Kingfisher re-enters German DIY Market

Despite extravagant attempts at secrecy, Kingfisher looks on the verge of opening its first "Screwfix" store in Offenbach, near Frankfurt. Europe's largest DIY retailer with annual revenues of around €13bn could re-open for business in Germany as early as next month.

CEO Ian Cheshire announced last October plans to open three other test outlets here, including Dreieich, on the perimeter of Frankfurt, and the Hessian town of Darmstadt.

Screwfix is thriving in its British homeland and pushed revenues by 17 per cent to €827m last year. This has clearly motivated Cheshire to make the banner his spearhead: "We have 350 outlets in the UK which is less than half the size of Germany, so we see a big potential market."  

But former management at the London-based Plc failed to make the "Castorama" Big Box concept work in the Federal Republic between 1998 and 2003. Also a stake in local DIY player Hornbach, sold in March this year, always looked incongruous, given the fiercely independent nature of the family owners.

So will the Brits be successful this time? 

Small stores, limited assortment

The Screwfix concept, specialising in professional DIY customers, is certainly very small by German standards. Stores, which are little more than catalogue showrooms, range from around 800m² to 900m² and double as picking centres for the company's online service.

The assortment is correspondingly limited and will probably include only between about 13,000 to 18,000 SKUs. This would certainly not fully meet professional requirements.

However, a Click & Collect offer promises to deliver internet orders by 7 p.m. the next day. German customers can already order online, and Screwfix plans to deliver on a national basis.

The locals up the ante

Local competitors have certainly been upping their game recently in anticipation of Kingfisher's arrival. One year after the feeding frenzy accompanying the demise of former Metro Group subsidiary Praktiker, many German DIY players are searching for new concepts. Everyone is looking at how Screwfix will market itself to professional customers who are often difficult to reach.

Probably building materials retailer Würth, who specialises in trade customers, stands to be affected most by Screwfix's arrival. The Künzelsau-based company has already started a counter-offensive with national same-day delivery for items urgently needed on building sites etc.

One big challenger, of course, will be Kingfisher's former German partner Hornbach. The English company sold its 13-year-old stake in Germany's sixth-largest DIY multiple this spring for €230m in order to have a free hand for their expansion in Germany. Hornbach, who also aims at trade professionals and whose sales and earnings are on a roll this year, obviously knows Kingfisher better than any other local player.

Will they stay or go?

So thumbs up, or thumbs down for Screwfix? Will it come a cropper, like so many other foreign retailers in Germany including American DIY multiple Wickes?

Essentially these foundered on the low-price culture here, but, fortunately for Screwfix, German consumers are nowhere near so price sensitive when they occasionally buy a handdrill, saw or shovel as when they shop for their daily food.

Also the big DIY suppliers do not have the same clout as in food retailing: A Black and Decker or even a Bosch won't have the market dominance of a Procter & Gamble or a Nestlé. This is mirrored in their lower profit margins.

All of these factors contribute towards generally higher gross margins for German DIY retailers (often over 30 per cent) than for supermarket operators (less than 25 per cent) and discounters (less than 20 per cent). 

Another frequent foreign investor mistake was an astonishing lack of homework in advance of entry. One presumes that Kingfisher used its stake in Hornbach to thoroughly understand the local market?

Small or big?

The small-box Screwfix stores also mean that planning permission can be obtained more quickly for relatively low capex, although we hope management will understand how much the Germans love big cars and big car parks.

The cleverly dovetailed online component of the Screwfix offer is coming to a prosperous country where internet-based services are making a relatively late, but increasingly dynamic start.

Therefore a sibylline prognosis as to future success might run as follows: This is a relatively low-risk niche strategy on a solid, but non-dynamic market with all the merits and demerits of pursuing a low-risk niche strategy on a solid, but non-dynamic market.

Perhaps, therefore, the real question ought to be: Will Kingfisher, on a market cap to sales ratio of around 0.9, be able to still the hunger of international shareholders with Screwfix Germany? One thinks not, but let the Brits prove us wrong and liven up the local competition while they do so.

Source: Lebensmittel Zeitung

Read the original news story here