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Lincoln Property Company
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A depressed housing market, unseasonal weather and a shift in consumer spend mean the DIY market has shrunk. How can retailers fix the problems?
The Brits have long been considered a nation of DIY-lovers. In the mid-1990s TV shows such as Changing Rooms had as many as 10 million viewers glued to the box each week to discover the latest trends in wall stencilling and mosaic mirrors.
The obsession with beautifying homes lasted for years and led to the DIY market ballooning to £9.76bn by 2004, according to Verdict research.
However, last year that figure had shrunk to £7.54bn and the sector’s woes were reflected in B&Q owner Kingfisher’s first-quarter update last week.
Everything from the weather to the economy has been blamed, but is it really that consumers are falling out of love with DIY? And if so, what effect will this have on home improvement retailers?
Conlumino managing director Neil Saunders believes the DIY sector faces a “structural” challenge because consumer interest in it is waning. He says: “Consumers look unfavourably on DIY, either because they lack the skills to undertake various tasks or they simply lack the inclination to get involved.”
The ‘do-it-for-me’ (DFM) trend - where consumers hire tradesmen to carry out jobs for them - is gaining more traction.
In a note last week Cantor Fitzgerald analyst Kate Calvert highlighted that this presents a challenge for market leader Kingfisher, which suffered a first-quarter group like-for-like decline of 4.2%. That followed its first profit fall in five years for the 12 months to January 31.
Calvert says: “The structural issues that Kingfisher faces are real. In the UK, underlying DIY sales have been in decline over the last decade as there is a marked shift from DIY to DFM.”
SCOPE FOR RECOVERY?
However, Kingfisher group chief executive Ian Cheshire insists the DIY market does not face a structural challenge.
He instead links the decline in DIY spending to the depressed housing market; fewer people are moving house so fewer people need to install new bathrooms, hang new doors or wallpaper their bedrooms.
“I don’t think the data is there to make that [structural] claim,” Cheshire tells Retail Week. “DIY spend has been suppressed because first and second-time buyers haven’t got on the market.”
Investors seem to back Cheshire. Despite Kingfisher’s disappointing figures, the DIY giant’s share price climbed on the day of the update. “The market has decided the recovery is coming and we’re going to be in good shape,” maintains Cheshire.
Panmure Gordon analyst Philip Dorgan says: “Investors think that as the housing market recovers Kingfisher will be one of the beneficiaries. Large investors’ view is that DIY isn’t dead.”
Dorgan says US investors in particular see scope for a Kingfisher recovery after the retailer’s larger American equivalent Home Depot bounced back from its own blip five years ago.
Like the UK now, Dorgan points out, some US observers were beginning to write off DIY because of factors including the rise of online retailing. Sales at Home Depot dipped from $77.3bn (£50.5bn) in 2007 to $66.2bn (£43.3bn) in 2009 as the credit crunch hit. However, sales steadily recovered when housing transactions improved, and are now at $74.8bn (£48.9bn). Dorgan adds that “sales and profits will respond to a move in housing transactions” at Kingfisher too.
HELP IN HOUSING
An improvement in housing transactions may not be too far off, according to Cheshire. He expects the housing market to improve this year, partly as a result of Government initiatives such as the Help to Buy scheme.
“The housing market is an important swing factor - if you get a feeling there are more skips in the street and more signs to sell and people get a little bit more confident about the value of their home then they are much more likely to say ‘OK, the pressure is off’,” says Cheshire. “It might be the swing factor this year.”
But he cautioned that any uptick in the housing market would flow through to the DIY sector slowly. “It’s probably six months away,” he says.
Topps Tiles also last week reported a decline in sales. Like-for-likes fell 2.6% in the eight weeks to May 25. Topps chief executive Matt Williams says a deterioration in consumer confidence means discretionary purchases such as tiles are under pressure.
He agrees that any uplift in housing transactions would boost sales. “It shouldn’t be underestimated, the effect it has on consumer confidence seeing their house prices go up. That could give us a boost,” he says.
RAIN STOPS PLAY
There is a third reason why DIY sales have suffered, particularly in the last year. It is the thing that retailers love to hate, and none more so than those selling home and garden products - the unpredictable British weather.
This year more than most retailers have had cause for complaint. The mean temperature in March was 2.2°C, and normally it’s closer to 5.5°C. The spring was the coldest for 50 years. There was even snow in Shropshire, Devon and Cornwall in May.
No wonder sales of hanging baskets were down 23% and greenhouses declined 52% in B&Q’s first quarter.
Kingfisher even attached a graph to last week’s statement showing the volatility of sales week to week because of the weather. Cheshire notes Kingfisher’s sales went from a “really good March last year to really bad this year”.
He says: “It’s why we put the graphs in - to show that you don’t go from +15 to -15 without something happening.”
