Exploring the Russian DIY market
Kingfisher, the British parent of European home improvement chains B&Q and Castorama, has stepped up its entrance into Russia, hoping to tap its estimated $20.3 billion DIY market.
Kingfisher already has four Castorama stores in the country — two in St. Petersburg, one in Samara and the most recently opened location in Moscow. Kingfisher plans to open 50 more stores in Russia under the “Castorama” banner over the next 10 years, and is pursuing a goal of “market leadership” in the country.
Of the rapidly developing countries known in the finance world as BRICS (Brazil, Russia, India, China and South Africa), Russia is one of the more unexplored by retail chains and other Western business interests, according to experts in the area.
Daniel McCarthy serves as professor of global management and innovation with a specialization in the Russian market at the Northeastern University College of Business Administration in Boston. His colleague, Sheila Puffer, is a professor of international business and a fellow at Harvard University’s Davis Center for Russian Studies.
“Private ownership has been very recent in Russia,” Puffer explained. “Their mortgage loans are now becoming more well-known. This had been a cash-based society for a long time.”
“The amount of new homes in the outskirts of Russia is just really taking off,” McCarthy continued. “This was once really a two-class society, where the very wealthy had their homes, and those were very opulent homes. Now a growing middle class is driving home ownership.”
The climate is open to a growing retail presence, particularly in the DIY arena they said, because of a combination of rising home ownership rates and rising disposable income. In 2007, real wages were up 16 percent year-over-year, Puffer noted, and real disposable income rose 12.5 percent year-over-year
But what do Western business leaders really know about the prospects in Russia? According to a study published June 17 in the Moscow Times, some misconceptions and trepidation persist.
The study, produced by international research firm Datamonitor, surveyed 800 senior executives of companies in the United States, Great Britain, France and Germany. Surveyors asked general knowledge questions, as well as opinions on business prospects in the BRICS nations.
Fourteen percent of those surveyed said they believed Russia’s chief export was vodka (it’s oil). Sixty-five percent of respondents could not name the currency used in the country (the ruble).
Kingfisher estimates the size of the Russian home improvement retail market to be at 10 billion pounds ($20.3 billion). The company has “heavily adapted” its four Russian stores to their local markets, focusing on the “heavier” end of DIY sales — electrical products, flooring, tiling, building materials, heating equipment and other major home renovation items.
Such big ticket items, sales of which have notably fallen off in the U.S. market over the past year, make sense in the Russian market, where individuals traditionally are self-reliant when it comes to their homes.
“People are very resourceful, even in spite of a sometimes underdeveloped infrastructure that has not been able to keep up with the growth of new homes,” Puffer said. “Overall, Russians are great at dealing with shortages. They’re used to doing their own painting in their homes and their own home improvement projects.”
Two big retailers eye store formats, expansion
Columbus, Ohio —based retail research firm TNS Retail Forward held its annual home improvement industry conference on Aug. 30, outlining the predictions for the next five years at the nation’s two largest home improvement retailers.
Both retailers face challenges in the coming years, but those challenges differ, analysts said. While Home Depot must deal with aging stores and fewer expansion opportunities, Lowe’s will face new challenges in Canada.
Economist and senior consultant Steve Spiwak said Home Depot faced impending market saturation and predicted the largest home improvement retailer would follow through on plans to diversify its store formats to continue expansion.
“Home Depot has its work cut out for it,” Spiwak said. On top of a weak housing market and major competitive pressures from Lowe’s, “it’s facing market saturation and an aging store base.”
For that reason, rather than continue strictly in the 100,000-square-foot and larger big-box format, the company could be considering smaller “25,000- to 50,000-” square-foot stores, “about the size of a neighborhood hardware store.”
Spiwak pointed to the company’s purchase of Yardbirds, which became Home Depot’s small-format offering in the San Francisco area. “Those basically were a way to get into the lucrative San Francisco bay area,” he said, but added the Yardbirds format could serve as a good “testing ground” for other areas of the country.
Yardbirds was a 10-unit chain of hardware stores purchased by Home Depot in 2006. The Atlanta retailer closed two locations and converted three others into Home Depot formats. In May, Home Depot converted two other former Yardbirds stores in Concord, Calif., and Petaluma, Calif., into a hybrid format under twin retail banners. The 40,000-square-foot units feature lower ceilings and fixtures, a racetrack layout and a large design center in the middle of the store. Neither location has lumber or building materials.
In addition to those stores, further test stores will be located in Alamo, San Pablo and San Rafael, Calif. The San Pablo store, the only Yardbirds to carry building materials, is expected to have a drive-though lumberyard.
