Charming, confident and persuasive, Kingfisher chief executive Gerry Murphy was always the perfect salesman.
Drafted in to lead the international DIY giant almost five years ago, he was widely expected to do a salesman’s job and offload the business to US giant Home Depot. But no deal was sealed and, last week, when it was revealed Murphy would stand down in February, the arguments about his legacy kicked off.
As far as Murphy’s critics were concerned, his patter had run dry and he had reached his sell-by date as Kingfisher showed signs of stagnation and fell from City favour. A share-price rise – later reversed – greeted news of his departure and newspapers attacked his record in their business pages.
Speaking exclusively to Retail Week in his first interview since the announcement that he would leave, Murphy is stoic about the brickbats. “There’s no point whining about press coverage after the event,” he says. “A complex business in a complex situation has to be reduced to sound bites.”
That said, he strongly defends his track record at Kingfisher, the UK’s biggest DIY group and the third largest in the world. While acknowledging difficulties in the UK, Murphy argues that there have been many achievements at international level. Overseas now accounts for more than half of Kingfisher’s sales.
When Murphy joined Kingfisher in 2003, it was digesting Castorama – the French DIY business that it had just taken full control of – and it still owned Anglo-French electricals group Kesa.
Murphy effected the demerger of Kesa and is proud of the changes he made to turn B&Q and Castorama into a more cohesive whole. “Pulling together two companies into an integrated international business that functions extremely well is not a trivial achievement,” he says. “Castorama has been transformed by a combined buying power and business culture.”
There is plenty of evidence that performance in France improved during Murphy’s era. Kingfisher’s retail sales rose 61 per cent in France over five years, profits climbed 72 per cent and market share advanced to 25 per cent. At Castorama, there have been 230 million (£160 million) of cost-price reductions, while the Brico Dépôt chain has grown exponentially.
Similarly, Murphy took Kingfisher out of peripheral overseas markets, such as Belgium, Brazil and Canada, focusing instead on opportunities for big growth in countries such as China and Russia.
Were he being judged on his overseas record alone, there would be few complaints about Murphy. However, it is his stewardship of UK business B&Q, the jewel in Kingfisher’s crown with a 24 per cent market share, that infuriates detractors.
There is no doubt that B&Q, like its rivals, has suffered from a recent downturn in the£17 billion market. However, Murphy’s critics think many of the chain’s difficulties in recent years when profits and sales suffered were of its own making. They believe that the reasons for B&Q’s malaise were a lack of focus on product, ranging and price structure, which undermined its traditional strength and a lack of investment in Murphy’s early days, rather than concentration on sales and profits.
“People like Murphy think DIY is just like any other retailing, but it’s not,” says one director with vast experience in the category. “They don’t understand how difficult DIY is – it’s not about items, it’s about projects.
“There’s been no imagination in the business, it’s been run by committee. We’ve gone through an extraordinary boom in housing, so how can they blame it on the environment?” he says.
Standing his ground
Murphy counters: “The UK story is complex. A business that was trading strongly in 2003 has had to ride a rollercoaster of a collapse in demand, from which it hasn’t yet recovered. Its performance is broadly similar to the rest of the market.”
Murphy agrees it would be “supine” to allow B&Q’s fortunes to be dictated solely by market conditions. In answer, he points to a swathe of changes made under his watch, in particular since Ian Cheshire became chief executive of B&Q in 2005.
B&Q is in the midst of a modernisation programme that will have encompassed more than half of its estate by the end of the financial year. Of the 210 medium-sized shops, 135 have been overhauled and of the 115 large outlets, 21 have had the same treatment. The changes have pushed sales densities up 30 per cent to more than£200 per sq ft (£2,155 per sq m) in the three large stores that have been open for more than a year, on the back of new product and an enhanced environment.
In the same vein, B&Q has shifted its stance to cater for those who want retailers to do their home improvements for them, as well as the traditional DIY shopper.
