Russia may be hard to crack but Peter Høgsted vows Kingfisher’s Castorama chain can win DIY share there. Nicola Harrison reports from St Petersburg

Despite its cultural treasures, picturesque canals and stunning architecture, it is easy to forget that St Petersburg is a relatively young Russian city with a war-torn past, in a country still jostling to take a leading place on the world’s financial stage.

But its potential for home improvement retailers is undeniable. While driving through the outskirts of the city, where Kingfisher operates two Castorama stores, the opportunity becomes very clear: lining the streets are scores of run-down apartment blocks that look in dire need of renovation.

And Castorama is on a mission to provide Russians with the tools to turn their homes into the aspirational living spaces they crave.

Kingfisher’s mission has been the same in other emerging economies, including Poland, Turkey and China – which has had its well-publicised crises. But for Peter Høgsted, chief executive of Kingfisher’s international arm, it is Russia that gets him really excited. “If I could pick a retail market that keeps me stimulated, it’s Russia,” the Dane says with a grin. “There’s a total lack of developed retail. I’m pretty confident we’ll see our ‘next Poland’ in Russia.”

Kingfisher’s 51 Polish stores generated sales of £1bn last year, while the country’s DIY market is worth £7bn. Compare that with the £16bn Russian DIY market, where Castorama’s nine stores generated £150m last year. That is a pretty big market to go for, says Høgsted.

In the long term he believes Castorama can operate more than 200 shops in the country. Høgsted is in no rush to roll them out just yet but has vowed there will be 20 Castorama stores across Russia by 2011. “This will be a reality,” he insists. “I’ll put my head on the block about that.”

It has not escaped the former Ikea UK boss’s notice that his previous employer has stopped opening stores in Russia, citing the “unpredictability of administrative processes”, which experts believe refers to a culture of backhanders and corruption that apparently permeates Russian business.

But Høgsted shrugs this off. He says matter-of-factly: “All new economies have grey areas. But this is not our game. Of course we have had our issues, and we have discussions about how to get on the energy grid and about finishing off stores in time. But when it comes to bribing and black money, we walk away from it. We’ll miss the short cuts but will create a sustainable long-term strategy in a safe and secure way.”

Such single-mindedness will come as no surprise to those who know Høgsted, who is highly regarded among his peers, having led the UK’s and some European divisions of the world’s biggest furniture retailer, Ikea. His 13 years at the business came to an end after a career-changing chat with Kingfisher group chief executive Ian Cheshire last summer. “Ian said he wanted to
change Kingfisher from a financial holding company to a retail group,” recalls Høgsted. “It sounded exciting so I made the jump.”

In the 10 months since taking the helm of Kingfisher’s international arm, Høgsted believes he has helped deliver a “clear direction” for the business, including producing a turnaround plan for China and developing the next steps for Russia.

This year he has also taken on the responsibility of a group commercial role. “We want to develop a common range with our own design and own production,” he says, with an air of excitement. “We want to show what things we can do together as a group.”

In the next 12 months, Høgsted says he wants to show that China is “going according to plan”, while developing Russia as well as Poland, which he believes has a “particularly big contribution to make to the group”. 

The mountain he has to climb to turn around China does not seem to phase Høgsted too much. “It’s an exciting task to take a broken business and try to stabilise it,” he says. “The China turnaround plan is 113 days old, and so far so good. We’re very optimistic things will go the right way.”

So much so, in fact, that Høgsted was happy for analysts on the trip to place £10 bets on when they expected Kingfisher’s Chinese business to become profitable. Presumably that means he thinks he might surprise them. Chinese losses increased 25.7 per cent to £14m in the quarter ending March 31. The retailer’s second-quarter update was due yesterday, after Retail Week went to press.

Best policy

So what is Høgsted’s ultimate vision for Kingfisher? While being ferried from one Russian DIY store to another on the analysts’ trip to St Petersburg, he reveals it is not – perhaps surprisingly – necessarily aiming to turn Kingfisher into the biggest DIY retailer in the world, overtaking US giants Home Depot and Lowe’s.

“Having that ambition – to be the biggest in the world – is not worthwhile,” states the straight-talking Høgsted. “It’s far better to be the best, and the biggest and best don’t always go together.”

Observers are pleased with Høgsted’s approach. “Peter has impressed me so far,” says Credit Suisse analyst Tony Shiret. “He seems to understand the dynamics of retailing. He’s a mixture of strategist and operations guy, and you don’t often find them.”

One operational idea that Høgsted is testing in Moscow could find its way over to B&Q China. Expensive land and sky-high construction costs have made it hard to expand in the Russian capital, where Castorama has one store and houses its distribution centre and head office.

As a result, big-box DIY retailers have only 11 stores between them in Moscow, compared with 53 in St Petersburg. “It demands we do business a little differently,” explains Høgsted.

So Castorama will pilot a new smaller-store model in Moscow, taking up just 60 per cent of the floor space of a normal-sized shed, while still stocking the full 35,000 product lines.

