Homebase tools up to steal B&Q share

The housing market is getting stronger and the DIY sector looks set for a boom. But Homebase, rushing to bring its Texas stores under the brand and lacking a marketing chief, is not in the best position to benefit.

Only torrential rain could stop it. This was supposed to be the best DIY weekend for a decade, when shoppers would flock to retail parks and stock up with paint, tools and building materials.

But when the DIY sales figures for last weekend’s Easter holiday are examined more closely, they will reveal that not all players benefit equally from this annual four-day home improvement fest. Industry leader B&Q is set for a bumper time, while second-placed Homebase, hampered by its continuing problems integrating 200 Texas Homecare stores into its chain, will not have fared so well.

Significantly, Homebase, the J Sainsbury-owned DIY chain, chose Easter week to launch a hunt for its first marketing director (MW March 28). The new appointee will take charge of the company’s 15m advertising through Abbott Mead Vickers.BBDO, as well as uniting other disciplines which have previously been spread across the company.

Existing head of marketing Mike Samuel will report to the board-level appointee. But whoever gets the job will be saddled with the task of marketing a brand in a state of flux as Homebase struggles to integrate the Texas stores it bought for 290m two years ago. J Sainsbury has decided to accelerate the integration process, which was to take five years, to only three.

Industry observers noted it was “about time” Homebase brought in a marketing director to make the task of marketing the Texas stores easier. The chain says the time is right, as it has now got all the Texas stores under the Homebase name.

However, it is still a long way from converting more than 200 stores to the Homebase format, although they have been rebranded with the Homebase name. In many of the renamed stores, the company has still to apply the Homebase style of working on product ranges and distribution systems. And it is even further from showing that the acquisition was a wise move.

The housing market is stronger than at any time since 1988, with consumers jingling the proceeds from building society windfalls in their pockets and one pence coming off income tax. But, unfortunately for Homebase, its acquisition of Texas may be tying up too much of its money, and time, to capitalise fully on this DIY boom.

When the deal was first announced, some analysts decried the takeover as an expensive way for Homebase, with only 82 stores to become a national DIY chain. The past two years have proved them right, as the costs of the acquisition have spiralled and the losses of Texas stores have proved impossible to turn round.

Having originally set aside a one-off 48m provision to account for the takeover, J Sainsbury was forced to announce a further 50m provision this year. It also believes that it over-paid Ladbroke by 70m for the deal. The disparity in price comes from the fact that Homebase did not get the stock it was expecting. Although arbitration supported J Sainsbury’s position, it ordered Ladbroke to pay only 10m in compensation. J Sainsbury, already forced to issue a profit warning, could be 110m worse off from the acquisition than it expected.

Roy Maconachie, analyst at stockbroker Henderson Crosthwaite, says: “It has been a good deal – but only for B&Q. It has taken a loose cannon out of the industry which used to use discounting.” He says that, ultimately, converting Texas stores to Homebase takes out a direct competitor to B&Q’s power-tool positioning, as Homebase offers “soft end” home improvement, such as furnishings, curtains and decorating.

But not all analysts share McConachie’s downbeat view of the acquisition. Homebase is the only part of the J Sainsbury group performing well. The company’s half-year results last October showed that operating profit for Homebase grew by 40.2 per cent to 26.5m, with sales up by over 16 per cent and like -for-like sales up 8.3 per cent. Just to ram home the point, J Sainsbury bought out the 25 per cent minority stake in Homebase held by Belgian GIB Group for 65m in September 1996.

While announcing the company’s results, chairman David Sainsbury said: “The conversion of Texas stores to the Homebase format continues to be extremely successful and is the key to unlocking the long-term potential of the Texas acquisition.” He claims that 23 Texas stores converted to the Homebase format achieved an uplift in sales of 45 per cent.

But Texas stores made an operating loss of 11.5m in the first six months of 1996 on sales of 365m. One analyst says: “The prospects for the DIY sector are improving, but the performance of Texas stores has been disastrous. When J Sainsbury gets the whole lot converted, it will be able to say whether it was worthwhile.”

Meanwhile, B&Q stands out as a business which has built itself up after years of uncertainty. Parent company Kingfisher’s preliminary results for the year to February show sales rising 14 per cent to 1.5bn, with like-for-like sales increasing by nearly ten per cent. Profits rose 75 per cent to just under 100m.

The Kingfisher chain has built sales from its giant Warehouse stores which are over 100,000 sq ft in area, and contribute a fifth of the chain’s total turnover.

B&Q’s success since last April comes after Kingfisher chief executive Sir Geoffrey Mulcahy reined in its store opening programme and told the chain’s management – headed by chairman and chief executive Jim Hodkinson – that before opening new stores, they would have to improve the chain’s retailing systems. Stocks were reduced and greater efficiencies, from the supply chain, introduced to put the retailer back on track.

Whoever is chosen as Homebase marketing director will have to cope with the structural problems of the chain – the poor performance of the Texas stores, many of which are poorly located. They will also have to cope with more efficient competition from a rejuvenated B&Q.

Homebase’s marketing tactics mirror those of J Sainsbury’s. Its Spend & Save loyalty card is key to the chain’s communications strategy, and is being used to offer insurance products. A month ago it launched the Homebase Living magazine. This Easter, Homebase launched its first national ad campaign, featuring its promotional scratchcard, in conjunction with Air Miles, which invites customers to win holidays.

Clearly Sainsbury’s believes it can offset some of the losses from the Texas acquisition by ramping up Homebase’s marketing efforts and improving the parlous state of the Texas stores. With the integration process accelerated, the new marketing director is going to have more than last weekend’s sales figures to think about when they are finally appointed.

Comments

    Leave a comment