Kingfisher has faced the toughest trading conditions for many years in the UK and the impact of a sudden downturn in consumer spending has more than offset good performances in France and in the Group’s other international markets. Kingfisher made good progress against its longer-term objectives, strengthening its established businesses, expanding its developing operations, entering new markets and harnessing the Group’s buying scale. However, the short-term trading environment in the UK meant that sales and profits at B&Q, Kingfisher’s biggest business, were significantly affected.
Difficult short-term trading conditions
In 2005, the UK economy grew by 1.8% with total retail sales growing by just 1% on the previous year. According to government figures, this was the lowest economic growth since the Second World War.
UK consumer spending has been dampened by high levels of household debt and rising taxes, as well as higher utility and fuel bills. Concerns about the outlook for the housing market have further impacted the home improvement sector. The government’s retail sales figures for 2005 show that total ‘household goods’ sales fell by 3.7% during the year. Against this very tough background, B&Q has grown its share of the UK’s Repair, Maintenance and Improvement market.
To address these short-term challenges, and to drive long-term progress, a new management team at B&Q, led by Ian Cheshire, has taken firm action to manage costs, drive customer traffic and support sales, consolidating B&Q’s longer-term leadership in the market.
These initiatives, covered in more detail in the Operating Review, included the streamlining of the Store Support Office in Southampton and the closure of 17 stores in markets already served by other B&Q stores. In 2006, the first three of around 17 of the larger B&Q Warehouse stores will be converted to the smaller mini-Warehouse format. Future store development will focus primarily on revamping existing stores, and opening new lower cost, higher return mini-Warehouse stores.
The pre-tax exceptional costs of the store rationalisation and the cost reduction programme are £205 million, of which £149 million are cash costs.
In the UK, B&Q continued its longer-term objectives of broadening its product offer for customers and offering even more competitive prices. The programme of modernising the smaller, older stores, which started in 2003, made good progress, with nearly half of these stores now converted to the more modern mini-Warehouse format. These stores are performing well and the format is proving popular with customers. The ongoing development of the next generation of the larger Warehouse stores also made encouraging progress with the opening of new-look stores in Gloucester and Milton Keynes.
B&Q is making these changes from a position of strength. It is the clear market leader in the UK with a strong brand built on value for money. I am convinced that the new initiatives being introduced will make B&Q more attractive to its customers and more valuable for its shareholders.
An important milestone in the year was the establishment of a new UK Trade division, led by George Adams, to complement B&Q’s largely retail consumer business and target the UK market for trade and building materials. This division includes Screwfix Direct, which has performed strongly following the previous year’s expansion of fulfilment capacity. Screwfix Direct’s Trade Counter trial, set up to build on the main online and catalogue business, has been successful with seven operating by the end of the financial year and 15 more expected to open in 2006/07.
The year also saw the opening of the first two Trade Depot branches with encouraging results. Adapted from the Brico Dépôt format in France, Trade Depot is aimed at serving the needs of small builders and specialist trade customers.
In France, Kingfisher successfully continued its ‘twin-track’ strategy of developing Castorama for the mainstream consumer and Brico Dépôt for the heavy DIY user or trade professional. Castorama is now three years into its revitalisation programme, with a quarter of the stores upgraded to a more modern format and continued progress in price competitiveness, range and service. The performance of these stores is continuing to improve, with the most recent example in Englos, near Lille, bringing together all the Castorama team’s work on ranges, prices and customer service in an attractive, modern environment.
Brico Dépôt added eight new stores in the year, bringing the total to 73. Sales passed the £1 billion mark for the first time and the Brico Dépôt store in Artigues, Bordeaux, delivered the highest sales of any store in the entire Group last year. The store, which is featured on the cover of this year’s Annual Report, delivered sales of €58 million from selling space of 6,200 square metres, a truly exceptional performance, even by Brico Dépôt’s high standards. In Kingfisher’s other international markets, 47 new stores were opened in eight countries. Expansion continued into new, developing markets with significant growth potential. The first B&Q Home store was opened in South Korea and the first Castorama Russia store opened just after the end of the financial year, Kingfisher’s 11th national market.
During the year, Kingfisher completed the acquisition of the OBI stores in China consolidating B&Q China’s market leading position in this most exciting market. The OBI business has been successfully integrated and all the stores have now been rebranded under the B&Q banner. With 48 stores trading by the end of the year, B&Q China is now twice the size of its nearest competitor and is one of the largest western retailers in China.
Harnessing our strengths
Cross-Group supplier programmes are a key part of Kingfisher’s strategy, helping operating companies use the Group’s scale and international reach to offer customers the best products at the best possible prices. During the year, the development of Kingfisher’s own-brands continued with further roll-out of the Performance Power range of power tools and the Colours range of paint and decorative ranges across more of Kingfisher’s operating companies. Direct sourcing increased by 5% to US$575 million. Another key strength is the sharing of ideas around the Group. Important examples this year have been the strong influence from B&Q China and Castorama France on B&Q’s format development and Brico Dépôt’s influence on Trade Depot.
Board changes
On behalf of the Board and management of Kingfisher, I would like to pay tribute to Sir Francis Mackay, who retires from Kingfisher at the Annual General Meeting in May. Francis has been an outstanding Chairman, steering Kingfisher through a period of major change, and we wish him every success and happiness in the future. We’re delighted to welcome Peter Jackson to the Board and we look forward to working more closely with Peter when he becomes Chairman in May.
Outlook
The UK home improvement market continued to weaken into 2006. At the time of writing, with the important spring and summer season still to come, it is too early to forecast the full year, although a continuation of the recent stronger mortgage and housing trends could provide some support later in the year.
Over the longer-term our home improvement markets across Europe and Asia remain fundamentally attractive with good prospects for sustainable growth. The Board believes that the actions we are taking will position Kingfisher well for the future.
Gerry Murphy Group Chief Executive
Gerry Murphy, Kingfisher’s Group Chief Executive, pictured with Nick Whyte at the new B&Q Warehouse store in Milton Keynes. The store, which opened in December 2005, showcases new ranges and merchandising techniques, with more kitchen and bathroom room sets and a wider range of ‘finishing touches’ products.
