An interview with B&Q's CEO for Asia

Interview

Shaping China's home-improvement market: An interview with B&Q's CEO for Asia

Steve Gilman says that because Chinese consumers are changing so quickly, retailers must change quickly to keep up with them.

Georges Desvaux and Alastair J. Ramsay

2006 Special Edition: Serving the new Chinese consumer

It might be easy to forget what the early days in China were like, when today you have 50 stores in eight cities, 10,000 employees, and more than £300 million (about $524 million) in sales. But not if you are Steve Gilman, the chief executive officer for Asia of the do-it-yourself (DIY) chain B&Q, a unit of the United Kingdom's Kingfisher. Gilman vividly recalls the ordeal of setting up the first store in China, in Shanghai, during the late 1990s: "By the winter of '98—we opened in June '99—there were over 50 of us working in this semidetached house. We had one toilet, which never worked, and it had a bucket with water in it, which we had to fill up and flush every time you went to the loo. I was there, off and on, most of the winter with four or five layers of clothing on because we didn't have any heating, either."

B&Q China has come a long way since then. In this interview at B&Q's UK headquarters, the plainspoken Gilman, a retailer for 32 years—27 of them at B&Q—describes what it took to make his company the biggest home-improvement chain in China, with annual sales growing at double-digit rates.

In a conversation with Georges Desvaux, a director in McKinsey's Beijing office, and Alastair Ramsay, a principal in London, Gilman emphasized the importance of listening and of learning through trial and error: "I have to keep reminding European managers to be a touch humble and realize that just because they know an awful lot about the United Kingdom and have worked in other countries doesn't mean they know anything about China and about Chinese people. The start of doing business successfully in China is to listen."

The Quarterly: How and when did B&Q get started in China?

Steve Gilman: In 1994 we started thinking that B&Q should internationalize. At that time, we had been scouting around Europe, but we weren't getting anywhere. Then a supplier from Taiwan had this crazy idea of opening a home-improvement store there. So we thought, why not Asia? That's how the first store opened in Taiwan, in 1996.

Two years later, we decided to enter mainland China. We sent a couple of guys to Shanghai to set up an office. Instead, they located a company called Home-Dec, which consisted of three Chinese partners: Shanghai Gas, Shanghai Gas Meter & Appliance, and a Baoshan property developer. The partners had a piece of land in Shanghai, and they wanted to open a home-improvement store. We decided to form a joint venture with them, with B&Q owning 65 percent. Their contribution was the land, and our contribution was cash and expertise.

To say that what we learned in Taiwan enabled us to open in mainland China is probably too big a claim. Most of the things that work in Taiwan don't work there. I think we can say that what we learned in Taiwan gave us the confidence to have a go in mainland China. The Kingfisher board agreed to the joint venture, but they gave us a limited sum of money to start, the idea being that if we proved we could make money in mainland China they would increase the funding.

Your javascript is turned off. Javascript is required to view exhibits.

The Quarterly: Given B&Q's inexperience in China, how did you decide on the store design and product layout?

Steve Gilman: In the beginning, we got the floor model right, but we got the merchandise horribly wrong. For example, when we were setting up the electrical merchandise—sockets, cables, conduits, switches—we decided to display the products the way we do in the UK: "good," "better," "best," as well as by function. So we merchandised by end use, not by brand.

It looked fantastic, but on opening day, when the store was really busy, the electrical aisle was dead. The next day, I saw that electrical-socket sales were very low, and I asked my employees what the problem was. But Chinese employees typically don't like to tell their bosses that something's wrong, so nobody responded. I encouraged them to speak up, and finally I was told that no Chinese consumer would ever buy a socket or switch or anything like that, because it's dangerous. It's electrical. In fact, it was technically against the law for them to touch or change anything of that type in an apartment block. It may still be. So the only people who ever buy those products are tradesmen, and tradesmen are very loyal to a brand. Then we remerchandised that aisle: "good," "better," "best"—but by brand. And of course, the day we relaunched, sales went up 40 to 50 percent.

The good thing is that most risks you take in China are actually low cost. In this case, the display was modular, so it was fairly easy to rearrange. Remerchandising the whole area only cost us a couple of hundred pounds of overtime.

The Quarterly: What lessons did B&Q take away from this early experience?

Steve Gilman: That was when we started to understand that we had to change some of our merchandising principles and that brand awareness is really important to tradesmen and consumers. On top of that, vendors were prepared to pay to have their brands displayed in our stores. So we found that we could supplement our income by charging vendors for displays. Now, for example, we charge 250,000 renminbi ¹ for a large, light-lit paint can that advertises a particular brand in the paint-mixing section.

The Quarterly: How has B&Q's strategy evolved since then?

Steve Gilman: When we opened the first store in Shanghai, we understood clearly that the target customer was, and still is, the new middle class. Most of them buy a concrete shell and then try to make it into a nice home to live in for a very long time. They don't renovate the rooms as often as we do. So when customers are ready to buy—we call them "live"—they're very live, and you need to get the biggest share of their spending you can at that particular time.

