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Content Published Last Week

1. Wren Kitchens, Howden Joinery, & the UK Kitchen Market Structure

2. ASOS, Boohoo, & Online Fashion Retail Business Models

3. Howden Joinery: Netherlands History & EU Growth Opportunity

4. Eurofins Scientific: A Food Testing Customer Perspective

Howden Joinery, Wren Kitchens, and HWDN in France

“We supply from local stock, nationwide, the small builder’s ever-changing routine kitchen and joinery requirements, assuring no-callback quality and best local price. Howdens was designed from scratch with the needs of the small builder in mind. That is our absolute focus.”

- Matthew Ingle, Howdens Founder and Former CEO, 2010

Founded in 1995, Howdens was built to serve the local builder. The company manufactures and sells kitchen cabinets and joinery to builders who fit the kitchen for the end user. Howdens’ trade-only model is engineered to avoid the inefficiencies of a retail model where all cost savings are passed back to the builder.

The company operates from ~800 depots and has ~32% market share by volume of the UK kitchen market. Howdens’ unique business model generates a consistent ~50% ROIC and has compounded FCF per share at 12% per year over the last 20 years.

We recently interviewed two executives to explore Howdens: one from the largest UK kitchen retailer, Wren Kitchens, and another with a Former Howdens executive who worked in the Netherlands business before the company exited the country in 2018.

We interviewed these executives because we’re exploring two questions that we believe are important for Howdens:

1. How could the growth in Wren Kitchens impact Howdens' core UK business?

2. What can we learn from the Howdens’ history in the Netherlands that could help us understand the French market opportunity and the broader European growth opportunity?

The Potential Threat of Wren Kitchens

Unlike Howdens, Wren’s retail model is focused on serving the end residential homeowner refurbishing their kitchen. The difference in the targeted customer between the two companies defines the business model. Howdens runs an always-in-stock inventory model with favourable credit terms for builders to buy and fit joinery products. The focus is on helping builders complete jobs and get paid quicker.

Wren is more of a traditional kitchen retailer that launches large tv ads to drive homeowners to their 25,000 sq-ft showrooms which offer a range of 75 display kitchens. Wren carries little inventory in-store and focuses on offering a wide selection of products across price points to serve the homeowner.

Both companies are vertically integrated although to slightly different levels: Wren manufactures nearly all of their products in the UK whereas Howdens manufacture ~100% of cabinets but only ~30% of frontals in the UK. Wren operates the last-mile themselves whereas Howdens relies on the builder to collect and deliver products from the depots to end customers. Each model is best in-class at serving different customers: Wren serves the homeowner directly, Howdens the builder.

Wren is now one of the fastest growing retailers in the UK. The company has scaled to over 100 showrooms in the UK and sales have doubled to £700m in the last five years.

How could the growth of Wren impact Howden’s core market serving the local builder?

To understand exactly how these two companies compete, it’s worth exploring how the UK market works.

There is a natural cyclicality to the kitchen industry as consumers typically upgrade their kitchen when house prices are increasing and consumer confidence is high. According to JKMR, over the last 5 years, there have been 1.2 - 1.4m kitchen installations per year, most of which were replacements along with new kitchens for ~160k new builds each year. Overall, the UK kitchen market is ~£4.2bn in value.

The different customer journeys of purchasing a kitchen are complex and make it difficult to understand the details of the market. We categorize the market into three segments:

1. Consumer retail; Wren Kitchens

2. Local builders; Howden, Magnet

3. Project based; new builds, social housing, etc; Magnet, Howden

The retail customer journey is simple: a homeowner watches a TV ad, browses online and then visits Wren’s showroom to make an order. Wren has commercial agreements with local builders to fit the kitchen for the end customer upon delivery by Wren’s trucks. Because these kitchens are all dry-fitted, Wren’s customer base is typically the homeowner who is refurbishing the kitchen with little construction or plumbing involved.

On the other hand, Howdens' local builders can fit kitchens across many different jobs for end customers:

1. Homeowners refurbing the kitchen

2. Homeowners doing extensions and construction work including the kitchen

3. Buy-to-let landlords refurbing multiple units

4. Social housing projects

5. New home developments

From the reported accounts, It’s not entirely clear how much of Howdens’ revenue is generated from each of the five jobs above.

Wren focuses mainly on job 1 but Howden also serves those customers via the local builder. Howdens offers builders a trade-discount which is effectively a commission for selling their kitchens to end customers. The builders are Howden’s quasi-salesforce:

"The reason why the contractor will go to a Howdens, for instance, is purely because if they are doing major work inside the house and that client has put all their trust into that contractor. Once they’ve got that trust, then the contractor will come and say, I think we should go to Howdens to purchase the kitchen. The first reason is, they will get a discount from Howdens. If the price of the kitchen is £8,000, he will get a 25% to 30% discount from them, so he is making money on that side."

This model works well because all end customers need a builder to fit the kitchen. It also relies on the homeowner to really trust their builder. It has worked very well for Howdens over the last 20 years because there hasn’t been a national kitchen retailer like Wren marketing directly to customers at such scale.

The internet has also placed more power in the hands of consumers to browse and choose kitchen styles than ever before. In 10 years, Wren has built a strong consumer brand whereas Howdens is effectively invisible to the homeowner. The builder may pass on a Howden’s catalog to the homeowner but there is no showroom and little contact between Howden and the homeowner.

Maybe Wren’s consumer mindshare could cause customers to direct their builder more towards Wren at the expense of Howdens in the future?

This could decrease the core kitchen renovation volume going to Howden.

