. I’m saying some simply don’t even do rudimentary research, very simple things you could do if you just talked to some people on the street.”
Lowe’s miscalculations were evident in its effort to sell gun safes. After mass shootings, including one in which 70 were killed in a blazing motorcycle-gang donnybrook, Australia in 1994 passed laws requiring that all guns be licensed and registered. Moreover, permits may be issued only for good reason. “Australia does not have a gun culture,” Robertson adds. “Outside the police, criminals and people who live on the land, virtually no one here owns a gun.”
Nevertheless, in the midst of the Masters buildup, Lowe’s shipped gun safes, strong sellers in North Carolina and the U.S., that collected dust unsold in an Australian warehouse, says a middle-level manager then working at the Woolworths headquarters in Bella Vista, New South Wales.
By its first full year, 2012-13, Masters was wobbly. Hydrox, the partnership, calculated from the beginning it would have startup losses. It set a first-year target of negative $119 million, before including taxes and interest, but the tab came in at a loss of $157 million. For the next three years, the more stores opened, the greater the losses, culminating in $233 million last year. Lowe’s and Woolies began slowing openings.
“They didn’t test their model and just pushed ahead,” Melbourne economist Murphy concludes. “They threw many hundreds of millions at it before it was even clear it was failing.”
Niblock told stock analysts in August 2015 that Masters was trying a “new format,” but by then it was too late. “While there were some midstream course corrections,” Murphy says, “they were enormously expensive because so many stores were already open.”
Niblock remained optimistic about the project. “I was down there last week,” he told the analysts, adding that he walked through some of the stores. “We’re pleased with the progress.” By then, with 62 stores open, Masters lost $227 million on sales of $930 million in 2014-15.
Woolies’ stomach for startup losses and Niblock’s ardor for Down Under began sinking. Niblock had long broadcast his belief in foreign markets, hinting at Brazil among others. Lowe’s first forays had been in 2007 and 2010, with Mexico and Canada ventures, and it had tried unsuccessfully to gobble up Canadian home-improvement giant Rona Inc. in a $1.8 billion hostile takeover in 2012. It would go on to acquire 13 Target stores in Canada in 2015, and, on its second try — friendly this time — it cinched a deal for Rona for $2.4 billion in May 2016, adding more than 500 corporate and dealer-owned stores.
Sticking to its own hemisphere made more sense than pouring more money into Australia, analysts say. “Lowe’s has a pretty high threshold” for its return on investment expectations, says Rifkin, the New York analyst. “First, logistically, getting materials to Australia and running those stores as hands-on as Lowe’s likes to be was more difficult than they perceived.” In Canada, where rival Home Depot has about 200 stores, 80% of the nation’s population lives within 100 miles of the U.S. border. Lowe’s is able to serve those stores much, much easier than Australia.
Cultural differences were less pronounced, too. “I don’t mean to annex the country, but Canada can almost be perceived as the 51st state,” Rifkin says. “Many U.S. retailers, when they have reached relative saturation here, have automatically made their first move north of the border.” That includes Krispy Kreme, which opened a store near Toronto in late 2001, and Charlotte-based Nucor Steel, which bought Harris Steel Group in 2007.
Expansion into Canada and Mexico has clicked, says Penhall, the Lowe’s spokeswoman. She says the chain has averaged double-digit growth in sales of stores open at least a year over the last three years and is pleased with its e-commerce strategy, addition of appliances and conversions of former Target stores.
Lowe’s finally announced in January 2016 that it was bailing out of the joint venture in which it had sunk $930 million, forcing Woolworths to buy back the Americans’ share. The cozy relationship between Woolies and Lowe’s deteriorated into a hissy fit worthy of Tasmanian devils.
Fuming that Woolworths was guilty of guile and “bad faith,” in August Lowe’s asked Australian courts to step in, help set the value of what was left, and close the books. Woolworths launched similar accusations against Lowe’s. Though now declining to comment, last year, Lowe’s spokeswoman Penhall told the Sydney newspaper that the venture was “too aggressive.” She added that Lowe’s, as only a one-third partner in the Masters venture, was not accustomed to playing second dog. In a legal filing, Woolworths cited that as evidence of the North Carolina company’s Yankee arrogance.
The last Masters store, at Penrith in New South Wales, closed in December after one year, along with Coff Harbour’s and other stragglers. Up the coast in Grafton, the weekend sausage sizzles were as popular as always, but Bunnings seemed to have extra sizzle of its own. Analysts predicted its share of Masters sales would amount to $600 million a year, this year and next.