Some critics remain unconvinced. One seasoned DIY retailer fears B&Q is losing sight of its core appeal. “It’s thinking about the customer as Wandsworth woman, who does her grocery shopping at Waitrose,” he warns. “The B&Q customer is the Asda or Tesco customer.”
Murphy is dismissive of the charge. “If the message is that the 1990s business model is the right one for the 2000s, they are misguided,” he says. “B&Q has had to reappraise the nature of its offer. It’s not about being frilly – it’s about broadening. DIY is still very much part of our future and the first store [makeover] we did – Wednesbury – is in the Midlands. It’s not a London-centric view of life,” he says. Great product, great stores and great service will continue to be at the heart of B&Q, insists Murphy.
Arguments about the impact of the Murphy years and the footing on which he leaves the business matter not just from a retailing perspective, but in the Square Mile, where investor disappointment has sent Kingfisher’s share price into tailspin. In November 2003, Kingfisher was capitalised at almost£7.5 billion. In the middle of last week, it was valued at£4.32 billion and last month its shares hit a five-year low. The pressure to deliver shareholder value is fierce.
Last week, Kingfisher chairman Peter Jackson said that “maximising group synergies and sharpening our focus on capital allocation and investment returns” would be future priorities.
Kingfisher shoulders debt of£1.3 billion and there are fears that its dividend will be cut, as well as concerns about returns on investment. Analyst Tony Shiret of Credit Suisse, one of Kingfisher’s house brokers, says: “In B&Q’s case, a sub-5 per cent return on investment capital tends to indicate that many B&Q stores should never have been opened and are unlikely to cover their cost of capital unless industry conditions become much more favourable. We have long said that spending a lot more money on underperforming assets may not be the way out.”
Such concerns may precipitate big changes at Kingfisher, perhaps spelling the end of the business in its present form. One industry observer says: “The only way forward for shareholder value is a break-up into its component parts – there’s no value in Kingfisher.”
The former DIY director agrees. “They need to pay down debt and sell off the bits that aren’t strategic. If you just kept China and the UK, you’d have a great business,” he says.
Shiret also raises the prospect of disposals. “One area where the departure may result in change is possibly group constituents, where it seems clear that some of the divisions have less relevance to the group’s long-term focus than others. If new management is to focus on the growth opportunities and mending B&Q, it would be better not to have distractions,” he says.
The disposal of trade business Screwfix and the sale or IPO of the French division are just two options that sources familiar with the situation believe could be on the cards. Some even argue that China should be sold as well and that Kingfisher would find a ready buyer in Home Depot, which has now entered that market.
A source close to Kingfisher confirms that “there will be no sacred cows”. He says: “The company has acted before to sell or demerge things if it increases shareholder value. It would be perfectly fair to ponder its future size or shape.” Whoever is named as Kingfisher’s chief executive is likely to be a strong pointer to the extent of prospective strategic change.
For Murphy, it makes sense to leave after five years in control and he feels he has done a good job. His critics see his era as wasted years. Whichever verdict proves correct, Kingfisher is likely to be a very different beast in five years’ time.
Kingfisher chief executive in waiting?
Cheshire, 48, took the helm at flagship business B&Q UK in 2005 and is the internal front-runner to replace Gerry Murphy.
The formidably bright retailer won praise for his stewardship of Kingfisher’s overseas business after taking the role of chief executive of international and development in 2002.
As leader of B&Q, Cheshire has steered the transition from traditional DIY to the new Do It For Me positioning. He has been prepared to make tough decisions, including cutting 400 headquarters jobs and closing 17 stores.
However, the chain’s continuing problems in its domestic market may prompt Kingfisher chairman Peter Jackson to go for an external appointment to bring in fresh blood. Former Boots executives Richard Baker and Scott Wheway, along with WHSmith’s Kate Swann, have all featured in speculation.
Tony Shiret, analyst at Kingfisher’s joint broker Credit Suisse, says: “We would expect Ian Cheshire to become group chief executive, which we would regard positively.”