However, Cheshire is confident that when the weather improves so too will the sales. “Do I read this as a pattern for the year? No. When the sun came out so did the numbers,” he says.
Dorgan concedes the poor weather has been a big factor in Kingfisher’s recent sales decline. But he also says the retailer is “being questioned” by the City because 11 out of the last 13 of B&Q UK and Ireland’s quarters have been negative on a like-for-like basis.
So what can DIY retailers do about abysmal weather, depressed consumer spend and a terrible housing market?
There is not much they can change about the climate. What they can do, however, is restructure their businesses to better cope with volatility.
Homebase has worked hard to try to shield itself from the changeable weather by switching adverts to suit conditions and using a predominantly UK supplier base, which makes it easier to delay stock.
There are other approaches retailers can take to tackle the decline in the market. A greater focus on trade could help offset any weakness on the retail side, particularly if the DFM trend continues.
Kingfisher’s multichannel trade business Screwfix is increasingly viewed as the jewel in the group’s crown, and more counters are being rolled out across the UK. B&Q also operates the Trade Point business within its stores and has relaunched the website.
However, Cheshire says the trade side of the business has not seen a bounce in sales that would suggest a rise in the DFM trend just yet.
“We’re not seeing trade take a big slice,” he says.
WORKING WITH TRADE
In a move that marries the trade and retail aspects, B&Q has launched the new Homefit service. B&Q puts customers in touch with vetted local tradesmen to undertake tasks such as floor installation, lock and alarm replacement and boiler installation.
Cheshire says B&Q has offered similar services for a long time but that Homefit is a “really determined national attempt to break into it”. He adds: “We’ve always been a mixture of DIY and DFM. Not many of our kitchen
customers fit their own kitchens.”
B&Q UK & Ireland chief executive Martyn Phillips believes the answer to driving top-line growth lies in offering a mix of DIY, DFM and trade.
“Nobody’s got all three covered,” he says. He argues that other retailers in the sector are “giving up” on DIY, which provides B&Q with an opportunity. “They’ve got caught up in ‘DIY is dead’ but there’s still a large market,” he insists. “We can be very strong in that, in a market people are moving away from.”
Retailers are working hard to build the DIY market in the absence of any help from the economy. “We’re constantly looking at that question - how do you drive it?” says Cheshire. “We need to grow both our short-term sales and share, and grow the market.” Kingfisher aims to do that by putting a strong emphasis on product innovation and customer service initiatives such as DIY masterclasses.
Topps Tiles and Homebase have also tried to stimulate the market, by tapping into consumers’ thirst for inspiration.
Both have installed ‘inspiration stations’ in their stores.
Topps Tiles has focused too on new product to woo this inspiration-hungry customer. “We don’t see it as a short-term trend,” says Williams. “We’re doing everything we can to capitalise on it. We’re driving the top-line with new product development. On average we’re bringing in a new range a week.”
Most of the bigger retailers are also trying new store formats. Topps Tiles has opened a lab store in Milton Keynes, while B&Q is testing initiatives including kiosks at its own lab store in Poole.
Homebase, which suffered a 52% slump in benchmark operating profit in the year to March 2, is rolling out the new format piloted at Aylesford, which features more furniture lines through its sister brand Habitat.
It is also pushing online operations by introducing more lines and improving delivery options to include next and named-day delivery. DIY retailers are traditionally behind the curve when it comes to ecommerce. Online sales account for 5% of total sales at Homebase and represent an even smaller proportion of B&Q’s sales.
Homebase managing director Paul Loft says: “We want to give the full customer experience. We’ll be experimental. Do people want it, how much will people pay for it?”
Loft says Homebase will connect the web offer to stores by rolling out wi-fi across the estate.
DIY retailers, which traditionally operate giant 100,000 sq ft stores, are also downsizing their estates to better reflect the changing consumer environment.
Both Wickes and B&Q have been seeking to sublet space to other retailers. B&Q has done deals with 15 retailers, including Asda and Morrisons, and is now awaiting planning approval before going ahead. “If we get all these away we will be doing deals on 4% of our space so that’s a pretty decent start,” says Cheshire. “Then we’ll find the next 20 stores.”
Cheshire has previously said that Kingfisher could make the same money with 20% less space, and aims to downsize further stores.
Dorgan believes that, while DIY’s margins of about 5% can improve and that sales densities will get better as the market bounces back, the market will never be what it was. “We won’t get back to the peak times of Changing Rooms, that time is gone, along with the 10%-plus margins.”
Home enhancement retailers might pray for settled weather, or even for Linda Barker and her crew to start filming a new home improvement series.
Given there seems little prospect of either, self-help will remain the focus - and there are opportunities for retailers to take as much control as they can of their own destinies.
hendren global group
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