Kingfisher boss Ian Cheshire talks DIY
Happy tools specialist: Ian Cheshire (centre) opens Screwfix's first foreign store in Germany
Only four of these small 600m² to 1,000m² outlets opened in the Rhine-Main area on September 10, but they could be the thin edge of a very thick wedge. Along with French subsidiary Brico Dépôt, Cheshire clearly wishes the multi-channel concept to spearhead his international plans.
Kingfisher, probably better known for its B&Q Big Box outlets, is already active in ten countries, including China, Russia and Turkey. Nearly half of group earnings are, however, achieved in France via the Castorama and Brico Dépôt banners, which Kingfisher hopes to supplement by the acquisition of Mr.Bricolage.
With annual revenues last year of around €14bn, net cash in excess of €630m, and a stock market valuation that has more than doubled under Cheshire's tenure as CEO since 2008, the London-based plc is in an excellent position to invest further in western Europe.
But why start the internationalisation of Screwfix on one of the world's hardest markets?
DIY in German: The interior of a Screwfix store
True, the retailer is now entering an oversaturated segment dominated by local players such as Obi, Bauhaus, Rewe or Hornbach. But Cheshire's blue eyes are not naive when it comes to Germany.
The quiet and polite Englishman helped extract Castorama from the mess it had got itself into east of the Rhine over ten years ago. Cheshire also knows the country well through a twelve-year partnership with Hornbach which ended at the end of 2013 when the German family owners bought back Kingfisher's minority stake for a an estimated €100m.
Ian Cheshire (55) will remain CEO until around the end of this year when he will hand over the reins to Castorama boss Véronique Laury. In a talk with Lebensmittel Zeitung at this year's World Retail Congress in Paris, the Englishman explains why Madame Laury will also inherit a promising concept in a new land.
"We adapt better now"
Sir Ian, Kingfisher has just entered Germany with Screwfix, but weren’t you part of the very management team that decided to exit the country in 2003 after the failure of Castorama?
I was actually responsible for exiting the business and have a long and bitter memory of running around places like Chemnitz trying to close stores down. I think it cost us €50m to exit six stores in Germany because the leases were so difficult to get out of.
So why did Castorama enter Germany in 1998?
It was an early attempt by Castorama France to go international after they had seen, for instance, German customers crossing the border to shop with them.
And why do you think it failed?
As we have again only recently seen with the liquidation of Praktiker, the German big-box, DIY-shed market is probably one of the most competitive in Europe in terms of store space per head. The oversupply means that all returns are structurally challenged. So unless you offer a different model, it is incredibly hard to establish yourself on a market which is already well-served by players such as our former joint-venture partner Hornbach. Also, Castorama didn't adapt enough to the local German market.
So what did you learn from the demise of Castorama Germany regarding your new venture with Screwfix?
We asked ourselves whether the business model had a point of difference and brought something new to the market, thus giving it a clear advantage. We also asked ourselves, whether we could adapt the concept locally.
And can you?
Our first four German Screwfix outlets may look similar to those in the UK, but the vast majority of the 9,000 lines on offer are German products. So we’ve rebuilt the model for the local consumer. Obviously, this is not a guarantee of success, but it means that we are in a very different place from where we were when Castorama left.
Were you worried or pleased when you heard about the insolvency of Praktiker last year?
The irony is that when I first joined Kingfisher 17 years ago I was doing M&A deals, and I remember writing a paper for the main board about the imminent consolidation of the German DIY industry because it was clearly oversupplied. So the insolvency confirmed what I once had thought, but I was surprised that it has taken quite so long for things to happen! Clearly all players have to deal with the consolidation pressures, and I think that it’s a good thing in the longer term for the good operators.
Why didn’t you start the internationalization of Screwfix in one of the Benelux countries? They are nearer to the UK and the logistical hub of north-western Europe.
We thought that Germany was more interesting because of its potential scale as the largest market in Europe. In fact, you don't need to gain much of such a huge market for the economics to become very attractive.
But it is also the toughest market in Europe…
True, but Germany is in many ways much more straightforward than a lot of the other countries we deal with. In Belgium, for instance, there are many local complexities as regards planning laws etc. Although I find it odd from a retailer’s point of view that shops are shut on Sunday, Germany is also a very efficient place to do business.
