Kingfisher's Overseas Businesses Offset UK Woes

International diversification helped DIY retailer Kingfisher PLC (KGF.LN) post a small rise in second quarter sales Thursday despite the severe challenges facing its business in the U.K., but branching out is not always the panacea U.K. retailers hope, as Kingfisher's difficulties in China attest.

The U.K. retail sector is being pummelled by rampant inflation, government austerity-inspired tax hikes and job insecurity that has caused a crisis of consumer confidence. As the U.K. shopper has snapped its purse shut, companies that have a successful business overseas have come into their own. At 1010 GMT, Kingfisher shares were up 2.8% to 260 pence.

But expanding overseas is not without its risks, and local knowledge is key to success as Kingfisher found out to its detriment in China. While Kingfisher's French Castorama DIY chain has consistently outperformed the U.K. market during the economic downturn, and the company's businesses in Poland, Russia and Spain helped push total sales growth up 1% despite a 5.5% drop in the larger UK. market, its foray into China was less successful.

The company expanded its modest Chinese operations with the acquisition in 2005 of the OBI DIY chain but swung to an operating loss in fiscal 2008 prompting a major restructuring and closure of a third of its oversized B&Q China stores.

The problems in China, where a prolonged property boom should have been the perfect setting for sustained growth, chiefly stem from Kingfisher misunderstanding the nature of the Chinese homeowner who is far less inclined to do home improvements themselves, and will generally hire a professional instead.

Despite a 5.4% fall in same-store sales in the region in the second quarter, Kingfisher nonetheless expects to break even this year, but lack of local knowledge has been a costly mistake.

Rahul Sharma, retail analyst at Neev Capital, believes working with a franchise partner, the model used by Mothercare PLC (MTC.LN) and Supergroup PLC (SGP.LN), offers better localised insight and a relatively low-risk expansion opportunity.

Last week Mothercare reported dire U.K. trading but strong growth overseas, particularly in India where it has become a destination brand for middle-class mothers, and youth fashion chain Supergroup announced plans to radically expand abroad.

Mothercare has two franchise partners in India - Shopper's Stop and Delhi Land - and now has 894 stores in 54 countries, while Supergroup bought out its largest European franchise partner CNC Collections earlier this year. CNC Collections founder Luc Clement will now head up Supergroup's European franchising push. The company plans at least 50 new franchise stores around the world this year.

By Kathy Gordon, Dow Jones Newswires; 44-207-842-9293; kathy.gordon@dowjones.com

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