Initially, we set out to give Chinese consumers a comprehensive range of home-improvement products to help them fill the concrete shell. We became a good shop for the tradesmen and a good shop for consumers who didn't trust the tradesmen for fear of getting ripped off. So the customer would come with the tradesmen to choose the products, and then the customer would add a little bit of home adornment at the end.

Gradually, after listening to our customers, it became clear to us that we needed a decoration service. We also realized that we needed to give more space to kitchens and bathrooms. Recently, this change has accelerated as people start to move into secondhand houses. Two or two and a half years ago, the secondhand housing market in Shanghai was virtually nonexistent. The following year, it was 15 or 18 percent of housing transactions. And soon there was a market for renewing your kitchen, your bathroom, et cetera. Now, if you don't have decoration services in China, you're dead. You've got to move fast.

The Quarterly: How does the fast pace of change in China affect your strategy?

Steve Gilman: Our structure is evolving and changing far faster in Asia than in more mature markets, because our customers are evolving so fast. The customers are learning faster than any I've ever seen. Most businesses in the world would probably plan a five- or seven-year revamp of their stores. We are partly revamping most of our stores virtually every year, just because our product ranges and the customers' requests are evolving so fast.

The Quarterly: Has the emergence of "big-box" retailers such as yours shaped the behavior of customers in China?

Steve Gilman: Absolutely. In the past, people had to go and find a decorator who would never have given them price transparency or materials transparency. They may have been getting poor workmanship, and they were probably getting fake or poor-quality products. People generally had little confidence in home improvement.

But we have found that in cities where there are no established home-improvement players, customers go through a kind of attitudinal shift when we come along. At the outset, they might consider a multinational chain more expensive, but then they read the newspaper and see that we will pay them twice the price differential if they find a product at a lower price elsewhere and that our products are guaranteed. They also know that since we're a big box, we're not going to run away if the water pipe suddenly bursts. So they give us a try. To be sure, if you look at those trolleys going through the checkouts, it's very low-level do-it-yourself, but there is a lot of home enhancement and improvement going on.

The Quarterly: What motivated you to expand beyond large cities such as Beijing and Shanghai?

Steve Gilman: When we first entered China, we decided that there were four primary cities where we wanted to be the leader: Shanghai, Shenzhen, Beijing, and Guangzhou. But by 2001 we recognized that it was necessary to go out to affluent secondary cities. By that time, the stores we had were all making an operational contribution, so there was less pressure on our central costs. The original intention always was that we would break even five years after entering China. The truth was that we were profitable beginning in 2003.

Even before we reached profitability, we built a store in Suzhou to see whether we could do something outside of Shanghai. And we did pretty well there. Then we gradually expanded to other cities, such as Fuzhou and Xiamen. And we went to Kunming because the Chinese government suggested it would be a good idea to invest in the west. They even contributed some money toward the cost. Our expansion to Kunming also helped us win government support to open more stores in the east. We were doubling the size of our business every year. Shanghai is still the most competitive city, but some of our better results come from the smaller ones.

The Quarterly: Why did you decide to buy, in 2005, the 13 Chinese stores of Obi, ² a German-owned competitor, rather than rely on organic growth?

Steve Gilman: There were four reasons. The stores were available at a reasonable price. Those that were operating and those in the pipeline were virtually all complementary to our network, both in cities where we were and in cities we wanted to enter. The purchase allowed us to enhance our scale earlier than planned and was advantageous to our growth plans in China. Finally, purchasing Obi was helpful in minimizing the presence of international competitors in China at this stage of the market's development.

The Quarterly: How much do your stores in China contribute to B&Q?

Steve Gilman: We have 50 stores currently. In 2005 China contributed £300,000,000 in sales, or 4 percent of the group's total. Overall, the profits in China have been £400,000 in 2003, £4,600,000 in 2004, and £5,600,000 in 2005—not including the purchase of Obi.

The Quarterly: How do you handle government relations as you expand?

Steve Gilman: World Trade Organization rules stipulated that as of December 2005, retailing would be an open and fully deregulated industry in China, so you can go where you want and open as many stores as you want. The reality is that you need to have relationships with the government at all levels if you want to be successful.

Take our Pudong store. When we built it, in 2001, we spent time talking to the Ministry of Commerce and the Ministry of Foreign Trade and Economic Development to make sure Beijing was happy. We then spent time talking to the Shanghai municipal government and the Pudong government to make sure they were happy. Our store sits in Huamu Township, so we spent time with its officials, and we made commitments to them that we would proactively try to recruit their residents. Why wouldn't we? We didn't say that every one of their people would get a job, but we did our first wave of recruitment in Huamu Township. The value for them is that we brought a Fortune global 500 company ³ to their doorstep, which they're very proud of.

The Quarterly: What does your domestic competition look like?

Steve Gilman: Of the major players, Orient Home, which owns over 20 stores around the country, is the best by a long way. Many of our competitors are smaller companies, but Orient is the only player in China, in terms of size and ability, that represents real competition. ⁴ But the playing field is not yet level. Value-added tax is still an issue. Most of the mom-and-pop shops don't charge VAT properly. They tend to pay at a low fixed rate or to cheat. We have to charge and collect VAT properly and pay 17 percent VAT properly. I know that over time the government will improve its tax collecting. It will make virtually no direct difference to me at all, but it'll make a big difference to some of my competitors. And as they pay more VAT, that makes them less competitive and that gives me more of an advantage.

