Hard graft ahead for the DIY sector

If John Major is searching for indications that a feelgood factor is returning to the economy he may have to look no further than the DIY market. On the surface, Boots’ purchase of WH Smith’s share in their loss-making joint venture Do It All, predictions of a four per cent growth in the value of the market and a good first quarter would all suggest summer has come at the right time for the 10bn DIY business.

But Boots’ purchase, for 1 and the promise of money from WH Smith to take it off its hands, rather than representing confidence in the sector can only be viewed as a defensive measure. It hopes to sell off 65 stores as part of its cost-cutting measures while investing in other sites, reverse losses of 20.2m and, analysts believe, within two years bundle all its DIY interests together and sell them. To close all 199 stores in the chain would have cost the two partners between 300m and 600m.

It is a scenario that doesn’t suggest confidence in the future of a sector which spent 76m on advertising last year. However, Verdict Res-earch’s Richard Perks predicts the value of the DIY sector will grow by four per cent this year, and next, after four years of depressed growth.

No doubt these forecasts have sugared the pill for Boots. As part of the deal, WH Smith pays its former partner 50m in the form of new share capital invested in Do It All, which has been a joint venture since 1990.

But the predictions are largely based on an improving housing market and other economic data. While it is reasonable to expect an upturn in DIY spending when the housing market picks up, the improvement in the first few months of this year has been fuelled by windfalls from maturing Tessas and building society flot ations, unrelated to home buying.

In line with the improving housing market, Verdict Research expects the DIY sector to “outperform other retail sectors as a high level of pent-up demand for home improvements is released”. The implication being that all the retailers have to do is develop more distinct positionings and identities to exploit this “pent-up demand”.

Closing the gap between the annual growth in store space, which has outstripped consumer demand for several years, is also seen as a positive sign for the sector – a dose of realism.

But none of this can mask the fact that the DIY market is suffering from overcapacity. Verdict Research believes this could result in rationalisation. However, in the short term, it is more likely to lead to a tougher fight to maintain or increase market share. Again differentiation, added value items and attention to customer service will become vital aids to survival.

Ironically, Do It All, aware of this overcapacity, has invested in its distinct identity in a sector in which it was a late entrant. David Clayton-Smith, director of marketing at Do It All, says service has traditionally been overlooked by the DIY sector.

As a result, 600 Do It All staff are now on interior decorating courses to enable them to advise customers better. The stores have already shown a 6.5 per cent increase in sales in the first 15 weeks of its financial year over the same period last year.

Mark Williamson, research analyst with stockbroker Albert E Sharp, says Do It All will become a modestly profitable business but this will be because of economic factors rather than as a consequence of anything that Boots does. He expects Boots to sell the DIY business in about two years, and probably as a package with its other AG Stanley businesses Fads and Homestyle, having failed to make a success of them.

Kingfisher-owned B&Q, the market leader, maintained its 15 per cent market share in 1995, although its profits slipped 30 per cent from 83m to 55.4m. In part this is explained by last year’s sluggish DIY market but also by the cost of opening five warehouses. Another nine were planned for this year but B&Q has pared the figure to four to reduce costs. This again raises doubts about confidence in futrue growth in the sector.

Rival Texas Homecare, which was bought by Sainsbury’s in 1995, holds 6.7 per cent of the market, down from nine per cent in 1993. But it too made a loss of 10.4m last year. Sainsbury’s is converting all the 214 Texas stores into Homebase at the rate of 50 per year.

Homebase is already well differentiated as it also focuses on the soft furnishings end of the DIY sector, through Laura Ashley franchises which feature in some of its stores.

Homebase has been taking a bigger market share for several years. In 1995, the company had 4.2 per cent market share and recorded profits of 36.2m. The company’s Spend & Save loyalty card, introduced six years ago, has 3.5 million members and has gained another 1.5 million customers from Texas. With the takeover, Homebase will soon be in a position to challenge B&Q’s dominance, even if it can’t compete on product range.

Of the other DIY retailers, most have maintained or have managed to slightly increase market share. Wickes recorded pre-tax profits of 30.8m last year on the back of a market share hike from 2.7 per cent in 1993 to 4.5 per cent in 1995. It has relied predominantly on the serious DIY customer, focusing on structural rather than cosmetic repairs.

There will be growth in the sector this year. Boots has taken a pragmatic approach to the loss-making Do It All and the Homebase takeover of Texas will move apace. But the size of that growth could be as hard to predict as the extent of the illusive feelgood factor which the Prime Minister is so desperate to encourage.

Spotlight, page 34