Everybody knows that B&Q has too much space, including Kingfisher’s management, but how do you start to get rid of 27.5m sq ft of it?

Everybody knows that B&Q has too much space, including Kingfisher’s management, but how do you start to get rid of 27.5m sq ft of it?

With no end in sight for austerity for the UK consumer, it is comforting that only 35% of Kingfisher’s sales in the last financial year came from B&Q. It is less comforting that B&Q accounted for less than 25% of the group’s total retail profit and that B&Q’s 27.5m sq ft of selling space represents nearly 50% of the Kingfisher total.

Clearly, the dreadful summer weather last year was bad news for B&Q’s seasonal and outdoor ranges and so there were some mitigating circumstances behind the further fall in B&Q profits in 2012/2013, but Kingfisher has to be prepared for the DIY market to stay challenging, not least after the coldest March for 50 years and with a distinctly chilly Easter weekend coming up.

Although B&Q seems to have seen off most of its “big box” competition and its chief rival Homebase is making no money, it was interesting that Kingfisher CEO Ian Cheshire today pointed out that the DIY market is still uniquely competitive and that the growth of Toolstation, B&M, The Range and Wilkinson has taken £600m a year out of the available sales for B&Q and its sister company Screwfix.    

For today’s DIY market, Kingfisher thinks it probably has 20% too much space in B&Q, having looked at the issue on a town by town basis. But getting rid of 5.5m sq ft of out-of-town retail park space isn’t easy. B&Q has relatively few leases coming up for renewal in the next few years and paying out the unexpired leases on stores that still actually make money doesn’t seem to make economic sense, so the solution will take time.

With today’s final results announcement, however, came the first news of a “rightsizing” (aka downsizing) initiative for B&Q that management has been working on for several months. The big 140,000 sq ft freehold store at Belvedere in Kent has been cut in half and the initial sales density in the smaller store looks very promising, although the new Asda superstore next door won’t open until June. Another 4 stores are being actively worked on, including a development with Morrisons in Altrincham, and there are further projects in the pipeline.

Ironically, the most promising candidates for taking surplus B&Q space are the food retailers, despite the much-heralded end to the “space race” announced by Tesco. Fortunately, in many regions of the country, Morrisons, Asda and Sainsbury are still keen to expand, so talks are taking place with all the big supermarket chains. The good news is that they are space hungry, pay higher rents than DIY sheds and have good covenants for the landlords. The bad news is that they also need lots of car parking and planning approvals for change of retail use take time to come through. B&Q has some attractive out-of-town space though, including 120 so-called “Warehouse” stores.

It remains to be seen whether B&Q can up the pace of its rightsizing (sorry, downsizing), but if they can only shrink 5 stores by say 70,000 sq ft each a year, then it will take over 15 years to get rid of 5.5m sq ft of space. By then, one suspects that the fast-growing Screwfix operation (which sells to the professional tradesmen) will be making more money than B&Q, but Kingfisher has neatly avoided that embarrassing scenario by announcing today that it is to merge the results of B&Q and Screwfix together. This is ostensibly because the two businesses are now increasingly run together, like the 2 French chains of Castorama and Brico Depot, but there may be an ulterior motive. Last year Screwfix made £47m in retail profit (a 6.8% margin), versus the £187m profit (a 6.2% margin) of B&Q.

So, it is certainly right to be shrinking B&Q’s space and management should be applauded for their initiatives, but if B&Q is to really bounce back this year in profits it will need a heatwave bonanza over the two May Bank Holidays to make up what has been lost in the spring so far. Nobody would be too surprised if on May 30th, when Kingfisher announces its Q1 results, B&Q profits are not on the slide again.

Fortunately, the adverse foreign exchange pressures on Euro and zloty profits translation have eased for the group, helping the outlook for the big businesses in France and Poland, so at this stage of the year City forecasts for adjusted PBT in the new-year are holding around £785m/£790m, versus the weak £715m last year. And there doesn’t seem to be a store over-capacity problem in France or Poland.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.