Business review

Delivering more value – Creating the leader

Aim – to deliver faster growth and higher returns by working together to become the world's expert at making home improvement easier for customers

The next phase of our development builds on the success of 'Delivering Value' which has repositioned Kingfisher as a strong business in the attractive home improvement market.

We currently operate in eight countries, spanning over 500 million households. Around £120 billion is spent per year on repairing, maintaining and improving these households. Spending in developed markets has tended to reflect underlying consumption patterns whilst in the developing markets rising wealth is fuelling accelerated growth as home owners catch up with developed country standards. As well as growth potential, the home improvement market is also attractive to retailers because of the relatively small number of well known manufacturer brands. This means a specialist home improvement retailer provides a vital role for the consumer by offering a wide product choice and expert advice. They can offer a high proportion of 'own brand' product, achieve economies of buying scale and have a more defensible position against online or generalist operators when compared with other retail segments.

However, the lack of sizeable, global manufacturer brands in our sector has meant there has been relatively limited product innovation in recent years to make home improvement easier and more accessible for the consumer. As a result demand has not been stimulated to its full potential.

This is particularly true in the more developed markets such as the UK and France where householders generally have a list of work needed to be done but their repair, maintenance or improvement jobs are thought to be too complicated or too costly. We believe there is a big opportunity for a real retail leader to emerge to address this opportunity and unlock the latent demand in these markets.

We aim to capitalise on the attractive characteristics of our market and to use our unrivalled international scale and experience to develop products, services and channels for our customers that make their household jobs easier to do. By doing this we will create the leader in our industry and 'accelerate away from the pack', delivering faster, sustainable growth and higher returns. Over the coming years we will focus on three themes:

Strategic transition 2011/12

"We believe we can stimulate the overall market, grow our like-for-like sales and our market share by becoming the world's expert at making home improvement easier for our customers."

Product

  • We will establish for the first time a product innovation function to design new, easier to use products under the banner of our 10 new own 'superbrands'. These products will be exclusive to Kingfisher businesses
  • We will use our scale and global sourcing expertise to bring these products first to market and at great value for money
  • We will expand our direct sourcing network across the world to find the best sources of quality and affordability

Multi-channel

  • We will add new digital channels for the convenience of our customers

Advice

  • We will be the best at offering advice and demonstration whether that is in store, online or through social media
  • We will de-mystify 'Eco' to make this important trend more accessible

"By having a 50% core common range across all our businesses we will use our scale to accelerate innovation, stimulating overall market demand and growing our like-for-like sales and our market share. Our scale will also make home improvement more affordable for our customers whilst boosting our margins."

This is possible because tastes across our markets are increasingly similar as customers travel more and buy products produced from international sources. We already sell the same categories in our stores, such as building & repair materials and tools, gardening and seasonal products, decoration products, kitchens and bathrooms. However, less than 5% of individual products on sale across Kingfisher's businesses are common to more than one business and sourced from a common supplier, reflecting our previous conglomerate organisation. As we progress towards a more integrated organisational approach we will increase the proportion of products that form a core common range to around 50%. Much of this will be our own brands, sourced direct through the global Kingfisher Sourcing Organisation.

Greater commonality will result in greater convergence of our operating models around the Group, enabling operating efficiency and cost productivity gains.

"By becoming the best at making home improvement easier and developing a core common range we will be able to accelerate and improve our expansion, thereby growing total sales and market share."

Having strengthened the businesses and established stringent capital disciplines, Kingfisher is now in a better position to successfully accelerate its expansion. There is potential to grow our current store network from 856 to over 1,100 in our existing markets over the long-term, and also establish a multi-channel presence in each one. Over time we would expect participation of sales from the three geographic operating divisions to be broadly equivalent (UK & Ireland, France and Other International).

'Proven' territories

  • We will expand faster and deeper into existing markets where returns are proven

'Early phase' territories

  • We will continue to develop in China and Russia and determine suitability for eventual expansion against challenging return hurdle rates

New territories

  • We will identify and enter new markets with stores and other channels, leveraging our core common range and more common operating model

Organisational development

Successful delivery of the next phase will require us to complete the journey from our origins as a retail conglomerate to a single, unified retailer. Much progress has been made in recent years and the organisation is now ready to complete the final steps in our journey, thereby unlocking the full potential of our unique international talent and scale.

At the same time it is also very important that we retain the value of our local diversity and closeness to the local customer. Rather than adopting a fully centralised model we will retain our existing country management structures whilst in addition creating a series of teams that work across traditional country and business boundaries. A number of these multinational, multi-operating company teams are already established, are well resourced and empowered to manage key projects, such as common ranging and multi-channel development, under the direction of the Group Executive. Known internally as 'One Team' this new approach will enable us to move from the existing 20:80 (common:local) business model towards an 80:20 model.

Challenging goals

A key element of the success of the Delivering Value programme has been setting clear and challenging medium-term goals linked to share-based incentives. As we start to enter the next phase of Kingfisher's development a revision to the existing Performance Share Plan, covering the three years to January 2014, will be proposed for approval by shareholders at the Annual General Meeting in June 2011.

Under the proposals, share awards will be made for reaching stretching earnings and returns targets. The maximum potential share award will vest as follows:

  • Earnings: 50% for achieving a compound average growth rate (CAGR) of 15% in adjusted EPS over the three years. EPS in 2013/14 will need to be 31.2p to achieve maximum vesting
  • Returns: 50% for generating a cumulative Kingfisher economic profit target over the three years.

Kingfisher economic profit differs from other reported profit figures because it takes into account a charge for the capital employed in the business. In doing this the calculation treats leases as though they were owned assets within capital employed, capitalising them using long-term property yield methodology. For the purposes of the calculation, reported adjusted post-tax profit is used, but interest and lease costs are added back. A charge for the cost of capital employed is then deducted by applying the Group's lease adjusted WACC to its lease and pension adjusted capital employed.

These share-based incentives will cover the two Executive Directors and the top 50 senior managers with plans to extend elements of this scheme to the next 150 senior managers. Further share incentives for store managers will also be rolled out next year.

Strategic transition 2011/11

Delivering value

Delivering more value – Creating the leader

Diagram showing the strategy transition

Kingfisher plc evolution

Conglomerate

Federation

Single integrated leader

Diagram showing the Kingfisher evolution
 

80% local flex

20% local flex