However, Germany also has a declining population on a low-growth, overstored market…
Our focus is primarily Europe with the exception of China, Turkey and Russia. Although the German DIY segment is not growing dynamically overall, we saw that its sheer size would give us opportunities to gain market share. In the UK Screwfix will turn over £800m this year with probably only 5 per cent of the market, so on a bigger market such as Germany we could potentially build a £1bn business.
Which a strongly entrenched oligarchy of local retailers will not take kindly to…
The Screwfix concept essentially targets the professional tradesman, so the customer overlap with players like Hornbach or Bauhaus is only about 30 to 40 per cent. The format also offers something new to Germany, especially as regards our systems platform. Interestingly, two days after we opened, Hornbach launched a compact format which looks remarkably like a Screwfix! So I see it as an encouraging sign when the Hornbach family thinks that the concept might work.
During your tenure at Kingfisher you have dramatically reduced indebtedness and are now giving cash back to shareholders. Could you use your growing war chest to make a local acquisition?
I would have been very happy if the Hornbach family had wanted to go fifty-fifty with us in the way we do with our local partner Koçtaş in Turkey, but that didn’t fit their interests. If something like that came up in Germany, or if an acquisition opportunity arose as recently with Mr.Bricolage in France, then why not? But we can’t see anything obvious at the moment to spend our money on. Incidentally, we are certainly not handing money back to shareholders because we haven’t any idea of how to grow the business; it's just that we are cash-generative.
But why start from scratch in Germany when you had a long alliance with Hornbach, one of the leading local DIY operators, between 2001 and 2013?
Our relationship with the Hornbach family was long and positive. We respect their business enormously, and it has great similarities with our own corporate culture. But the family wouldn't let us increase our 21-percent stake in their company because they didn’t need the money. And from our point of view as an industrial company, that should be developing itself, it didn't really make sense long-term to be a minority financial partner. So we eventually concluded that it would be better to be bought out, and the whole process was totally amicable.
But why didn’t you explore a joint-venture with them for Screwfix in Germany?
We did look at the idea, but we wanted to have majority control because we own the systems and intellectual property etc. Meanwhile, Hornbach didn't want to be a minority partner any more than we did.
Could you imagine entering a partnership with any other local player?
I wouldn't rule out having a partner in future. Why not? But when testing a concept in a new country, I think we need to establish it ourselves first.
You still refer to your four Screwfix stores in the Rhine-Main area as a test, but your central depot in Haiger is theoretically large enough to serve a network of 100 outlets. In what timeframe will you decide whether to roll out the format, or not?
We are trying to avoid getting boxed into a precise timetable and stating our Key Performance Indicators. We shall start learning from the first four stores, but we shall probably have to get up to around 20 outlets before we can conclude whether the longer-term opportunity is there. After that, it is a question of how you scale up.
How quickly could Screwfix expand?
We are currently growing Screwfix in the UK at around 50 to 60 stores a year. We didn't, however, start like that. We began with two, then ten, then 20, and now 60. In Germany we will refine the concept and strive to get our operations right. It will probably take about 18 months of testing and development to really know whether something is there, or not.
If things go well, how big could Screwfix become in Germany?
We believe that the UK can support 450 or 500 Screwfixes, so by a process of extrapolation that number could theoretically be 750 or more in Germany. We see a £1bn business in the UK, thus Screwfix could potentially be at least the same size, if not bigger, in Germany, should the concept work.
But can it really with only 9,000 lines?
It depends on your definition. If you go to the stores in the UK, you will find around 11,000 stock items, but, if you include our online and specialist ranges etc., we are talking about more than 40,000. We have opened with 9,000 lines in Germany although in time we shall probably increase our range to about 11,000 to 12,000 items on site.
But we don’t need to hold many products as we have a really efficient supply chain that can bring extra ones overnight for the purposes of replenishment. In fact, one of the keys to Screwfix is the systems platform which we have heavily invested in.
How and why did the Kingfisher Group originally come to acquire Screwfix in the UK?
Our connection with it started back in 1998 when I was the person to buy the business. It began as a catalogue company, then went into the internet, and then unusually it decided to build stores in the physical world.
How do British DIY customers react to the multi-channel approach of Screwfix?
We find that the biggest single channel is people ordering on their smartphone. They press "buy" and walk into the store five minutes later to pick their goods up ready-to-go. They are delighted to have a straight, five-minute walk-in. The next most common channel is for orders to be delivered overnight, so if you order in the UK before 6 p.m., you will have the goods there the next morning.