For the homeowner, it also seems Wren wins on quality and range. In each showroom, Wren has a ‘comparison bay’ to prove how attractive Wren’s offering is relative to competitors:

“There were at least 37 points that I went through, with them, comparing what John Lewis, Magnet, Howdens, Wickes, B&Q and what Wren have got. In no way, was Wren trying to put them down. They were just pointing out the comparison. If Howdens has got a wall unit that is only 28cm or 30cm in depth, you put a plate in and they see that they can’t close the door. As a standard, the Wren’s depth is 32cm. That is just one example. The comparison bay does a tremendous amount for the client.”

A wider range and higher quality products attract the homeowner even if they have to wait 2-3 months for the kitchen.

Wren is also now offering contractors a 10% discount to contractors who bring customers to the showroom:

“​​If Wren knows that he is a contractor, in the new showrooms, they will take him to a separate room where they can speak to them privately. They will give them a 10% discount and they don’t have to pay for it straightaway; they can pay in 30 or 60 days.”

Over the last two years, Howdens has seen active builder numbers decline slightly from 469,000 to 465,000. The company’s kitchen volume growth has slowed and revenue growth has been driven by price increases and gradually maturing depots.

Howden has built over 20 years of trust with local builders across the UK that will be hard to break. But the presence of a scaled, national retailer marketing directly to the consumer with a wider and higher quality range could increasingly pressure Howden’s volume growth.

Even if Wren doesn’t take more market share, it could still lead Howden to extend their range to remain competitive. A wider range makes an always-in-stock model more difficult and expensive to maintain, putting pressure Howden’s on model.

One the other hand, Howdens still has a very strong proposition for buy-to-let landlords who are refurbing multiple units and want speed and cost efficiency:

"If it’s a buy to let or the customer is looking to go as cheap as possible, they don’t want to go to places like IKEA and do it themselves; they want to go to a contractor and get a contractor to do the job. That contractor will then go to Howdens because he can pick things up very quickly and he can also keep the costs down, because Howdens is cheaper than Wren."

Because the market is opaque and poorly measured, it’s difficult to assess the risk to Howdens’ core UK business.

There could also be a longer-term terminal risk if Wren decides to focus more on builders. For example, Wren could open small depots between showrooms that hold stock to serve builders:

"The biggest challenge is that if they want to compete with Howdens’ customers and the contractors, they need the contractor to be able to have more and faster access to their products. For instance, if there is a hub of Wren kitchen showrooms, they could open up a warehouse in the middle of the hub that has the flatpack stuff and the normal stuff that people buy a lot. The only way Howdens is going to lose that is if the other sides change their attitudes towards builders."

This seems unlikely but worth considering as Wren scales.

Although builders hold the keys to fitting a kitchen, the consumer still makes the final buy decision. As with other categories, if the consumer is gaining more decision making power, this could reduce the value of Howden’s deep relationships with builders over time. Until then, it seems that Howden can maintain an organic growth rate of mid-high single digits driven by the maturing depot base for the next 6-7 years.

Howden's International Growth Opportunity

Howdens has ~780 depots in the UK and management believe there is room for ~850. At the current depot growth rate, this is ~3 years of new depot growth remaining in the UK plus another decade of ~40% of the depot base maturing.

In 2018, shortly after the new CEO took over from Ingle, Howdens exited the Netherlands and Germany after years of testing the markets. The company decided to focus on scaling the ~40 depots they own in France and Belgium.

Why did Howdens leave Germany and the Netherlands?

The decision was made shortly after Livingstone took the CEO role. Maybe it was the uncertainty around Brexit plus the fact that operating in the UK, France, Belgium, Netherlands, and Germany would have left the company spread thin.

Either way, what was interesting was the response of the Netherlands team after the decision was made:

“Just to give you an idea, everyone was heartbroken and I think, to some extent, Andrew as well. But decisions needed to be made. A lot of people were quite passionate about this adventure. It would not have been a money-consuming adventure…We were doubling sales every year. It was not so much that we didn’t see the model wasn’t working in the Netherlands; it was chipping in the extra investment, in order to grow through different stores.”

What type of international markets could work for Howdens?

Firstly, there needs to be a high level of homeownership to drive kitchen renovation demand. Germany is a rental market whereas France and the Netherlands have a homeownership percentage of ~65%, similar to the UK. This could partially explain why the German depots were not growing and why Livingstone decided to focus on France. Although the Howden model seemed to be working in the Netherlands, it’s a much smaller opportunity than France and Belgium.

The other important variable is how builders fit kitchens in the market. Howdens is effectively a sales channel and a lender to builders. It offers attractive credit terms and discounts to help builders complete jobs quicker and increase their earnings. If builders are paid by the hour instead of by the job, this could reduce the demand for Howden’s always-in-stock model. It seems German builders are paid more by the hour whereas France and the NL are similar to the UK.

After acquiring a company in 2004, Howdens has scaled the number of depots in France from from 11 to 39. Also, in the last two years, depot growth has accelerated from 25 to 39 units. Just like the UK, it’s hard to find good data on the French kitchen market. However, we believe management are prudent capital allocators and the ROIC for French depots is likely to be similar to the UK.

France could be a huge opportunity for Howdens. A slowly maturing and cash generative UK business with a huge runway in France could provide an attractive opportunity for Howdens over the next decade.

However, Wren is not standing still in the UK and will be one to watch.

We’re focused on finding executives in the French kitchen market so if you do know anyone who has fitted a kitchen in the country recently then please let us know!