Ace Hardware has, with smaller format stores, been able to “intercept a lot of customers and prevent them from going to the larger home centers, for home spruce up projects. It’s quicker, it’s faster,” he said. “The hardware co-ops are sort of banking on this approach of being convenient and offering a high level of service to their customers.”
Although Lowe’s does not face the same market saturation problems as Home Depot, nor the same issues with aging stores, it has expressed interest in further exploring smaller format stores in coming years, said Nick McCoy, senior consultant with Retail Forward.
Lowe’s is looking at “smaller markets and in-fill markets with smaller stores—80,000-square-foot stores that have done fairly well,” McCoy said, adding, “anything less than 80,000 square feet will be too small. Don’t look for Lowe’s to be opening small hardware-type stores any time soon.”
In dealing with tough market conditions, both analysts warned of slower growth for the two retailers in the next five years. The new market conditions favor those retailers who are better at catering to a more specialized market.
“Homeowners are now shifting to smaller, focused projects,” McCoy said. “Long story short is we’re probably not going to find a bottom this year [in the housing market]. There’s far fewer home equity cashouts happening these days. [Market conditions are] favoring small category specialists rather than the massive warehouse retailers.”
For Home Depot, Spiwak said Retail Forward is expecting to see “modest growth.” Home Depot lost some market share in the last year, and Spiwak says he predicts they will lose another 1 percent of share while growth slows.
“[Home Depot is] not going to be able to open up as many stores as it has in the past, and it’s going to be restrained by that market saturation,” he said.
One way of dealing with the housing slump, he said, is by focusing on “non-traditional events,” such as football tailgating and back-to-school sales.
“We expect, of course, that industry growth is slowing,” overall, McCoy said. “We expect it to be cut [roughly] in half over the next five years,” from 8.5 percent to 4.5 percent.
Lowe’s has helped its position, McCoy noted, by revamping its distribution network. The company recently reached its goal of having 75 percent of its products moving through its distribution system, which “vastly increased their flexibility for distribution management.”
McCoy also discussed Lowe’s entrance into Canada, an “intensely competitive” market.
Some rumors had swirled that Lowe’s could view RONA as a potential takeover target to further the company’s expansion. A report from Desjardins Securities put the probability of a takeover at 40 percent, “given Lowe’s need for physical locations.”
However, McCoy said he doubted a takeover would happen, and Lowe’s would instead concentrate on “organic growth.”
“There’s been a lot of speculation that Lowe’s might acquire RONA. I really don’t think that’s very likely,” he said. He noted that although Lowe’s did take a major market share step by acquiring Eagle Hardware & Garden in the late 1990s, he doesn’t believe RONA fits a mold that Lowe’s wants.
“[RONA] is just so vastly different form Lowe’s,” McCoy said. “I just don’t think that’s a logical alternative.”
B&Q revamping numerous U.K. stores
B&Q, the United Kingdom-based big-box home improvement retailer, is in the midst of a major renovation of several of the company’s stores. Twenty-five large format stores are on deck for a new renovation with eight renovations currently underway.
B&Q is known for large, orange, big-box retail stores in U.K. suburbs, similar to Home Depot in size and selection. The new renovations feature an expanded flooring department, with a streamlined display to highlight the color selection of wood, laminate, vinyl and carpet products. The new stores feature a “carpet shop” with a wide variety of product, according to the retailer’s Web site.
The stores include a newly refurbished “Garden Centre,” with items including greenhouses, landscaping products, natural stone paving products and outdoor furniture.
Anew lighting department highlights new styles, including designs for children, external lighting and solar lighting options. The department also features a streamlined design for easier shopping.
The stores’ paint departments also have been updated to include more colors from the company’s brands, Dulux and Crown paints.
“B&Q is making good progress modernizing its stores and updating its ranges,” said Gerry Murphy, B&Q group chief executive, at the company’s second-quarter earnings call in July. B&Q is a subsidiary of Kingfisher, which owns other European home improvement retail chains including Castorama, Trade Depot and Screwfix.
Sales at B&Q stores fell 3.6 percent in the second quarter, with much lower sales in the lawn and garden segment because of adverse spring and early summer weather conditions across the United Kingdom.
In addition to the modernization, the company plans to downsize six large stores, while revamping or relocating another 36 “Supercentre” stores. New stores include the modernized look, and by the end of 2008, the company expects to have 154 of its 313 stores modernized.
This year, B&Q also furthered its expansion into China, with a 120,000-square-foot store in Hong Kong. The company currently has about 60 locations in China, with stores in Taiwan and South Korea.