Murphy's Law ends at Kingfisher

Gerry Murphy has stood down after coming under fire during five tough years at the head of Kingfisher, the parent of B&Q. But where next for the struggling DIY group?

Gerry Murphy is standing down as chief executive of Kingfisher, the parent of beleaguered DIY chain B&Q, after five difficult years at the helm. Though the City was taken by surprise by the timing of the announcement, most analysts were not particularly shocked at the news. Kingfisher, which also owns Castorama in France, has failed to impress, largely due to the performance of B&Q.

The UK home improvement market has changed markedly since 2003 when Mr Murphy was wooed from his post at media group Carlton but the company has failed to keep up and profits have been falling. Shares in Kingfisher have plummeted from a high of 284p earlier this year on speculation of private equity bid interest to 189.6p and yesterday the company said it expects its third-quarter trading update, due this month, to confirm "a tough environment in the UK", though a better performance is expected from its overseas division.

It is thought the timing of Mr Murphy's decision is due to the board wishing to draw up a new three to five-year plan for the company. As Mr Murphy was unlikely to commit to a further five years, both sides believed it would be better to start afresh with new leadership. The 51-year-old will stay on until 2 February, the end of the current financial year, while a successor is found.

Mr Murphy will certainly not be leaving empty-handed. He could walk away with up to £2.3m as he qualifies for a payment of 15 per cent a month of his £912,000 salary for every month he is out of work for up to 12 months, plus phased payments of a £250,000 pension fund. Both of these would be reduced were he to walk into another job. He also has around £400,000 in shares from a long-term incentive scheme to cash in.

Peter Jackson, the chairman, who joined the company in January 2006 paid tribute to Mr Murphy's leadership yesterday. "In a time of great change and challenge for the group, he has transformed Kingfisher into an integrated and successful international home improvement retailer with strong management and a clear direction," he said. "Our strategy of building strong positions in fast-growing markets and improving our established businesses is the right one."

Mr Jackson said the company would be running "a rigorous selection process" but added the board believes "there is strong internal succession for the role". The City is taking this to mean that Ian Cheshire, the head of B&Q, is likely to take up the post. Nick Bubb, an analyst at Pali International, said it is ironic that the man in charge of the ailing B&Q division may be given the job of running the group. But Mr Cheshire is well respected in the City and was in charge of the company's more successful international operations before he took the reins at B&Q in 2005.

Early on in his tenure, Mr Murphy oversaw the demerger of Kingfisher's electrical retailing businesses, Comet in the UK and Darty and But in France, which became the separately listed Kesa. He is also credited with rationalising the company, which has exited Canada, Germany, Brazil and Belgium, while leading growth in Poland, Italy and China.

Analysts were divided on how much responsibility for Kingfisher's uninspiring performance can be laid at Mr Murphy's feet or whether he was just "doing a good job in difficult circumstances". Tony Shiret, at Credit Suisse, said: "Clearly, despite his achievements at group level and outside the UK, the prospect of a long slog with an uncertain end-result at B&Q appears not to have been that attractive to Mr Murphy, which we find completely understandable." While Mr Bubb, at Pali, said: "Profits have gone nowhere and ultimately the buck must stop with Mr Murphy."

Certainly, the UK home improvement market has shifted significantly. Nick Gladding, lead analyst at Verdict Research, said: "Five years ago the market was a much more buoyant place, companies were opening new stores, people were using them. There was a lot of coverage of the sector in the media, and property programmes were sparking interest in the market." But he said that a lot of that "has come unstuck" and DIY retailers have had to reinvent themselves. Although Verdict predicts the DIY and gardening market will increase by 3.1 per to £16.1m this year, this follows falls of 3.2 per cent in 2005 and 0.2 per cent in 2006. Even with the upturn – which Verdict says is down to price increases due to inflation on the back of higher raw material and energy costs – the market will be worth less than in 2004.

"B&Q has struggled to reinvent itself," Mr Gladding said. "It has come up with a number of initiatives but they have not yet translated into profits." Credit Suisse said B&Q's return on capital investment of below 5 per cent indicates that many stores should never have been opened.

David Pattison, senior analyst at business analysts Plimsoll, said: "The global DIY market has stagnated and B&Q, the epitome of the one-stop-shop, has stood still, despite all the innovation over the period. It has been swimming against the tide."

He added that the higher-end interior design market and the lower end builder's merchants market "have been holding up quite well" but B&Q has failed to keep pace. "Mr Murphy has held his back straight but there is a need for a change of leadership which the company has recognised. There is a need for more dynamism. Somebody who is willing to take risks would certainly ignite the share price."

There have been changes at B&Q. In September, it unveiled its strategy for a revamped chain, with the aim of giving it a more stylish feel as it tries to appeal to women home-improvers.

But, as a series of interest rate rises start to work through to the consumer, the credit crunch and fears of a consumer slowdown send jitters through the market, and the prospect for the home improvement sector does not look positive.

There are measures that could be taken to overhaul the business, assets could be sold off, and there could be much more investment in B&Q or much less. As Mr Shiret says: "It is possible that a period of running the business more tightly could act as a springboard for profit recovery."