Alchemy must get DIY formula right

When it agreed a nominal 1 deal to take the Homestyle and Fads DIY chains off Boots’ hands in August the venture capitalist group Alchemy said it would make the loss-making chains profitable within 12 months.

Three months into the task the money men are now talking about recovery within three to five years – an indication both of the challenge ahead and Alchemy’s failure to understand fully the scale of the problems facing the 320-strong store chains. As part of that effort the group is now reviewing all its operational activities, including advertising and branding.

It is also having to review its staff because, as expected, a number of top-level Boots personnel have taken a golden parachute back into Boots since the takeover, including managing director Peter Roche and marketing and merchandising director Ian Filby (MW November 13).

The extent of the chain’s problem cannot be exaggerated. AG Stanley, the holding company for Homestyle and Fads, has been losing volume market share since 1990, dropping to an all-time low of 1.1 per cent in 1996 according to Verdict Research figures which showed the market growing by 0.8 per cent. Only two other chains suffered falls in market share over the same period: Texas and the Boots-owned Do It All.

While the DIY market has experienced an upturn helped by building society windfalls and increased activity in the housing market, AG Stanley still suffered losses of 11.8m for the year ending March 1997. And that was despite both the out-of-town Homestyle and in-town Fads experiencing sales increases of 12.6 per cent, and 3.2 per cent, respectively.

AG Stanley has not made a profit since 1992 and Boots wrote off an exceptional loss of 180m to get rid of the two chains. That mood of pessimism is echoed by retail analysts who believe AG Stanley has already missed the boat, allowing the big players to take advantage of the upturn to build market share. The expectation is that growth in the DIY market will slow down but B&Q will remain dominant, leaving the future looking grim for Homestyle and Fads unless their new management can work miracles.

Alchemy senior partner Jon Moulton has taken on the chairmanship of AG Stanley. Shortly after the takeover, he predicted an operating profit in 12 months but is now looking to sell or float in three to five years.

“Three to five years is a heck of a long time but I still think Moulton is a very brave man to take this business on,” says Roy Maconachie, analyst at stockbroker Henderson Crosthwaite.

This opinion is echoed by Louise Von Blixen, an investment analyst at Société Générale Strauss Turnbull Securities. “It will be difficult when the others are getting stronger and the gap is widening. It will take an awful lot of investment to bring the Homestyle and Fads chains up to speed,” she says.

Moulton claims to have turned round the Goldsmiths jewellery chain and various smaller retailers during his career as a venture capitalist, placing them “safely in the hands of their next owners”. But he has also done some dud deals. At Apax Partners, which last week hooked up with Chris Evans to launch an 80m bid for Virgin Radio, he funded the 1995 management buyout at Prestige which ended in receivership.

But Moulton maintains the AG Stanley deal is a good idea. “We got an attractively priced, large company and it should be a straightforward route to more profit,” he says.

The emphasis is on better management at all levels, from local store managers to the senior management line-up, which has yet to be finalised. One idea is to give local managers more autonomy for marketing initiatives. “Some of the branches were hopelessly mismanaged and some were average,” says Moulton.

Alchemy has already replaced Roche with David Medcalf, who joined from wholesaler The Headlam Group to take up the chief executive slot at AG Stanley five weeks ago.

Medcalf is currently reviewing all marketing and advertising and will also decide whether to retain the marketing and merchandising role left vacant by Filby. He has hired undisclosed design and branding agencies to deal with what Moulton describes as the “inconsistent nest of formats” which the duo believe need to be simplified. But venture capitalists, with an eye on a short-term involvement, rarely make the best marketers or branders.

Arc Advertising won the Homestyle and Fads account in 1995, then worth 3m, and is responsible for the current TV campaign which was shot before the Alchemy takeover. It is not certain whether it will be retained and the agency refuses to comment.

“The new management team will examine all aspects of the business and the suppliers used. Arc is no different to any other supplier,” says Medcalf.

Marketing plans are still at an embryonic stage. Moulton says that there will be no announcement on the future until April but the 60 out-of-town Homestyle stores will continue to carry that name while any change could see the Fads name disappear.

It was Fads, the high street stores selling wallpaper and paint products, which were hit particularly hard during the recession. Alchemy identified 100 underperforming stores at the time of its takeover; three have already been sold off and the future of the others hangs in the balance.

Moulton and Medcalf say they will keep the stores if feasible. “We will have to weigh up the cost of turning them round against the offer to dispose. But everything has its price and if someone wants to buy, we will sell,” adds Medcalf.

New Homestyle stores have been opened in Nottingham and Durham and it looks as though marketing efforts will focus on this brand. “We want to create a feminine shopping experience within Homestyle stores, particularly in the area of new colour and design ideas,” Medcalf explains. Plans for a major marketing push over the Easter holiday period – the most lucrative time for DIY retailers – are underway and will include a greater emphasis on regional press and point-of-sale marketing.

But a strategy of slightly modified Homestyle stores is unlikely to produce a resurgence in profits on its own. In its latest report Verdict Research says of the general market: “Opportunities to widen the offer in areas such as soft furnishings/ housewares, gardening, building and pet supplies will continue to be pursued but do not allow for a wholesale transformation of an individual chain’s retail proposition.”

Alchemy was a medieval form of chemistry concerned with turning base metals into gold. It is obviously an analogy the venture capitalist has used time and again as it has bought interests in different companies.

But reviving AG Stanley will require more than throwing to-gether some base metals and hoping for the best.