October 9, 2001

Talk with Kingfisher CEO Geoffrey Mulcahy

Sir Geoffrey Mulcahy, CEO Kingfisher (photo: Kingfisher)
On a visit to Germany: Geoffrey Mulcahy
Regarded by some as a living legend, quiet-spoken Sir Geoffrey Mulcahy, Group Chief Executive of Kingfisher plc, is surprisingly unpretentious.

In fact, his easy-going way makes it hard to understand why he has polarised City opinion during his long career in retailing.

This is a man, who was praised to the hilt for turning around what was once FW Woolworth. He then fell like an angel from City grace, only to be returned to relative favour recently.

Mulcahy has now split Kingfisher into two separate companies so that the new group can focus on international expansion.

Was that his reason for a recent trip to Germany? A talk was arranged to find out in the breakfast room of Munich's famous "Bayrischer Hof" hotel.

Mulcahy admitted to looking at the Praktiker DIY store portfolio. However, he was underwhelmed by the quality of the Metro Group subsidiary's sites, calling at least a third of them "quite frankly rubbish".

This is clearly a man who calls a spade a spade.

INTERVIEW


Sir Geoff, in the financial year to 3 February 2001, group revenues at Kingfisher increased 11.5 per cent to £12.1bn. However, the profit from general activities dropped by 16 per cent. Why?


If the profit of £121m arising from the sale of our e-business associate, LibertySurf, is included then profit before tax was down by just 3 per cent. This was after £33 m of accounting adjustments relating to property depreciation and pre-opening costs.

A trading decline by Woolworths and ProMarkt to the tune of £50m as well as the deficit from LibertySurf's operation, veiled the record results which were achieved by the retail outlets B&Q, Brico-Depot, Darty, BUT, Comet and Nomi in Poland.

As part of the sale of Superdrug and the demerger of Woolworths in July this year, you have divested 1,500 out of a total of 2,900 outlets. Today, Kingfisher with activities in 16 countries is a real cosmopolitan among British retailers. How well are you organised internally to drive forward new expansion abroad? 

With fewer stores, we are now a more focussed business centred on the international home improvement and electrical and furniture markets.

We are better placed to deliver future growth, both organically and through acquisition, and are targeting ourselves average earnings growth of at least 10 per cent over the next five years.

Around 55 per cent of our turnover now comes from outside the UK and we see this figure steadily growing in future as we become even more international.

Kingfisher's declared goal is to achieve an average minimum growth of 10 per cent over the next five years. How do you react to those investors, who expect an annual minimum of 20 per cent from a retail company with such an international presence? 

We are targeting average earnings growth of at least 10 per cent over the next five years. This is a minimum target. Clearly we will be striving to maximise earnings beyond this minimum.

In 1982 you were FW Woolworth and a purely British company. For what strategic reasons was the decision taken to move abroad in 1993 under the name Kingfisher? 

The trigger for our own internationalisation was the recognition that our specialist subsidiary for electrical goods Comet and the DIY business B&Q could benefit from working with compatible companies in Europe.

Our partners in Europe followed a similar business philosophy to us and recognised the advantages of joining a large retail business like Kingfisher.

Why must one always look to join an even larger retailer? 

Larger retailers benefit from scale economies which means that you can purchase more from your suppliers at cheaper prices and pass those lower prices on to your customers.

We can also afford to invest in innovating new formats and in logistics and distribution as well as growing our store network.

This creates a virtuous circle. Investment in growth together with the cost efficiencies from an increased size of business are of course not restricted to just purchasing, but extend to store and management costs.

Yet despite your successful globalisation the value of Kingfisher shares remains on the low side... 

Over the past ten years, our share price has risen by over 150 per cent compared to an average of 120 per cent for "FTSE 100" retailers. Despite this, 2000/2001 was a tough year for us, which was reflected in the share price.

Over the medium-term we have produced above average returns for our shareholders.

What hope can you give your shareholders — well practised in being patient — for future share price gains and does a low valuation not considerably restrict your global acquisition and merger plans? 

By splitting our company in July we are now strongly focused on the international home improvement and electrical and furniture markets which offer strong profit potential through organic growth in existing markets and in new markets through acquisitions as well as organic growth.

Furthermore, we own famous brands and we operate in growth markets such as Poland, the People's Republic of China, and Taiwan.

Our strong management teams exchange 'Best Practice' at an international level and continuously ratchet down back office support costs. Last but not least, we are highly innovative in terms of developing new retail formats.

Why did you split Kingfisher plc into two independent companies in July of this year? Was the unhappy share price development and the poor performance of both Superdrug and Woolworth to blame, or did you want to crank up the share price in order to make further acquisitions in Europe? 

Essentially, Kingfisher had developed into two types of business. Our home improvement and electrical and furniture business is a specialist European retailer with global scope (B&Q, Castorama, Comet, Darty, BUT) while the General Merchandise business was concentrated solely in the UK (Woolworths, Superdrug).

By creating two separate businesses with their own focused strategies and dedicated management teams, we believe they are now better placed to accelerate their own development. Today, 'new' Kingfisher can concentrate totally on pursuing its international growth agenda.

As recently as January 2000, you stated in an interview with Lebensmittel Zeitung that the combined turnover strength of the Kingfisher group would create more scope for the individual businesses than if each was by itself. What brought this strategic turnaround about?

What you have described as a turnaround I see rather as proof of flexibility. The Kingfisher board annually reviews the state of the company. During this process we always ask ourselves whether we have the correct company structure to achieve our strategic growth aims.

The strength of Kingfisher has enabled us to grow each of our businesses into large players in their markets. We judged the time was right to focus on growing our international businesses. The new structure will enable our management and financial resources to be dedicated to that end.

