A recent slump in profits has forced Halfords to reassess its strategy, but the retailer’s new chief executive is confident he knows the best route forward.

Halfords

Halfords’ new chief executive Matt Davies is revving the retailer up a gear after unveiling his three-year strategy to put it on the road to recovery and make it a £1bn revenue business by 2016.

The ‘Getting into Gear’ plan is based on the three pillars of Halfords’ strategy, which pre-date Davies’ arrival
last autumn - supporting drivers of every car, inspiring cyclists of every age and equipping families for their
leisure time.

Matt Davies, chief executive, Halfords

Matt Davies, chief executive, Halfords

Davies has drawn up a plan comprising five steps: service revolution, re-establishing its specialist credentials through ‘the H factor’, stores fit to shop, 21st century infrastructure and click with the digital future.

The programme was revealed as the car parts and cycle specialist recorded a 24.5% slump in full-year pre-tax profits to £71m - although that still hit the top end of City expectations and group sales edged up 1% to £871m.

To put Halfords on the right road, Davies intends to plough £100m into the core retail business in order to
generate profitable revenue.

“For 10 of the last 13 quarters the business has gone backwards,” says Davies. “Our retail revenues have gone from £812m in 2010 to £746m.

“The costs have all been taken out of the business yet our cost base is rising by 2% a year. If you flow that on a few years, it’s not a pretty picture. So, we have to generate some top-line like-for-like growth.”

For Davies, better customer service is crucial to driving profitable sales growth, and a key store refurbishment programme will account for half of the £100m investment.

But the investment is expected to hit profits over the next two years and forecasts have consequently been cut by analysts.

That, combined with a dividend chop, led some City analysts to question the initiative. Espirito Santo
analyst Sanjay Vidyarthi says: “The implication is that 15% sales growth over three years will not generate any EBITDA growth, suggesting a deeper level of investment than expected.”

But Davies is confident his is the right route for Halfords. “We’re going to need to invest, hence the short-term profitability and cash generation impact,” he maintains.

“Halfords is a good business. It already had a clear strategic framework in place but we’ve got a clear imperative now from being good to being great, and to make sure we drive profitable sales growth.”

Service revolution

Halfords has a strong service proposition that it has been improving over the past year, such as its WeFit service, which fits windscreen wiper blades, bulbs and batteries. Last year the proportion of such products bought and then fitted at Halfords increased 8.9% to 35.2%.

Better customer service to drive Halfords’ growth

Better customer service to drive Halfords’ growth

Davies believes that such services must be accompanied by improved customer service. Halfords’ customer service standards are often criticised but if they can be moved up then they can be key to sales of services, crucial to increasing profitable revenue.

Customer reviews showed Halfords offered inconsistent customer service. The retailer’s Net Promoter Score, which assesses the likelihood of customers recommending services to others, was, until very recently, close to that of a value retailer. For a retailer that claims to be a specialist, it was not a good result.

Through a £7m investment, Davies aims to transform customer service among Halfords’ 12,000 staff by opening Halfords Academies to provide the “training that colleagues need”. He is also launching a qualification programme called 3-Gears, which trains and rewards the Halfords teams for serving customers.

All Halfords staff will receive Gear 1 training, providing product knowledge and customer service. Gear 2 will bring more specialist training in either auto and leisure or cycling. Gear 3 will create product experts qualified to train others. Gears 2 and 3 both entitle store staff to pay awards once completed.

The retailer will also change the recruitment process. Davies explains: “We have an issue that 20% of people who join the business, three months later are no longer in the business.

“We can’t deliver the service we aspire to and the level of expertise to our customers if we’re not recruiting people, training people and supporting people in building careers with Halfords. That’s why we want to half that [20%] in the next couple of years.”

Halfords is also making changes to its contracted hours and rotas to enable staff to interact with customers more.

The H factor

Halfords will reassert its authority in core auto and cycling ranges - although leisure remains a key category - through better product development and design, stronger value and better space allocation, to enable growth in existing and new ranges.

By the end of summer Halfords aims to have altered the layout of 100 stores to release space for the cycling category. This will involve moving child seats downstairs in stores and shrinking space devoted to car enhancement, where like-for-likes have slumped 4.2% because customers are spending less money on their cars in the gloomy economic environment.

Halfords is keen to increase its market share in the buoyant cycles category, which is forecast to grow 5% a year.

Halfords will refocus on its auto and cycling ranges

Halfords will refocus on its auto and cycling ranges

At present Halfords sells 1 million bikes a year and has a market share of between 20% and 25%.

The retailer will build on the momentum of last year’s summer of sport by celebrating the ‘Year of the Cycle’ at Halfords. It will bolster the offer with new exclusive products and there will be relaunches across its top-end Boardman bikes and Voodoo cycle range. Halfords is adding models to its Victoria Pendleton range and later this year will relaunch its Apollo range.

