Masters Disasters Et Al - Business Valuation Lessons

Figure 1: What can go wrong when taking on the competition?

INTRODUCTION:

2016 has already seen the rise and fall of two major players in Masters & Dick Smith. It's always easy in hindsight but what are experts saying were the problems and how can small business and other advisors such as accountants and business valuers learn from these mistakes when advising their clients?

Lesson #1 - understand barriers to entry

According to IbisWorld, those businesses that enter into competition when barriers to entry are low, have a much better chance of survival. The problem for Masters was that they appear to have given Bunnings way too much start. Trying to break into the hardware game and win market share meant that labour and overheads costs were always going to be very expensive compared to revenue over a period of time. Whilst their business advisors did expect accounting losses initially, they didn't think it would take this long to start breaking even and then enter into profit territory.

This is why those enterprises that operate in an environment where barriers to entry are high, usually have a higher capitalisation rate (and therefore generally higher business valuations) than those that operate in a area where it is relatively easy for a competitor to start.

Does your business have a high barrier to entry?

lesson #2 - stick to your knitting

Masters who was part owned by Lowes, a US company found itself stocking products that were not necessarily related to hardware stores. Even though in the US consumers are known to search for vacuum cleaners and washing machines in their hardware stores, in Australia this is not something one would expect that a hardware store would stock. Looking at Dick Smith, it's brand was built around technology and advice (computer type gadgets) over many years but gradually it found itself stocking non-technology type products such as televisions and other white goods. This put it in competition with other companies such as JB Hi-Fi and Harvey Norman thereby greying its specialisation advantage and causing it to take it's eye off the ball in what customers want from a technology company.

Does your business try to be all things to all people?

Lesson #3 - Have a point of difference

Similar to Lesson #2 above, by moving away from it's roots, Dick Smith hardly had a point of difference in the marketplace. Masters was purely seen also as another big hardware store and if it had any points of difference to Bunnings then they weren't very well communicated with the buying public.

What is your point of difference?

Figure 2: Does your business need a renovation?

lesson #4 - Location, location, location

One big lesson to be learnt from Masters lagging well behind Bunnings would have to be the fact that many of the the best locations for hardware stores had already been taken. This would have given Bunnings an enormous advantage.

Remember that one of the key areas business valuers look for when assessing the strength of a enterrise's value is the location and it's importance to finding its target market where applicable.

Figure 3: Location!  Location! Location! Some of the beautiful views across Dubbo's 27 Hole Championship Golf Course.

lesson #5 - What customers want

Dick Smith tried to bring in its own product brands and then sell them at higher margins sprouting them as high quality products when in reality they either weren't or they couldn't convince customers otherwise. This meant that in order to get rid of the stock, massive discounting would be required. In hindsight, keeping known brands may have been the better option, or at a minimum, price the home brands more accordingly as soon as they were placed on the shelves.

With Masters I did see one unconfirmed report that it was known as being more female friendly which in some respects may have been a point of difference as per Lesson #3. However, this may have also gotten trades persons (a huge source of revenue) offside as at this stage, it is demographic predominantly populated by males. In any case, I must admit that if such a point of difference existed then it was not necessarily well communicated within the marketplace.

CONCLUSION:

It's very easy after the event to say what was wrong and why something didn't work. However, if there are lessons to be learnt then now is the time to reassess any plans to jump in and buy or set up a business without checking some of the above lessons. If you have an enterprise, draw some comfort that if you can handle any of the above points well, you stand a much greater chance of not only selling it but also receiving a much higher price.