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Balanced mix of defensive and growth markets
Halfords operates in a combination of relatively stable product markets (albeit modestly declining in the case of car maintenance) and in higher growth niche product markets (such as car enhancement).
The Directors consider that the car maintenance segment provides a strong and reliable core customer base for Halfords stores, and a solid financial foundation for the Group. Further, they believe that Halfords’ competitive position has allowed Halfords steadily to increase sales from car maintenance products over more than 10 years, demonstrating the relative stability and resilience of this product market during different stages of the overall UK economic cycle.
The Directors believe that the cycling market has been relatively stable over the nine calendar years 1995 to 2003, although sales were negatively impacted in 2001 and 2002 by the foot-and-mouth epidemic.
Halfords’ sales in the car enhancement market have seen a higher growth rate than sales in the car maintenance and leisure markets in the four financial years to 1 April 2005. The Directors believe that sales in these higher growth product categories are driven primarily by changes in consumer spending habits towards car enhancement products and services and general increases in disposable income in the UK. The Group seeks to leverage its strong brand, scale of operations, competitive pricing and service differentiation to capture new market share in these niche product markets.
The Directors believe that the defensive market dynamics of the car maintenance market, when combined with the growth characteristics of the other product markets in which the Group operates, give Halfords a strong and resilient platform from which to respond to changing consumer trends and to continue to grow sales.
Leading market positions
Halfords is the UK’s leading retailer, on the basis of turnover, in each of the four product markets in which it operates. Competition in these markets is fragmented and the Directors believe that Halfords enjoys a leading market share in each of these four markets.
Halfords aims to attract customers with an extensive service offering and competitive pricing (achieved through scale of purchasing power) to compete with small independent stores, whilst offering skilful and knowledgeable customer service to differentiate itself from other large retailers.
The only other national retailer which focuses its operations on the four product markets in which Halfords operates is Motor World. Halfords’ turnover is more than twelve times larger than MotorWorld’s turnover (based on its latest published accounts) and Halfords has a more comprehensive store portfolio with convenient out-of-town sites, whereas Motor World operates mostly from high street locations.
The Directors believe that the limited availability of good quality out-of-town sites and the high cost of establishing an extensive store and associated distribution network creates a significant barrier to prospective new market entrants and limits the potential growth of current high street competitors. The Directors also believe that the Group is well-positioned to capture additional market share as small independent retailers continue to exit some of the highly fragmented markets in which the Group operates.
Distinctive brands with national recognition and broad appeal
Market research conducted by
the Group, indicates that customers associate the Halfords brand
with qualities such as trustworthiness, high product quality,
reliability and a broad product range. Market research also
suggests that the Halfords brand, which has been in existence for
nearly 100 years, is the most recognised UK store brand in the
cycling, car maintenance and car enhancement product markets.
The Directors believe that its extensive range of own-brand products, when combined with Halfords’ scale of operations, provides it with a significant cost advantage over its competitors.
The strength of the Halfords brands has allowed, and the Directors believe it will continue to allow, Halfords to leverage its brands into new products and product categories, with recent examples being outdoor leisure and child safety.
The Directors believe that the Ripspeed and Bikehut sub-shops in the Group’s Arcade superstores are perceived by both mainstream and enthusiast customers as shopping destinations in their own right, due to the broad product range, expertise and specialisation they offer.
National store portfolio which would be difficult to replicate
As at 26 September 2008, Halfords operated 455 stores (395 of which were superstores) of which 431 are located across the UK, servicing major UK conurbations, cities and towns. Halfords is represented in 95 of the UK’s top 100 retail catchments listed by Experian Limited.
The Directors believe that Halfords enjoys a considerable advantage over many of its competitors that are predominantly based in high street locations, as its out-of-town superstores offer a broad product range, parking facilities and longer opening hours. This portfolio of superstores, built up since the mid-1980s, would be difficult for those existing competitors or potential new entrants without such a portfolio to replicate.
Halfords’ portfolio strategy is to continue to improve the quality of its store portfolio by closing less attractive stores and opening new ones in more profitable locations. Of the Group’s 455 stores, 99 per cent. were cash profitable in the 2008 financial year.
Strong track record of earnings growth and cash generation
The Directors believe that Halfords’ strong track record of turnover growth over the past 20 years demonstrates the strength of the business within the UK economic cycle. The Directors also believe that Halfords’ consistently high level of conversion of earnings to cash flow allows it to support the Group’s growth strategy and provides the Group with further financial flexibility.
Strong bargaining positions with suppliers
As the UK’s leading retailer, on the basis of turnover, serving each of the product markets in which it operates, the Directors believe that Halfords is the largest UK customer of many of its key suppliers and therefore is well-positioned to negotiate preferential terms of supply and volume discounts.
The Directors consider that Halfords’ portfolio of stores also offers suppliers an attractive selling platform for bringing new and innovative products to the UK market, and this strength enables Halfords to secure periods of exclusive distribution of certain new product lines.