The Quarterly: What kinds of tactics do you use to compete with these companies?

Steve Gilman: It's a very price-competitive market. We have never really had the lowest prices; we've always been about "EDFP"—everyday fair prices. And we have always said that we want to offer customers excellent value for money, not to be cheap. But Chinese consumers are really tight consumers. They don't spend any more than they have to.

The margin model is inverted in China: the vendor makes the most, the middleman makes the second most, and the retailer makes the least. That's not the margin model we see in most developed countries. I mentioned earlier that one way we've learned to increase margins is to earn income off brands. We also use rebates and auctions, and we've done very well with auctions. They have probably worked better in China than in most countries in the B&Q group. We have had some very successful auctions for copper pipe, electrical conduit—stuff that doesn't need a brand.

Slowly but surely we're starting to take out some of the middlemen and take a larger share. But we've invested more in prices and given more to the consumer every year than we've ever taken to the bottom line. We've done that every year since we opened, and we will continue to do so. Our margins now are approaching half what the European margins are. We've practically doubled them from the early days. Our plan has always been to improve margins by about 1 percent a year, net margin, and we've always been there or thereabouts.

The Quarterly: What do you think of the possibility that other international players might enter the market? To what extent does your experience in China give you an advantage?

Steve Gilman: Other players are going to come in; there's no doubt about it. But they will have to build a very tailored, adapted model of a store to meet the Chinese customer's needs. One thing's for sure: they will be coming and playing on the turf where we have been playing now for eight years—ten years if you include Taiwan. Perhaps we know the rules of the game better than they do.

We have always tried to adapt to meet the needs of consumers, whether those consumers were in mainland China, Taiwan, or South Korea. In fact, you've probably not heard me use the expression "DIY" much because I don't—I very rarely talk about DIY because much of what they do in China is home improvement, meaning that consumers aren't always doing the fix-up work themselves.

The Quarterly: What operating challenges are specific to China?

Steve Gilman: To be honest, it's difficult to say that there's anything that's specific to China, anything that you don't see everywhere in the world. The only thing that is really different is the speed of change. But I could say that talent is among our biggest challenges. In any of the mature markets, it's a lot easier to nick people from a competitor than it is in an immature market, although we do our fair share of that. But finding large numbers of people who are experienced in your industry is impossible in China. What you can find are large numbers of people who are very well educated and motivated, but you have to train them. We have our B&Q University in China, just as we do in the UK, for training purposes. Fifteen hundred people went through an examination process last year.

The Quarterly: How do you keep the people you train?

Steve Gilman: Our people really like the culture. They like the growth. We promoted 650 people to management positions last year. And we pay reasonably well: there are bonuses every year, and there's a long-term bonus, which is released after three or five years as long as the business performs well and the individual performs well.

The Quarterly: Are there any lessons from China that you could apply in a developed market?

Steve Gilman: The experience in Asia is increasingly informing our European business. Our first two-floor store in Europe, built in Sutton, in London, was inspired by the two-floor stores in China. Our experience in Asia also inspired our UK stores to add new categories of products, like home office equipment. And I'm advising the UK on customer flow and circulation because they haven't got the experience. Ian Cheshire, B&Q's chief executive, is talking about having an innovation fair in China. He wants to bring part of the commercial team from the UK to look at innovation and new products that we can bring back. The B&Q University team from the UK has already gone to Taiwan and China to learn how we train people there.

But some things are uniquely Chinese, and we can't transfer them to Europe. One example is the enthusiasm our employees have for education and learning. One of the biggest joys for me, working in China, is watching the people grow. If we offered a training course at three in the morning and offered no monetary compensation for attending, we would still have a hundred people there because people just want to learn.

The Quarterly: How would you describe your relations with Chinese suppliers?

Steve Gilman: Ninety-six percent of what we sell in China is manufactured there, although we do believe that imports and the use of our global supply chain will grow in importance in the years to come. Our relationships with local vendors are in some ways similar to, and in other ways totally different from, our relationships with suppliers in the rest of the world. The local suppliers' development, ability to grow with us, and strategic approach to a partnership with an international retailer are all very different from what we find elsewhere. The number of relatively small vendors in a country as big as China is also a major issue for them and for us.

The Quarterly: What are your final thoughts about operating a large retail business in China?

Steve Gilman: The start of doing business successfully in China is to listen. You spend your money on your market research and you trust your local employees. You create an environment where it's good to make mistakes because that's how we learn and grow. All I know is to keep listening to the customers because they're going to be changing, and the market has the potential to be the world's largest. It's a hell of an exciting ride.

About the Authors

Georges Desvaux is a director in McKinsey's Beijing office, and Alastair Ramsay is a principal in the London office.

Notes

¹ About $30,000.

² Obi is now called Praktiker Bau- und Heimwerkermärkt, which is a subsidiary of Metro.

³ Kingfisher.

⁴ The US retailer Home Depot is in talks with Orient Home to take a large stake.