Would not the sale of the individual businesses have made more money for your shareholders than the demerg of Superdrug and Woolworths?

Following our announcement last September that we intended to demerge, we were approached by a number of parties interested in buying the General Merchandise businesses.

We had a duty to our shareholders to examine all of the options and diligently considered and discussed the proposals while we continued the work towards demerger.

This was a complicated process which took time to work through and, finally, we decided that a sale of Superdrug and a demerger of Woolworths were in the best interests of our shareholders, employees and of those businesses themselves.

Originally, you wanted to break up the Kingfisher group in spring 2001. In actual fact, this was postponed to the end of July. Why did this take such a long time, and didn't this delay damage your image? 

That is not correct. The fact of the matter is that when we announced the break up of the group in September 2000, we said that the demerger would be completed by the end of the second quarter of our financial year which was at the end of July. We subsequently kept to that schedule.

The perception that we had delayed was an invention of the British press who constantly speculated whether we were going to demerge or dispose of the General Merchandise businesses while we were examining all of the options.

On your balance sheet there are debts of about £1.9 billion. Did the resultant pressure not make you inflexible vis-à-vis the sales price? 

We acquired the 28 "Homebase" DIY sites from J. Sainsbury at the end of the last financial year at a price of over £200m.

This was a great deal for us because it strengthened further our leading position in the UK's DIY market. It builds on B&Q's successful position and was a strategically sensible investment with the future in mind.

Furthermore, a one-off £350m of accounts payable on the suppliers' side has to be added based on the 53-week year. When these two items are deducted the total debt came to £1.3bn.

This corresponds to a gearing of under 40 per cent — which is actually rather low as far as some of our shareholders are concerned — especially in America.

They prefer to see companies with strong cash-flows like ours financed with more debt. And don't forget that the sale of UK high street property portfolio is expected to reduce our debt by around £600m.

Between September 2000 and summer 2001, there has been a veritable exodus of the top management from Kingfisher. In May this year, your Chairman Sir John Banham announced his resignation. Is this erosion of management not proof that the restructuring at Kingfisher was not without its internal strife? 

No. Sir John Banham, and I, are of a similar age and we were of the opinion that it would not be good for Kingfisher if both of us left the helm at the same time. Beyond that, however, let's go through some of the individual cases.

The chief executive of Kingfisher Electricals, Roger Holmes, received an excellent offer from Marks & Spencer which he took, and we wish him all the best.

His successor is Jean-Noel Labroue, who had been running our French electrical subsidiary, Darty, for more than 20 years. Our former finance director decided to leave after spending some time with the soon to be demerged General Merchandise business.

In July, you did not take the opportunity of increasing the 54.5 per cent stake in the French DIY operator Castorama. What does this mean?

As we said in July, we are working with the French management team at Castorama, and there is no reason why all of its objectives cannot be satisfactorily delivered by the current management structure and ownership of the Castorama Group.

However, buying out the minority shareholding is something we have an option to do in the future should we so decide. At the moment, we believe we could use our money more effectively elsewhere.

Revenues at Castorama in France are stagnating. A certain dynamic can only be noted in your new discount format "Brico-Depot". Why has Kingfisher had so much trouble in achieving growth in business sectors with higher margins?

We have been very successful in building businesses with good profit margins. Darty and B&Q are excellent examples of this. Brico-Depot is a price aggressive concept, and many of the Home Improvement and DIY products only have small margins.

Darty, however, offers many goods with high margins and achieves strong returns in the French consumer electronics business.

In order to have a successful range of goods, each retailer must include goods at an entry level price, so as to ensure a high number of customers. Once the customer has been attracted into the shop, goods of better quality and higher prices can be offered.

For example, after opening "Big W" we offered pairs of jeans at only £10 or £17 during the first weeks.

We still sell them at these prices, but the customer can now also buy top brand jeans for £27. This drives growth in the average transaction value and cash margin. The important issue is to offer customers a choice of price, quality and design so they can choose.

There were rumours in Germany about an imminent takeover of Obi by B&Q. Would such a step fit into Kingfisher's overall strategic concept and increase the group's value for your shareholders? 

We don't comment on or discuss rumours on principle.

As the DIY market in Europe truly becomes one market it will consolidate. It is our aim to be the market leader in Europe. There is obviously contact within the industry, especially as it is undergoing considerable change and internationalisation.

If you want to know, whether I have ever met Manfred Maus, the answer has, of course, to be "yes". If you want to find out whether I had breakfast with him yesterday, the answer is, of course, "no comment".

By opening 14 new "ProMarkt" electronic specialist outlets you have increased turnover by 5.7 per cent in the last financial year. ProMarkt, however, yielded a like-for-like drop of 4.3 per cent. Altogether, losses have increased to £19.4m. Why are you finding it difficult to get your German operations fired up?

But you must give the new management, which has only been in position since the beginning of the year, a fair chance. To create a successful business you need to invest in people and the stores. It takes time.

Despite the generally difficult market position, they have made good early progress in improving the situation. We will look again at the performance in detail after the summer months.

What progress have you achieved on the European purchasing side?

80 per cent of our consumer electronic goods are now purchased centrally and we also have developed our own "Proline" label. In the medium term, we want to consolidate 60 to 70 per cent of our Home Improvement/DIY range. We are working on these objectives.

However, the most important factor is to ensure that we are offering the customers in each local market the goods that they want and that is why we move continuously in this area.
  
 
Related article in German: Interview by Mike Dawson in Lebensmittel Zeitung, no. 40a, 09.10.2001


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