Will Home Depot Move into Europe? Troubled British Chain Could Open the Door

LONDON — Only five years ago, B&Q — the Home Depot of Britain — was riding high in a booming do-it-yourself market. With new chief executive Gerry Murphy at the helm of parent company Kingfisher, the B&Q chain's profits were buoyed by a nation hooked on home makeover TV shows.

But after two years of decline in Britain's troubled DIY market, Murphy is due to step down in February, and some analysts say the move could set the stage for an acquisition by Atlanta-based Home Depot, sending it into Europe for the first time.

The analysts believe that with Murphy gone, the Kingfisher group could break up, spinning off the core B&Q business and the chain's operations in Asia and Russia, the Castorama DIY business in France, and a 21 percent stake in Hornbach, the leading DIY business in Germany.

Thanks to a slumping U.S. housing market, international operations have become key to Home Depot's growth.

"Our international efforts are currently focused on China, Mexico and Canada," said Paula Drake, a spokeswoman. "We do not speculate on future expansion plans."

Home Depot has ruled out expansion in Europe in the past, but speculation has indeed mounted that it could bid for one of the Kingfisher properties.

"Kingfisher has long been seen as a potential takeover target for Home Depot, especially because it has modeled itself quite closely on Home Depot," said Nick Gladding, a lead analyst at Verdict Research, a retail research firm in London.

"Kingfisher is struggling to turn its business around at present, and key investors are now questioning its strategy," he said. "With the share price low, Kingfisher is vulnerable to a takeover approach."

"With the dollar so weak it would be an expensive purchase to make," Gladding said, but a bid could be possible if the British pound were to start to weaken in the coming year.

"The challenging market prospects for the United Kingdom and limited site availability for new stores mean that Home Depot would be very unlikely to go it alone in the U.K.," he said.

B&Q has been serving the Chinese market since 1999, and Bryan Roberts, an analyst at the Planet Retail consulting firm here, said that Kingfisher represents one of relatively few opportunities for acquiring a decent present in Europe as well as China.

"And so it might still be on Home Depot's radar," he said.

Mitch Kaiser, senior research analyst at Piper Jaffray & Co. in Minneapolis, said that in the United States, a worsening housing environment will continue to pressure Home Depot's growth rates into 2008.

He said that the chain would most likely focus on continued investment in its existing stores in order to improve the "shopping environment."

Analysts say the do-it-yourself sector in Britain is just starting to return to growth after two years of falling sales.

Even so, DIY remains one of the weakest sectors in British retail, with only music and video, furniture, and floor coverings faring worse.

Taking its toll has been a troubled housing climate, sluggish consumer spending, and a shift in attitudes.

Gladding said there was a strong DIY culture in the U.K. in the late 1990s.

"Recently, though, attitudes have changed with more people preferring to get tradesmen in to do the work for them, partly because the influx of skilled Eastern European workers has made this a cheaper option," he said. "And it's also partly because many DIYers have found the work more difficult and time-consuming than they first expected."

Kingfisher recently reported a slump in U.K. profits of nearly 12 percent in the third quarter of 2007.

"In contrast, Kingfisher's European operations — particularly those in France and Poland — have been posting a strong performance while operations in China have been adversely affected by a slowdown in house building," Roberts said.

In Britain, B&Q has started working to improve the aesthetics of their warehouse-like stores, which one local newspaper said resembled "dusty sheds the size of aircraft hangers."

It is now devoting more space to storeroom displays of completed kitchens and other rooms in order to appeal to more female customers.

Roberts also said that because many British shoppers these days are demanding a do-it-for-me service, "B&Q is therefore responding to these market shifts by increasing ancillary services such as design and installation."

NOT DOING IT THEMSELVES

The DIY and gardening markets in the United Kingdom are struggling to regain the growth rates of years past.

...........Revenues

...........(at current

Year exchange rate)....Annual growth

2002....$30.8 billion........5.3 percent

2003....$32.5.................5.0

2004....$33.9.................4.1

2005....$32.7.................minus 3.2

2006....$32.7.................minus 0.2

2007....$33.7.................3.1

Source: Verdict Research, London