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Kingfisher (UK)

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Kingfisher is one of Europe's biggest home improvement retailers, home to B&Q and Castorama among other brands. Those chains are all that remains of what was once an extensive collection of different retail businesses accumulated during the 1990s. A change of strategy in 2001 led to a gradual dismantling of the group as Kingfisher sharpened its focus on the DIY sector. Woolworths was demerged in 2001, and the electrical retail businesses Darty and Comet were spun off in 2003 as Kesa Electricals. The slimmed down Kingfisher is among the top four companies in the global home improvement industry. It was arguably better placed than its American rivals to exploit rapidly expanding developing markets such as China. However expansion beyond Europe met with little success, leaving Kingfisher heavily reliant on its core UK and French markets. Business there remains challenging.

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Brands & Activities

Kingfisher is now solely a home improvement retailer. However, it surrendered its leading position in Europe in 2014 to French group Adeo, and now ranks #4 worldwide by sales (behind Home Depot and Lowe's of the US). The group controls 1,200 stores in 10 European countries, mostly operating under the B&Q and Castorama brands.

B&Q is the leading home improvement retailer in the UK & Ireland by a considerable margin, currently with 295 stores nationwide, split between B&Q Warehouses offering a full range of home and trade products and advice, and smaller B&Q Supercentres. The company has also begun to roll-out mid-range mini-Warehouses, slotting between its two existing formats. Products range from tools, supplies and fixings to bedroom, bathroom and kitchen fittings. The group's branding approach is strongly reminiscent of US giant Home Depot, most notably in logo design and the orange aprons worn by staff. However performance has come under intense pressure from a general downturn in consumer spending.

As a result, the group began a major restructuring programme in 2006, including the closure of several stores and the refurbishment of the rest of its estate. Sales declined slowly but steadily in the late 2000s and early 2010s and in early 2013, the group secured court protection for its troubled Irish division in order to reduce store numbers and renegotiate high rents on the existing properties. The group announced plans in 2015 to close up to 60 more existing outlets to improve profit margins. As a result, profitability has improved, along with same-store sales, but total revenues declined 3% in ye 2017 to £3.68bn.

Flat performance at B&Q has been offset by strong growth by smaller brand, Screwfix. This forms the core of a trade division which sells tools, accessories and other hardware products online or by mail order catalogue. It has been the fastest-growing brand within the group, opening an average of one new store per week for six years from 2011 to 2017. An accompanying service for plumbers was launched in 2009 as Plumbfix, followed by another for electricians under the Electricfix banner. However, attempts to expand the business into a general retail network under the Trade Depot brand were largely disappointing, and that format was closed in early 2009. Instead professional-only TradePoint counters have been established in larger B&Q stores with some success. By early 2017, Screwfix had more than 520 outlets in the UK. Sales have grown steadily, rising by between 23% and 26% in each of the three years from 2014 to 2017 to a total of £1.30bn in the latter.

Combined UK sales for both businesses in the year to 2017 were up almost 3% at £4.85bn, while operating profit rose 10% to £358m. According to Mintel, B&Q had just under 34.8% share of the UK home improvement sector in 2010, while Screwfix added a further 2.4%. Main rival Homebase had 16.1% while Travis Perkins (which also owns Wickes and Tile Giant) had 14.2%.

In France, Castorama is the leading DIY brand for general customers, but ranks second overall behind Adeo's Leroy Merlin, which has a large trade customerbase. It operates mainly large format supercentres. There are 102 stores, and the group also operates sister chain Brico-Depot, with 119 smaller outlets. Traditionally targeting more experienced home craftsmen, Brico was repositioned during 2003 as a discount store to attract trade buyers, and sales have responded strongly. Despite a considerable difference in selling space - Castorama has twice as much as Brico - their respective revenues are similar.

In 2014, the group agreed to acquire a large minority stake in French rival Mr Bricolage, subject to necessary clearance from anti-competition regulators. However those permissions were not received by April 2015, causing the negotiations to collapse.

The French DIY market has been under pressure in recent years, and Castorama's like-for-like sales slipped 3% for the ye 2017 to £2.31bn. Brico Depot was also down slightly LFL to £1.95bn. Combined market share for both brands was 25% in 2011. France overtook the UK as the group's most profitable market in 2011, and retained that position until 2015 despite sliding exchange rates. However, it has slipped back behind for the past couple of years with an operating surplus of £353m on total revenues of £4.25bn.

