The usually infallible B&M posted a subdued set of interim results this morning.

The value giant’s pre-tax profits slumped 70.5% to £32.2m at the half-year mark, which it attributed to its struggling German division.

Jawoll, the fascia B&M operates in Germany, may translate to ‘oh yes’ but its performance was more ‘ach nein’.

It swung to a £12.2m pre-tax loss in the six months to September 29, compared with a profit of £1.1m the previous year, which has prompted a “strategic review” of the business.

Why has one of the UK’s most formidable operators had such trouble in one of Europe’s biggest discount markets?

Logistics issues

B&M chief executive Simon Arora describes a perfect storm of distribution and transport issues, which led to the business’ local warehouse failing to process the volume of orders required to stock its stores during peak. This meant expensive third-party logistics partners were needed, resulting in a 37.5% increase in adjusted operating costs to £50m.

Jawoll fascia

B&M admits it ‘made a significant misstep’ with its German business

These issues, which were exacerbated by Jawoll’s Soltau warehouse “not being geared up” to process products sourced from the Middle East, accounted for half of the German business’ total pre-tax loss. The remainder was down to subdued sales and subsequent price markdowns as Jawoll failed to supply key spring and summer ranges for shoppers in a timely manner.

This missed opportunity resulted in a 75-basis-point slump compared to the previous year.

B&M acquired Jawoll six years ago before it listed on the stock exchange, and Arora is quick to note that this is the first time the business has fallen into the red since B&M took ownership.

Nevertheless, Jawoll’s performance over the last year and in today’s results paint a picture of a business that has not been treated as a priority. After all, surely six years is enough time to have your warehouse geared up to process products from one of your most significant supply markets, particularly those that supply key ranges during peak periods?

Eyes on the prize

Arora concedes that the value retailer “made a significant misstep” with its German business during the half-year – and one that is out of character with the rest of the business.

While Jawoll sank to a loss, B&M’s UK performance went from strength to strength, with total sales up 13.8%, or 3.7% on a like-for-like basis, and UK EBITDA up 13.7% to £137.3m.

It is an impressive performance in a subdued market – and one at odds with the errors made at Jawoll.

Arora would not be drawn on whether he was still committed to keeping Jawoll in the B&M stable.

“Germany is an attractive market, but I don’t want to second guess the ongoing strategic review,” he says.

“B&M is still growing in the UK and is far from done in terms of expansion. It will open at least 46 stores this year”

The underlying question is whether the German market represents a big enough opportunity to justify the work and money it will take to get Jawoll firing on all cylinders?

After all, B&M still has a sizeable opportunity to go for in the UK. It is still growing in the UK and is far from done in terms of expansion. It will open at least 46 stores this year.

Meanwhile, Heron Foods, the discount food retailer that B&M snapped up in 2017, is growing rapidly with adjusted EBITDA up 24.8% to £12.3m over the half. With the discount food market growing, there is a big opportunity to be seized.

The retailer must also work to ensure French value chain Babou, which it acquired last year, avoids the same pitfalls as Jawoll. Arora was keen to stress its French business is well stocked and is not suffering the same logistics issues as Germany. It has also opened three B&M-branded stores in the country.

With so many opportunities to reach for, does B&M need to invest its time and energy turning around its underperforming German business? Should it not focus on the more immediate opportunities within its grasp?

German discount success may have seemed like the biggest catch six years ago – but today, B&M is a business with bigger fish to fry.