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Like shipwrecked sailors, large businesses can be tempted into cannibalism. There are moral objections to casseroling the cabin boy. The financial argument against one division devouring the sales of another is that it wastes capital. In business, as on the high seas, you may have no choice.
The problem is epitomised by Kingfisher, a UK-listed DIY retailer that this week finalised a new management team. Sales at B&Q, its chain of tired big box stores, have been falling for years. They have soared at Screwfix, another division. This operates low-cost warehouses selling tools and hardware over the counter.
Screwfix has not been eating B&Q alive. But it has extracted pounds of flesh from B&Q, luring tradespeople and DIYers with low prices and helpful counter staff. Rivals with the same business model would otherwise have gone unchallenged. Overlap between B&Q and Screwfix’s products creates economies of scale in procurement.
An activist investor would urge Kingfisher to spin off Screwfix. In theory, its faster growth profile would mean a higher rating than Kingfisher’s eight times earnings. In practice, those gains might be eaten up by losses on the parent’s share.
Attempts by Kingfisher management to revive B&Q have had a despairing air — shares have almost halved since 2015. You could say the same of Marks & Spencer. The chain has tried to revamp flagging clothing sales, even as its food business flourishes. Here, the healthy division is not gobbling the sales of the weaker unit. More likely, it has suffered from a lack of funding and management attention.
WH Smith has dealt best with the problem of mismatched divisions. Its fast-growing travel stores sell snacks and reading material at stations and airports. Its scruffy high street shops are in managed decline.
Bringing Post Office branches in store has helped. But the company admits the best days of the high street have passed. The market approves; shares have almost doubled over five years. As fiction’s most famous cannibal once said: “The tragedy is not to die, but to be wasted.”
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