SBHD: DIY retailing is a risky business – misjudge the market, as many have done, and there’s a heavy price to pay. So is Sainsbury’s biting off more than it can chew with plans to buy a shaky-looking Texas?
Selling paint pots and ladders seemed so easy in the Eighties. But after the housing market collapsed, DIY retailers wondered where the new growth would come from. After all, you can’t sell off council houses twice over.
But houses will always need painting and curtains replacing. First prize in the DIY market will go to the retailer who gets the formula right – and knows when expansion has reached its peak.
The road to the high ground in DIY retailing is strewn with corpses. Attempts to rationalise the spare capacity in the DIY market have been ill-fated. Look at Do It All, the joint venture between Boots and WH Smith. Over-expansion in the Eighties meant the chain has had to dispose of up to 100 stores. Finding buyers has not been so easy.
Homebase is one of the few chains in a stagnating market to leap forward.
Sainsbury’s has made no secret of a wish to expand its business outside UK food retailing. But talking to Ladbroke about the purchase of the Texas DIY chain seems an expensive way of going about it.
Sainsbury’s Homebase chain has been selective about taking on new sites, and has built up a network of 82 stores. But analysts say taking on about another 200 Texas stores is one rung too far on the expansion ladder.
The accession of David Sainsbury as chairman of the group three years ago has led analysts to believe the company will be bolder and more prepared to acquire new businesses than under ex-chairman and cousin John Sainsbury.
Last summer, he launched a counter-bid against Tesco for the William Low chain in Scotland. This was either an aggressive Sainsbury tactic to make mischief for Tesco, or a reaction to losing out on a key piece of business. He then steered the group into a takeover of the Giant Food business in the US.
The new regime at Sainsbury’s knows it has the cash to make a speculative bid for a chain such as Texas, but some say it looks like David Sainsbury is biting off more than he can chew. The question is, how much of the Texas chain can be integrated into Sainsbury’s Homebase, and how quickly. Buying Texas stores looks like an expensive graveyard for Sainsbury.
A possible fit between Texas and Homebase appears far from perfect, even at first glance. Last year Texas managed to turn in profits of only Ãº7.8m on sales of Ãº690m. In the first six months of this year, profits fell even further to just Ãº2m.
The Texas management team has developed a new store format to refocus the chain on the “heavy end” of DIY.
Verdict retail analyst Clive Vaughan says the new management team is getting to grips with the problems, and is concentrating more on offering pure DIY materials. “There is some optimism that Texas is on the mend, although it has a lot of problems to overcome.”
US marketer Peggy Cornwell took up the reins of the marketing department at Texas in August. She has been at the forefront of a team assembled by chief executive John Coleman, who was brought in to turn around the chain’s fortunes in mid-1993. Coleman already had some success in restoring sales to the Dorothy Perkins chain.
Texas is now aiming to attract more serious DIY fanatics, by featuring more building products and follows the trend towards project-based retailing. So store layout projects such as “bedrooms” are kept together, rather than spreading the products for one job around the store.
Out goes the “Pretty Chic” departments which sold fabrics and home furnishings. In come trained staff to advise on heavy DIY jobs.
Texas has an advertising budget of Ãº18m (Register MEAL). But most of the advertising has been tactical, with week-by-week press ads focusing on product and price.
Under Cornwell, the ads have taken a different tack. Simon Howitt, group director of Grey London, the advertising agency that handles the Texas account, explains that more emphasis is being given to Sunday colour supplements and home improvement magazines. “The market has to motivate interest in the home improvement sector, and Texas has to reinforce the idea that it provides the solution,” he says. “The long-term strategy is that Texas provides ideas and `How To’ information on home improvement.”
The chain is testing the new format in selected stores around the country. It is following the trend of more project-based stores, and its marketing has been repositioned more towards male shoppers.
Homebase, by contrast, has built sales in the Nineties through specific targeting. The stores all feature Laura Ashley concessions that sell home furnishings and fabrics, with a stronger bias towards women shoppers.
A takeover could benefit Laura Ashley greatly, allowing it to extend its business far beyond its present capabilities.
The Homebase chain has 82 stores. Last year it piled up profits of Ãº24m on sales of Ãº328m.
It has outstripped its rivals by applying the science of food retailing to selling paint brushes and ladders. Stock is well laid out, and the Sainsbury’s name gives it a perception of quality.
Where established players such as Texas and Kingfisher’s B&Q chain have been slogging it out on price, Homebase has persuaded shoppers to pay a premium for presentation and customer service.
Sainsbury’s Homebase chain has been a strong performer, and seems to have hit on a profitable strategy in a flagging DIY market.
SG Strauss Turnbull analyst Robert Snaith is sceptical of a “full-frontal” takeover of Texas by Sainsbury’s. He points out that while obtaining planning permission for new food stores has become difficult, it is less of a problem to gain permission for DIY stores. Sainsbury’s paying over the odds for Texas will set the markets against the group. Anything more than Ãº150m for the whole chain is thought to be too expensive.
But such a move could make sense. Verdict’s Vaughan says that one of Texas’ big problems is its lack of retail back-up. Do It All has Boots and WH Smith to help with system integration. Homebase can rely on Sainsbury’s expertise in product distribution, and the service standards of its parent company. Vaughan says: “A deal could be good for Texas in that respect but there are some benefits for Homebase – Texas-branded kitchens are strong. There is a good synergy there and a deal provides a strong challenge to B&Q.”
This lack of retail backing is one of the main reasons Ladbroke is thought to be keen to sell off Texas. Retail is not one of its core businesses. Since Coleman was brought in to revitalise the chain, analysts have put forward the theory of a management buyout. This makes sense, as the team has developed the new concept stores. However, it is a brave management who goes ahead with such a buyout, given the as yet unresolved problems at the chain.
There is no doubt that a full takeover requires a sell-off of many Texas stores. So maybe a bid for a limited number of stores makes more sense.
Speculation has been rife that Texas will be broken up, its stocks ditched, and its stores sold to different buyers. First Leisure and Rank Organisation were mooted last week as possible buyers of some of the sheds, for conversion to bingo halls.
Some analysts are suggesting that a Sainsbury’s bid for a handful of Texas stores – about 30 to 40 is the best possible outcome. But unless Ladbroke is going for a wholesale break-up of the chain, this lacks credibility. Sainsbury’s will presumably look to pick up the best located Texas stores, leaving the Ladbroke chain in an even worse position.
The new format at Texas is said to borrow heavily from the B&Q Supercentre format. B&Q has, in turn, taken lessons on DIY retailing from the US, most notably from Home Depot. B&Q has hit on a clear strategy of upgrading service and simplifying the layout of its stores. However, it has still had to fight a price war with Texas.
B&Q has developed its Warehouse format of giant 100,000 sq ft stores, much along the lines of the Home Depot format. However, finding planning permission for such stores has not been easy, and its proposed expansion of format has run into problems.
But a combined Texas and Homebase could present a strong threat to B&Q’s market dominance. B&Q leads the market with a 15 per cent value share, according to Verdict, followed by Texas with nine per cent and Do It All with 5.1 per cent. Homebase has only 3.6 per cent.
Whatever the outcome of the Sainsbury’s/Texas deal, the DIY market is set for some radical changes over the coming year.
The much-vaunted arrival of the giant Home Depot chain from across the Atlantic would certainly change the DIY landscape in the UK. Ladbroke may be looking for a way out of the sector before such an earthquake occurs.