How do your trade customers generally buy?
Quite a lot of tradesmen have items delivered straight to the sites where they work; others pick them up and some have them sent to their base. So they can slip an order in three different ways.
Who does your deliveries in Germany?
We use an offshoot of UK-based Parcelforce. Originally, I thought there would be lots of next-day delivery services in Germany, but we appear to be the first to offer this in quite the way we do.
But doesn’t it take a lot from your margins to have a third party deliver your customers' online orders? Could you not run your own delivery fleet?
The efficiencies and economics of running a delivery service mean that you are better off as part of a bigger system than doing it on your own. So in the UK we stick to our expertise as a retailer and dispatch thousands of parcels a day from our warehouses to the courier networks who then do the actual delivery.
Attempts by German retailers to launch Click&Collect services or Drive-ins have proved to be a damp squib, and there is no real local equivalent to Tesco.com or Ocado. Does it concern you that online shopping in Germany lags far behind the UK?
The UK is the most penetrated e-commerce market in Europe, so we are not expecting Germany to be the same yet, but consumer acceptance is bound to grow. Also, Germany has a long history of mail order where customers are familiar with using catalogues to place their orders. So Screwfix with its catalogue-based order showrooms is coming to Germany in a tradition that people understand. Last but not least, all customers will appreciate the sheer convenience of our multi-channel offer.
But isn’t your online range dwarfed by the 1.2m DIY lines offered by Amazon.com?
Clearly they can reference a huge amount of products and will continue to put pressure on prices and margins. If you know exactly what you want, it is the place to go. But a lot of people are trying to find out what they need, and Amazon doesn’t have the content to help them work this out or the merchandising on the screen to help them navigate their way through. So I think there will always be room for DIY specialists like ourselves, especially if they also offer exclusive own label products.
How much of the Screwfix assortment is private label?
In the UK it is over 40 per cent, but in Germany we are starting at a lower level although we hope to get to 20 per cent in due course. With just four stores we obviously don't yet have enough customer traffic to obtain the minimum necessary order quantities.
If one thinks the Screwfix concept through to its logical conclusion, doesn't its very success call into question your large, some would say too large, B&Q store base in the UK?
Why close our store base when all of our outlets make money? Originally we did have concerns about cannibalisation, but we've seen that B&Q big-box sheds can co-exist quite happily with Screwfix. You can call the Screwfix concept omni- or multi-channel, but essentially it is a service proposition whose efficiency and convenience are really appreciated by the customer.
Also our B&Q big-box stores serve the general consumer in a different way and don't cater to as many trade customers as, for instance, Hornbach does in Germany.
Looking beyond German borders, you make a lot of money in Russia, but will you be able to stay there in view of the geopolitical risk?
Thankfully, we are not in the oil or gas business! Obviously we cannot control the geopolitical risk, but none of the sanctions imposed to date have hit our bottom or top line. Also the Russian government wants its citizens to become more prosperous and to look after their homes. We don’t plan to pull out because it is a very interesting market with few modern DIY stores. Housing stock is not in great shape, and the first generation of consumers to own property is very interested in home improvement and gardening.
China has sometimes looked like a horror story for you, and we have often wondered when you were going to pull the plug on operations there. But now we hear you are searching for a local partner?
DIY in China requires a very different retail model to what western retailers are generally used to, and everyone who has gone in with a big-box concept, including even Home Depot, has had to leave. We already have a brand, an interesting set of property assets, as well as products and systems. So, if we can develop a more Chinese-driven model with local partners who provide the management and the local infrastructure, then you could see something quite successful. We have already proved that we can do this in Turkey with local partner Koçtaş.
How near are you to finding a local partner?
I am meeting some people this very week.
Do you have anything else on the cards?
Currently we are busy transforming the stores we have just bought in Portugal and Rumania. We are also looking at other countries, particularly if we could take Brico Dépôt and Screwfix to them, but we don’t have anything that is definitely on the horizon yet.
Meanwhile, you are leaving the USA to Home Depot and Lowe's?
Yes, why get into a cage with two 850-pound gorillas?
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 42, 17.10.2014
Successful tenure: After six years as CEO Ian Cheshire will be succeeded by Véronique Laury.