Halfords has a great opportunity in the cycling parts, accessories and clothing market, which is worth £700m. At present it has 1,700 such lines and a 15% share of the market. The intention is to grow that after Halfords launched an additional 13,000 lines in May.

Halfords is teaming up with broadcaster Sky as its technical partner for Sky Rides bike rides nationwide. It will promote its cycle repair offer to the 150,000 participants in the events.

The retailer has also launched free kids’ clubs in the school holidays to teach youngsters how to maintain their bicycles and learn how to do things such as fix punctures.

Davies says: “I think it is a great shame when someone gets to the age of 16 and doesn’t know how to change a puncture. It is not about selling things to them. For me, that’s what a great retailer should be.”

Stores fit to shop

Halfords has 466 shops. Many observers have previously suggested store closures may be necessary as online retailing becomes more popular. But Halfords is not planning any significant closures, and revealed that 99% of its stores generate a cash profit.

Shops also remain vital contact point for customers - 90% of Halfords’ online orders are collected in store.

The retailer does plan to resize stores and open more premises in Greater London where it is under-represented, but is likely to maintain the current store level.

But the key thing for Davies is to transform the look and feel of the stores. He is ploughing half the total £100m investment into refurbishing 150 shops and refreshing every cycling area in the next three years.

Halfords will launch the new design at three stores - York, Coventry and Evesham - by the end of August. The refit is designed to offer a more coherent customer journey, more live displays and to bring the cycle repair and WeFit offer to the forefront.

Davies says: “Our estate is no longer at an acceptable standard of presentation and significantly lags behind our customers’ expectations, especially cyclists, where a fresh and modern store environment is so important.”

The new cycling areas will be segmented according to use rather than price, as was the case before. The areas will also deploy graphics to “enthuse you to get into cycling”, says Davies, and cycle accessories and clothing will be better displayed. He is scrapping the three lab store trials that were introduced last year.

Group finance director Andrew Findlay says: “There are some interesting wins [from the lab stores] and some things we won’t repeat that didn’t work, which we were trialling at the time.

We want to take it on a step further.”

21st century infrastructure

Despite Halfords driving its online business, Davies is clear that stores remain crucial.

“Shops are always going to exist,” he says. “The world is not going to go totally online. If you want to guarantee your existence as a retailer you have to provide a pleasurable shopping experience and that’s what Halfords is about.

Halfords in numbers

“Come into our stores and share our passion. There is such a significant service and expertise element. If we can bring that out we can prosper in a world that is going more online.” Over the next three years Halfords will invest £38m in improving its IT and systems to ensure they keep up with business growth.

The retailer has reorganised its supply chain around a central distribution centre in Coventry and a specialised cycle centre in Redditch. It now aims to focus on improving its supply chain to support customer service.

Last month the retailer appointed former Tui business change delivery director Anna Barsby as its IT director. It is a role Findlay had been responsible for in the interim until the position was permanently filled.

Barsby will be tasked with urgently overhauling the whole of the IT system. This year she will relocate Halfords’ data centre, carry out software upgrades and develop a store voice and data network. Halfords is also trying out air-lock deliveries, which arrive overnight to enable store staff to work on them before the shop opens.

Digital future

Halfords’ online sales surged 15.9% last year, representing 10.3% of the total.

As online becomes increasingly important the retailer is designing a new website after a digital review found that it did not provide a good enough customer service experience.

The upgraded site, which will go live at the end of the current financial year, will be centred around the three strategic pillars so that customers can browse and shop easily in dedicated product zones.

Halfords also aims to take on the pure-play online cycling specialists such as Wiggle and Chain Reaction. Davies says: “We’ve got huge respect for those businesses. We just want a bigger element of that part, accessories and clothing market.”

The new site will be optimised for mobile devices, which at present account for 24% of online retail sales.

The figure is expected to double in the next few years. Halfords will also develop community features such as live chat, integrated dynamic content and help pages.

JP Morgan analyst Georgina Johanan says: “We see the introduction of a new website as a key positive given the
tangible uplift that we have seen this generate for other retailers.”

Halfords is also working to improve online fulfilment, particularly of reserve-and-collect orders, stock availability and return capabilities.

Autocentres

Halfords Autocentre

Halfords Autocentre

Halfords’ 283-strong garage business, Autocentres, is not included in the ‘Getting into Gear’ strategy.

It has been the strongest part of the group for a while as the retailer has invested £6m a year in expanding the estate by 20 to 30 centres each year.

Halfords believes Autocentres is a significant growth opportunity for the group, calculating an opportunity to open up to 700 premises by filling the gaps independent garages are leaving - they are closing at a rate of 1% to 2% a year.

But Matt Davies has brought short-term profit expectations down. He believes they were overly optimistic because investment in new centres drags down short-term profitability.