The group's widespread international business has also been restructured in recent years, with outlets in weaker markets sold off. The company is the market leader in Poland, with sales breaking through the £1bn level for the first time in the year to 2009. Performance has been a little mercurial since then, but there was solid growth in ye 2017 to almost £1.2bn. There are now 75 Castorama stores in that country. Based on the lessons learned in Poland, a first Russian outlet opened in 2006, and there were 21 stores by early 2017. It is now the group's fourth largest market, but sales here too have been dented by currencies, falling to £349m in ye 2017. The group acquired 15 stores in Romania in 2013, relaunched under the Brico-Depot brand. The group also leads the market in Turkey through local brand Koctas, a joint venture with Koc Group. There are also operations in Spain under the Brico Depot brand, and the group opened its first stores in Portugal in 2014.

Kingfisher was also until recently the local DIY market leader in China (as B&Q). It strengthened its position there in 2005 with the purchase of the stores previously operated by German home improvement giant Obi, becoming one of the country's biggest Western-owned retailers. However, the business came under pressure from the economic decline in the second half of 2008, and the group had reduced store numbers from 64 outlets to 40 by mid 2011. Yet China remained a challenging market, not least because the Chinese are less interested in the DIY concept than Westerners. At the end of 2014, the group agreed to sell a 70% controlling stake in that business to local group Wumei Holdings for £140m. The remaining shares were sold in 2016.

Kingfisher sold its stake in a Taiwanese joint venture to its local partner in 2007, and quit Italy in 2009, selling its operations there to French competitor Leroy Merlin for €650m. Other territories exited in recent years include Belgium, Brazil and Canada. The group closed its Castorama business in Germany in 2003, but retained a 21% shareholding in family-controlled Hornbach for several years. Those shares were sold in 2014. However the same year, the group began testing the Screwfix brand in the city of Frankfurt. There are now 19 outlets in Germany.

Kingfisher has sold off a wide variety of other businesses since the late 1990s. Woolworths was demerged in 2001; Kesa Electricals in 2003. Chartwell Land, once one of the country's largest specialist retail property companies, was largely dissolved in 2003.

Financials

Performance has bounced up and down for several years, buffeted by the winds of the economy. Combined group sales in the year to January 2013 slipped 2% to £10.57bn, before recovering by 5% in ye 2014 to £11.13bn. Pretax profits rose 10% in ye 2014 to £759m. For the year ending 2015, solid growth in the UK was undercut by the weak French economy and currency fluctuations. Revenues slipped back by 1.4% to £10.97bn, and pretax profits slipped 15% to £644m.

Statutory revenues for ye 2016 slipped by a further 5% to £10.44bn, partly reflecting the sale of B&Q China, while pretax profit plunged 20% to £512m as a result of restructuring charges. Profit from continuing retail operations was more or less flat year-on-year.

Reported revenues for the year to 2017 rebounded by 7.5% to £11.23bn, though that was mostly the effect of currency. The increase at constant rates was less than 1%. Pretax profits soared by 48% to £759m. The UK contributed 44% of revenues and France 38%.

Background

Kingfisher was created in 1982 with the acquisition of Britain's Woolworth chain by property and venture capital group Paternoster. Once a substantial business, Woolworth had experienced a steady decline since the 1960s. A new management team was appointed under chief executive Geoff Mulcahy, who embarked on an ambitious and extensive acquisition spree. Woolworths already owned several additional brands. The most significant of these was DIY chain B&Q. This business had originally been established in a refurbished cinema in the town of Southampton by brothers-in-law Richard Block and David Quayle. Their idea was to launch a warehouse-style DIY superstore along the same lines as US and European competitors. Under their initials B&Q, the business expanded steadily over the next few years. By the end of the 1970s there were 26 stores across the country, mainly in the south. Block had already left the company in the mid-1970s, but Quayle carried on, and eventually sold out to general retailer Woolworths in 1980.

In the following years a series of other companies swelled the size of the business - electrical retailer Comet was acquired in 1984, distributor Entertainment UK in 1986 and healthcare group Superdrug in 1987. Also in 1986, the group fought off a takeover bid from high street rival Dixons (now DSG International). Three years later Woolworth Holdings, which had adopted the new name of Kingfisher, returned the compliment with a hostile bid for Dixons. The latter's shareholders accepted the bid, but it was eventually blocked by regulators on competition grounds.

