They say an Englishman’s home is his castle. GUS is banking on the UK’s love affair with property to justify its &£900m bid for Homebase and to deliver growth across the whole of its retail and business services empire.
Having turned around Argos, which it acquired in 1998, GUS is to try its hand at DIY, helping Homebase to continue along its road to recovery.
Analysts were surprised by GUS’s decision to acquire Homebase from venture capitalist Permira, which had led a &£750m buyout of the business from J Sainsbury in December 2000.
Mintel Retail Intelligence analyst Richard Perks says: “DIY is something that GUS doesn’t know much about. My initial reaction was very negative. Its existing businesses – Argos and home shopping – work well together with Experian, which is a major provider of information to the two.”
But because the DIY retail sector is growing, Perks has come around. He now believes the acquisition is a “good investment” for GUS although “a bit opportunist”. He adds: “Maybe it is no coincidence that GUS chairman Victor Blank is a corporate banker.”
It may also be no coincidence that Argos managing director Kate Swann has been both marketing and managing director of Homebase. Homebase insiders say they have been told that Swann will not return to the business in a more senior role, although Homebase chief executive Rob Templeman is to leave in April.
GUS claims that the core DIY market has grown by eight per cent a year over the past five years and was worth &£7bn in 2001. But it is Homebase’s move into home furnishings – a strategy which differentiates it from DIY retail rivals such as Wickes and B&Q, and one that is also being pursued by Argos – that makes the retailer attractive to GUS.
In the past year, Homebase has begun to introduce soft furnishings, furniture and kitchens to its stores. GUS plans to introduce similar lines throughout the chain over the next three years, estimating that they will eventually account for about 15 per cent of Homebase’s sales. This strategy is likely to see mezzanine floors devoted to room displays in half of Homebase’s 272 stores. The company will open five to ten new stores a year over the next three years. According to GUS, the &£20bn home furnishings market has grown by seven per cent a year in the past five years.
Verdict senior retail analyst Steve Gotham says: “While Argos has done well for GUS, its exposure to the mail-order business is certainly a downside. The Homebase acquisition offers GUS the opportunity to enter the fastest-growing retail sector of the past five years.”
GUS’s interim results for the six months to September 30 showed record profits for Argos, Burberry and Experian and a 20 per cent increase, to &£247m, in group pre-tax profits. But its home shopping division saw sales fall from &£715m to &£704m and operating profits fell from &£13m to &£9.5m. Changes in shopping and working habits, and the greater availability of credit cards, has led to a five per cent fall in agency sales. This has affected brands such as Kays, while sales in the direct business – which includes Marshall Ward and Abound – grew by more than 30 per cent, accounting for 14 per cent of all home shopping sales.
Gotham claims that GUS is trying hard to make the home shopping business profitable and would be loathe to sell it off. Analysts agree that GUS, which partially floated Burberry earlier in the year while retaining a 77 per cent stake in the business, is likely to divest itself of the rest of its holding at some point as the luxury goods brand does not fit well with the rest of the group. Analysts say that despite reports that GUS is considering selling off credit and marketing information group Experian, it is unlikely to do so.
Gotham suggests it will become harder for GUS to maintain Argos’ strong performance, as the brand will reach a natural ceiling of development. This explains Argos’s drive to attract more affluent customers, with its ad campaign starring Richard E Grant, and its efforts to tap into the home furnishings market.
The DIY and home furnishings sectors have been boosted by the UK’s preoccupation with the housing market and interest in home makeover TV programmes such as Changing Rooms, as well as a consumer spending boom fuelled by low interest rates. But even if the housing bubble bursts and consumers cut back on their spending, retail experts say that DIY and home furnishings will remain resilient as consumers decide to improve rather than move. Gotham predicts that the market will continue to outperform the rest of the retail sector and will grow at an annual rate of six to seven per cent for the next four years.
Homebase’s move into home furnishings is being mirrored by rival Focus which, following its acquisition of Wickes and Great Mills in 2000, moved into second place in the DIY market behind B&Q. In 2001, according to Mintel, B&Q had 31 per cent of the hardware and DIY retail market by value, followed by the Focus Wickes Group with 18 per cent and Homebase with 15 per cent.
GUS claims that, as well as giving it an entry to a growing sector, the Homebase acquisition will allow it to make annual cost savings of &£20m within three years.
The buying power, sourcing skills and home delivery capability of the Argos Retail Group (ARG), which includes Argos and home shopping catalogues, will help to boost margins at Homebase. ARG’s expertise in financial services should allow Homebase to extend the range of financial products it offers to members of its loyalty scheme, from account and credit cards to loans and home and contents insurance.
There is also scope for marketing initiatives between Argos and Homebase, such as a joint loyalty card and other cross promotions. A marketing tie-up with Homebase, with its relatively upmarket customer profile, could attract more affluent customers to Argos stores. But analysts claim that any joint initiatives are unlikely to go as far as putting Argos concessions in Homebase stores.
It is questionable, too, whether the fiercely competitive ARG will be prepared to sanction concessions in Homebase stores currently operated by Laura Ashley, The Pier and Abbey National. It may prefer that Homebase offers its own products direct to consumers.
GUS may have entered the DIY market just as the media is predicting an end to the housing boom, but it seems unlikely that the British will fall entirely out of love with their property and turn their backs on the DIY superstores.