Have the DIY giants already done it all?

Two of the UK’s top three DIY retailers were due to float this year. One has pulled, the other may follow. Amanda Wilkinson looks at the options open

Homebase is getting its house in order in readiness for a possible flotation, expected later this year. But the volatile state of the stock market may force the DIY retailer to abandon its grand design, as happened to rival retail group Focus Wickes.

It is less than two years since private equity firm Permira – then called Schroder Ventures Europe – led a &£750m buy-out of Homebase from J Sainsbury in December 2000. In April, Permira, which owns 70 per cent of Homebase, said that the retailer was performing ahead of budget and appointed bankers to look at various options for the business.

Under its current ownership structure (J Sainsbury retains an 18 per cent stake and the chain’s management holds the remainder), Homebase has been busy refurbishing its stores in an attempt to position them firmly at the “lighter” end of the DIY spectrum. It has introduced an upmarket home accessories range, called Academy, as well as furniture such as tables, sofas and beds.

Verdict senior retail analyst Steve Gotham says: “Homebase is essentially moving from a DIY shed to a hybrid out-of-town department store.”

Yet the retailer has done little to change its TV advertising campaign, having stuck since 1999 with actors Leslie Ash and Neil Morrissey, who portray a couple taking advantage of Homebase offers to decorate their home. After months of speculation that the &£18m advertising account would be reviewed, following the buy-out, Homebase head of marketing Andrea Preducov has at last called a pitch (MW last week). Incumbent Abbott Mead Vickers.BBDO, which also handles Sainsbury’s, is expected to repitch for the business. Yet there is a rumour that Homebase management want to cut their own path, independently of Sainsbury’s. The story may carry even more credence if the retailer pursues a flotation.

Homebase is not giving any clues and refuses to indicate whether the review spells the end for the Men Behaving Badly stars, claiming that the actors have recently signed new contracts.

But industry analysts have labelled the campaign “weak” and “irritating” and long overdue the axe.

Mintel Retail Intelligence analyst Hayley Myers says: “The campaign is a bit tired. We have seen the couple in lots of different scenarios now.”

She suggests that any new campaign should make the most of Homebase’s lifestyle angle, and the ways in which people spend weekends decorating their homes, having a barbecue or gardening: “The brand is more about how people spend their leisure time. B&Q is more about price, and how to become a DIY expert.”

Richard Bird, managing director of Wickes, which serves primarily the “heavy” and trade end of the market, claims that Homebase’s advertising and marketing strategy has been “confusing”, mixing the TV branding campaign – that appeals to the lighter end of the market – with price-led press ads, featuring core products which appeal to confident DIYers.

Although some observers praise Homebase for distinguishing itself from rival brands, others claim the retailer had no choice – in 2000 it lost its second place in the UK DIY market, following Focus’s acquisition of Great Mills and Wickes. And in an acknowledgement that it could no longer compete in the large “warehouse” format, five of its biggest stores were sold off to market leader B&Q.

In 2001, according to Mintel, B&Q had about 31 per cent share of the hardware and DIY retail market by sales. Focus Wickes group had 18 per cent and Homebase 15 per cent.

Homebase’s closest competitor in the DIY market is Focus, which is also revamping its stores to appeal to the lighter end of the market. However, in moving more towards furniture and furnishings, Homebase is likely to find itself competing with Argos and Ikea.

Limited trading figures are available for Homebase since the buy-out and Gotham says analysts will “want to see a bit more evidence of sales growth and profitable performance” before they are prepared to back a flotation – assuming stock market conditions become more favourable.

Focus Wickes had to call off its flotation last month due to the “uncertain” and “volatile” stock market, according to a spokeswoman for the retailer. But Seymour Pierce analyst Rhys Williams believes other factors were also at play, such as the limited number of investors willing to buy into the DIY sector – particularly since they were anticipating a Homebase flotation later in the year – and a perceived need for a new chief executive to join the long-serving Focus Wickes management.

The abandoned float has triggered speculation that Focus Wickes – majority-owned by venture capital company Duke Street Capital – could be lined up for a trade sale. But Homebase has reportedly ruled out a merger and competition rules would probably prevent a merger with B&Q. There has been talk that US DIY retailer Home Depot would enter the UK market, but it has said its expansion plans lie in South America.

Despite the problems in the stock market, there is one factor that the can be sure of – continued growth in the DIY retail sector.

Gotham says: “We believe the market will grow between six and seven per cent a year for the next four years, continuing to outperform the overall retail sector. It has clearly been subject to media influence and has been helped by a buoyant housing market and an increasing trend to improve rather than move home.”

Media interest in home improvement may have dropped off, but UKTV is planning to launch a DIY channel that will have to compete against Discovery Home & Leisure.

Homebase and Focus Wickes may have to settle for third and second place in the DIY market, as individually they are unable to tackle the might of B&Q. But it is a market that is still growing and one in which the three main players only account for between 50 and 60 per cent of sales.

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