Høgsted is considering using large vending machines to store stock, similar to the 80m-high ones that Ikea uses. He admits Cheshire thinks the idea sounds “crazy” but insists it’s a great way of condensing space. “It could be our ticket into Moscow,” he says.

While the capital may be proving hard to penetrate, Castorama has had an easier ride in the rest of Russia since launching in 2006. Its nine stores across the vast country employ 1,900 people and serve more than 500,000 customers a month.

In terms of market share, Castorama trails rivals Obi and Leroy Merlin by number of stores, but has ambitions to turn the tables. In the recession, Russians – like Britons – care little for luxury brands and are constantly hunting out value.

As Castorama Russia marketing director Natalia Morozova says: “It’s fashionable to be price-conscious right now.” The retailer thinks it can steal a march on price and has adopted an every-day-low-price architecture, meaning it will not embark on discounting or sales activities. “Price perception is a key driver for us,” explains Morozova.

But the recession has had other effects on Russia. The property market is just 15 years old, private ownership of land was granted only five years ago and mortgages are a new phenomenon.

Before they were introduced, Russians tended to purchase homes with cash. Demand for mortgages rocketed 270 per cent between 2006 and 2008, with the average mortgage rate an eye-watering 12 to 14 per cent. However, the recession has taken its toll, and demand plummeted 67 per cent between January and March 2009 compared with the same period last year.

Mortgage rates have increased to 13 to 17 per cent since the end of 2008. Consumer income declined 0.4 per cent between January and May 2009, while the stability of the rouble has been rocked in recent months after years of stability.

Opportunity knocks

The economy may look wobbly, but Castorama argues there is plenty to play for in the fragmented Russian home improvement market.

While rivals such as Baucenter flounder and halt expansion plans and consider hiving off parts of their business, Castorama is on the expansion trail in a region that lacks an organised retail presence. “Castorama is a young and ambitious business,” says Høgsted. “It’s not as stable as Poland but there’s a hell of a lot of energy and it is a forward-looking organisation.”

Høgsted says Castorama Russia chief executive Oleg Pisklov has “agreed to a break-even business already this year”, adding: “There’s nothing worse for retailers than to see that all your efforts have not ended in profit.”

Investec analyst David Jeary says: “You can tell just by looking at the housing that there must be a huge demand to improve the living accommodation. There’s obviously lots of potential in Russia. Organised retail is still in its infancy.”

And Russians are just getting used to the way Westerners do retail. Big-box retailing is new to them, and Kingfisher International operations director Richard Boyd says first-time customers tend to wander around Castorama stores on a few occasions in a state of wide-eyed wonder before eventually returning to purchase – which they seem to be doing more and more.

Feeling positive

In 2008, Castorama Russia’s like-for-likes jumped 24.6 per cent. The average transaction value is $40 (£24). The retailer has noticed a “definite slowing down” in the past few months but it
is still showing positive growth and is optimistic it will continue to take market share.

A peek at one of its rival’s stores makes that seem entirely plausible. A Maxidom shed in St Petersburg offers a cluttered range of everything from Old Spice aftershave to doorknobs, with a bewildering store layout that sets toothpaste alongside car oil and has power tools confusingly sold in several sections of the store.

The Castorama offering is much more streamlined, and resembles a B&Q store in the UK. But unlike B&Q, it sells only one own-label line in the power tools category, although Castorama plans to expand the ranges so own-label will eventually account for 10 to 15 per cent of sales.

The retailer is taking advantage of the falling cost of advertising in the recession and, like B&Q, ads feature its own employees. But staff issues have sometimes been a headache for Castorama, with some teething problems experienced in customer service – the bread and butter of any good retailer.

There is said to be a belief held by St Petersburg locals that those who walk the streets with a smile on their face are a bit simple. This view, which implies that a warm, friendly demeanour does not come naturally to the average Russian, does not bode well for customer service. But Boyd says Castorama has worked hard on service in the past few years, and it is becoming a point of difference for the retailer.

With so much to do in each of the territories he oversees, Høgsted is a busy man. What does he do to relax? “I do retailing,” he jokes. “When work is stimulating and challenging, you don’t feel it as pressure.”

He does find time to play handball, though, as well as some games of tennis with Kingfisher group finance director Kevin O’Byrne. “I win, of course,” laughs Høgsted. “Nine and a half times out of 10, I win.”

Høgsted’s competitive streak will no doubt benefit Kingfisher’s quest to dominate the home improvement market in Russia – and indeed the world over.

24.6% Castorama Russia like-for-like sales growth in 2008

9 Number of Castorama stores in Russia

Russia is…

  • Roughly twice the size of the US but, with 142 million people, it has less than half the population
  • The fastest growing economy in Europe
  • The sixth largest economy in the world
  • Ranked 11th in the world for number of billionaires
  • Ranked second in the world for mobile phones per capita

Other big-name retailers in Russia