Retail giant Woolworths, which already dominates groceries, pubs, poker machines, liquor, petrol retailing, general merchandise and consumer electronics, is moving into hardware to take on Wesfarmers’s key business, Bunnings.

The news saw investors quit Wesfarmers shares, which fell 7.7%, or more than $2 in early trading to $24.28 at 10.40am.

Woolies moves deeper into food, hotels and liquor have already generated concern from existing smaller operators and some members of various Governments. But because hardware is dominated by Bunnings, there won’t be any problem for the move from competition regulators.

Woolies has teamed up with the number two US home improvement and hardware brand, The Lowes Cos, to make a takeover bid for Danks Holdings, which operates Home Timber and Hardware, Thrifty-Link and Plants Plus Garden Centres.

Danks supplies 205 Home Timber & Hardware stores, 312 Thrifty-Link Hardware stores, 66 Plants Plus Garden Centre stores and 939 independent hardware stores.

Danks says on its website that “Home Hardware concentrates on selling core products such as paint, general hardware, power tools and garden products, together with timber and building materials for the tradesperson, renovator and serious DIYer. Thrifty-Link Hardware group primarily caters for the needs of the convenience hardware store shopper and focuses on personalised, helpful service. Plants Plus is the largest garden centre group in Australia with over 60 stores, and one of the most visible brands in the market.”

Woolies and Lowes are offering around $87 million for Danks, which is the second largest hardware retailer behind Bunnings.

Woolworths said today the bid had been unanimously recommended to Danks shareholders by the company’s board. Woolworths chief executive Michael Luscombe claimed the Australian home improvement sector was under-serviced and the company sees an opportunity to bring competition and growth to the sector.

“There is a real opportunity to increase the overall size of the sector and this significant new distribution and retail investment should be positive for both customers and the industry alike,” he said in a statement. (Not to mention Woolworths and its shareholders, Mr Luscombe).

The Woolworths and Lowe’s joint venture have offered $13.50 for each Danks share, valuing the company at $87.6 million. They will also pay a 53 cent a share dividend. Mr Luscombe said “Woolworths was interested in adding choice to the industry and we believe we can improve the pricing, product range and experience for customers,” he said.

“At the moment, the sector is dominated by one major big box player, so there is a real opportunity for increased competition in that part of the sector.”

(And ‘We at Woolies’ want to be a big box retailer that at least shares domination of this sector, is the subtext to the whole deal). Woolworths has targeted 150 new store sites, which could create thousands of new jobs, it said.

Its first home improvement store is expected to open in late 2011. Woolworths’ joint venture with Lowe’s will see the US company own a one-third share of the new home improvement business and provide the necessary technical expertise for this sort of big box retailing which Bunnings has mastered.

The bid was made a day before Woolworths is due to reveal its 2009 annual profit. Some analysts have questioned some of the retailers recent moves, such as investing the best part of $2 billion in New Zealand for low returns. Woolies is spending around $2 billion refurbishing its supermarkets across the country to lift sales. It’s considerably cheaper than spending the same money on a group of new stores because renovated outlets produce a more immediate boost to sales and profits.

The move into Hardware will take longer to generate returns, even if it is built around the core of the Danks’ chains. Customers can expect some big and aggressive price cutting from Bunnings as it defends its position. Apart from its resources business, Bunnings is the single most profitable part of Wesfarmers, with earnings before interest and tax up nearly 12% to $659 million in the year to June 30.

For Danks, the bid has come in its 150th year of business, and will once again, somewhere, produce a variation on the old standby headline of the finance pages such as: ‘Danks for the memory’.