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On the shop floor with…Kingfisher chief executive Ian Cheshire

In the two years since Ian Cheshire moved into the leader’s seat at Kingfisher he has experienced both good and bad. The positive has seen the group become a much more cohesive unit that is now well placed to battle through the recession, but on the negative there has been the collapse of its much-vaunted China business. By Glynn Davis, City editor

On the shop floor with…Kingfisher chief executive Ian Cheshire

Sitting extremely relaxed in a high-end central London hotel after a hard week of travel and meetings Cheshire is pretty upbeat - and well he might be because the group recently surprised the City with extremely good figures for Q1 - helped by the late Easter and good weather.

“People had forgotten how bad last year's weather was so we benefited this year and we also had a year of preparing for better times so we had a double benefit,” he explains. The only problem is that Cheshire now feels he has to go into dampen-down-enthusiasm mode as he reckons the media and analysts could well be expecting a tad too much in Q2.

“We've had a thriller in Q1 but in Q2 last year we clawed back a lot so I have an awful fear that the press will now talk it up. We may get luc

ky again but we'll not be selling the same people a second set of garden furniture,” he says.

He believes such over-optimism has been a driver behind the growth in the shares of Kingfisher and the retail sector as a whole to the point that it has probably been overdone: “The City recognises retail as incredibly cyclical and identified it as the canary in the coal mine. Very few people have been selling shares in cyclical stocks so the amount of stock available has translated into share prices moving up ahead of rational valuations. People are scared of missing the jump.”

Although Cheshire is predicting continued market volatility in the short-term he is positive on the overall situation two to three years out from now. By this point he will be hoping the situation in China will have been sorted.

This is a part of the group he knows extremely well having headed up international from 2002 to 2005 before heading up B&Q UK and then taking on the chief executive role. For a period of time China seemed to be all you heard from the group.

He now says this was for obvious reasons: “Through 2003 to 2005 we emphasised China as an opportunity for growth. You just cannot get people excited about Poland, unlike China. Although it is only five per cent of sales it is big on the thought processes.”

This is particularly so in the US where 50 per cent of Kingfisher shares are held by institutional investors such as Brandes. This vocal promotion of China made it especially tough for Cheshire when the wheels came off the business in late 2007.

He ran me through the confluence of events that brought to a near-halt the seemingly unstoppable business. Firstly there was a change in regulations brought in to protect small players against large merchants like Kingfisher that meant it could no longer operate with a “guaranteed cash margin” from its largest suppliers.

This arrangement came about when the group chose to merchandise by brand in-store in order to grow the business fast. It involved signing deals whereby major suppliers effectively ran their own in-store areas and trained the staff in return for guaranteeing Kingfisher a certain level of income from sales.

However, the regulations ended this and the suppliers then started to direct shoppers out of Kingfisher stores and into their own showrooms where they could enjoy a greater margin. These so called 'flying orders' hit at the same time as the government sought to put a “clampdown” on the housing market.

“There was an abrupt downturn in the housing market as they had pricked the bubble. If you were a pure retailer then it was bad but if 50 per cent of your sales came from whole fit-outs of rooms then it was even worse,” he recalls.

It coincided with the global meltdown and sales in China went from plus-40 per cent to negative-20 per cent in only three months and have now stabilised at between negative-30-to-40 per cent. The recovery plan is a long term play - five to 10 years - with Cheshire reckoning the government will stimulate the housing market again at some point.

He has also taken affirmative action, involving downsizing the business from 63 to 41 stores and re-positioning it with a stronger focus on soft furnishings and home decoration products.

And with some of the costs removed from the business he is forecasting break-even to be reached possibly by 2011, which will curtail the horrendous losses of 52 million experienced in 2008.

Cheshire is certainly looking on the bright side: “The benefits of this situation are that it forces us to look at our retail offer. And don't forget we have a brand that has 10 years of life in China. If we recognise where we are and the potential then why not make it a 500 million business.”

Such has been the effect on the China business that Cheshire says investors now choosing to buy into Kingfisher are effectively receiving a free option on China, which has undoubtedly proven attractive to US institutional investors.

Helping Cheshire address the ongoing China issue is the extremely strong team that he has assembled - including Kevin O'Byrne as finance director, Euan Sutherland as chief executive of the UK division and Peter Hogsted as director of international.

What appealed to these heavyweight newcomers, according to Cheshire, was the prospect of “making a difference” and although they each have their own divisional responsibilities he says the business is run as a team of five.

This team ethic represents something very different from the old Kingfisher. “There is no longer a civil war going on such as the one that raged after the Castorama purchase in France,” he says. The end of the war also paved the way for central warehousing to be brought in, which has enabled common group sourcing - which still only involves 10 per cent of its products worldwide.

And he suggests the recession has also proved beneficial because it has brought people closer together with common goals. “They are now less precious. If we can buy flights and screw drivers in a different way then this is a good idea. I've been very lucky in terms of timing,” he says.

To suggest he is lucky to have taken up the CEO reins at Kingfisher during a recession is a good indication of Cheshire's positivity and levels of optimism - but he wouldn't want analysts and the media to read too much into this - certainly not for the next quarter anyway.

glynnd@theretailbulletin.com

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