The 1990s found Kingfisher looking overseas for development possibilities. A joint venture with US superstore Staples led to the launch of Staples UK (sold in 1997), and in 1993 Kingfisher engulfed Darty, France's leading electrical retail group. Further acquisitions followed, including Belgian chain New Vanden Borre, and a 26% stake in French furniture and electrical group BUT. The pace of expansion increased in 1997 with the purchase of Dutch store BCC for £32m, and a move into the German market with the purchase of a 60% stake in Wegert, which simultaneously acquired another chain, Promarkt. In 1998 Kingfisher increased its stake in BUT to 62%, acquired Polish DIY chain Nomi and moved into Asia with the purchase of Singapore-based Electric City, Singapore's largest computer retailer. In September that year, Kingfisher agreed to merge B&Q into a newly created joint venture with French DIY retailer Castorama. By sheer coincidence, French entrepreneur Christian Dubois had opened the first Castorama store in northern France in 1969, the same year that Block and Quayle opened their first B&Q.

Kingfisher's acquisition spree reached its peak in 1999. That year the group announced plans to merge with supermarket group Asda to create what would then have been the UK's second-largest retail group. Rumours of a possible deal had been rumbling on and off for more than a year. Asda chairman Archie Norman had originally worked at Kingfisher under Sir Geoff Mulcahy, and the tie-up would have had enormous benefits for both companies, creating a real force to be reckoned with in the rapidly expanding European hypermarket sector. But Kingfisher's jubilation turned to despair mid-year when US giant Wal-Mart put their hat into the ring, snapping up the supermarket operator for a higher amount.

Never a company to do one deal when it could do ten, Kingfisher turned its attentions instead to the launch of LibertySurf, a free ISP for France, modelled on Dixons' Freeserve spin-off. The service was launched as a joint venture with renowned French dealmaker Bernard Arnault, the chairman of luxury goods business LVMH. Kingfisher and Arnault's private Groupe Arnault each took a 40% stake in the operation, with Kingfisher responsible for marketing through its Darty electrical chain. Expansion through acquisition continued through 1999 and 2000. Castorama snapped up Screwfix, while the electrical group merged its Belgian subsidiary New Vanden Borre with the country's #2 group Hugo Van Praag.

At the start of 2000 Kingfisher was reported to have entered preliminary discussions with German retail giant Metro to explore the benefits of merger. However, the German group had its own internal wrangles to deal with, and the negotiations later stalled. Regardless of its conversations with Metro, Kingfisher dipped a toe into the German market anyway, acquiring a 22.5% stake through Castorama in Virtueller Bau-Markt, the company behind online DIY retailer heimwerker.de. It also bought the 40% it didn't already own of German group Wegert, which operated 186 electrical stores under the Promarkt or MakroMarkt brands (later sold). Shortly afterwards Kingfisher rolled on into Turkey, taking a 50% stake in the leading Turkish DIY retail chain, Koctas, which became a joint venture with Koc Group, the country's biggest conglomerate.

Yet the loss of Asda, and failure of talks with Metro, seemed to take the wind out of Kingfisher's sails. At the same time the group's share price came under relentless pressure from institutional investors. In 2000, the group announced plans to split itself in two, dividing its DIY/Electrical and General Merchandise divisions into two separate companies. That didn't stop the ongoing acquisition drive. Kingfisher added to its DIY portfolio with a a 60% majority share in Datart, the market leading electrical retailer in the Czech and Slovak Republics. Later that year, the group took advantage of the slump in internet valuations to buy 85% of on-line entertainment retailer Streets Online, for £15.7m. But by early 2001, the group had begun to restructure in preparation of its split into two. LibertySurf was sold to fast-growing pan-Euro ISP Tiscali for a substantial gain, and the Singapore-based Electric City chain to leading Australian electrical retailer Harvey Norman. Pharmacy chain Superdrug was eventually sold to Dutch group Kruidvat at a substantial loss.

After long delays, and a series of disputes over management strategy, the group's general merchandise arm, centred around Woolworth's, was finally demerged in 2001. Later that year, the group acquired a 25% stake in Hornbach, the leading German DIY warehouse chain, with activities also in several other EU countries. Time Retail Finance, a division providing consumer and trade credit facilities for Kingfisher retail companies and several non Group retailers within the UK, was sold to GE Capital Bank in early 2002 for £149m, booking the group a handsome profit. In 2002 the group launched a further radical restructuring, including the departure of Sir Geoffrey Mulcahy.

At the same time Kingfisher announced that it would spin off its electrical retailing business, while also taking full control of the DIY group, offering €5.1bn for the remaining 45% stake held by Castorama's original owner, Francois Dubois. The latter rejected the initial offer as "unsatisfactory", and began an increasingly bitter campaign against any deal. However independent arbitrator Rothschilds agreed that Kingfisher's valuation of the business was fair, and minority shareholders were finally bought out later in the year. The electricals business was demerged as planned in 2003.

Last full revision 1st May 2017

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