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Admittedly, I am not too handy around the house when it comes to most minor renovations or furniture repairs. When I’m at Home Depot or Ikea, I can confidently buy my domestic wares knowing that my partner will likely (and enthusiastically) volunteer assembly; and luckily, my domestic deficiencies are not policy restrictions at either stores. Imagine — an Ikea sales associate refusing to sell me a couch unless I could guarantee its assembly be left to professionals? Ingvar Kamprad, Ikea’s founder, would not have entertained this idea and likely would have had me promptly removed from his office if I suggested it to him.

Yet this is exactly Howdens, a complete kitchen and joinery manufacturer/distributor, approaches business in the UK, leading to a 17% annualized total return to investors, outperforming the FTSE 100 by more than 10% annualized since becoming a standalone business in 2006. This is despite a savage downturn in UK home prices that bankrupted many of of their less well-run competitors.

Source: Bloomberg

From 694 depots around the UK, Howdens sells only to builders and trade professionals (contractors in North American parlance). They design and manufacture cabinet product ranges in two large factories in Yorkshire and Cheshire, which then distributes these products on a just-in-time basis to their local depots. The 694 local depots are the center of the business model. Each depot is given significant autonomy in its day to day operations with the local manager compensated based on their depot’s profits (not Howdens profits as a whole). The depot is where trade professionals interact with Howdens and it has been designed to meet their needs in as efficient a way as possible.

How does focusing on target customers, like builders and trade professionals, serve as an advantage against competitors? Simple. Focusing on professional customers is cheaper and is much better for the brand.

Function Over Fashion

Howdens solves problems for small builders doing joinery work. It’s about fitting into their society, not letting them down and associating with people who run their own business. Builders don’t get paid until a job is complete and satisfactory; that means our products must look good, be available locally when required, meet standards, are easy to fit and don’t break.

Local competitors in the UK, who focus more on the DIY market, need to have a much larger average store footprint so that they can have a large showroom to show off their product ranges to customers. Competitors’ stores are often more than 25,000 ft2 while Howdens are around 10,000 ft2. More general retailing competitors like IKEA can often have massive store footprints, commonly 300,000 ft2, as anyone who has been forced to navigate its maze of a showroom can attest (perhaps by a significant other who likes office supplies and shelving a lot more than they do). This restricts the locations where IKEA can deploy a store, especially in a more space constrained country like England.

Howdens doesn’t need expansive showrooms and doesn’t need to impress a homeowner with a fancy store, so their depots can be located in industrial areas instead of retail properties. They also keep staff requirements lower for each of these depots, since they require only a designer and few sales staff. Thus, the lower overhead and smaller depot footprint work to the advantage of Howdens’ trade clients as they can get a lower price at Howdens than from any competitor for a similar quality of product; with convenient locations sprinkled around a city instead of one large format store on the fringes of town.

Source: Howdens H1 2019 Investor Presentation

Protection from Consumer Hands

The level of skill required to fit a modern kitchen, due to the types of cabinets, finishes and appliances, as well as regulatory requirements, is beyond many of us, and we simply don’t have the time to do the work involved. In general, there is a shift towards ‘done for you’ rather than DIY.

Consumers Couldn’t if they Wanted To

Open concept designs that blend social and cooking spaces are all the rage and are continuously making the modern kitchen far more complex for the average do-it-yourselfer. If they wanted to go this route, Howdens would need to invest a considerable amount into customer support, redesign its depots to expand the showroom area, and be prepared to field endless calls from confused and angry homeowners who can’t figure out how to get things fitting together properly. But by focusing on the contractor experience through things like digital applications that give the contractor extended visibility into stock levels, on-site designers for each depot, and design software for creating a seamless fitting experience, Howdens not only secures their relationship to their target customers — they’ve secured a culture so heavily ingrained that no consumer bystander ever could have a chance.

Self-Installation Risks Hurting the Brand

We believe that it is no longer possible to have a kitchen that both looks good and works properly without the help of skilled fitters. This is why we only sell to builders.

Every piece of a Howdens kitchen is designed to fit perfectly together and look seamless. But if a DIYer lacking sufficient experience and training tries to install the kitchen themselves there is a risk that the end result looks horrible. Gaps between cabinets, misaligned drawers and malfunctioning appliances are common in the case of self installation. When a homeowner shows off their new Howdens kitchen, the company needs the reaction of their guests to be a mix of amazement and jealousy, not derision. Howden’s business model works best when friends and family want to redo their kitchen too, using the same contractor and a similar product range from Howdens.

A properly installed Howdens kitchen

Howden’s True North: Their Customers

Executives and entrepreneurs are often a hard-charging group. There is a widespread tendency to say yes to anything to close the sale. While this tenacity can be an admirable trait at times, it can also be the downfall of many businesses. Entrepreneurs may find themselves saying:

“Of course we can meet your delivery deadline.”

“Yes, we can tailor the product to meet your specifications.”

“Adding this product/service is a logical brand extension”

“We’ve been successful in our target market so now we’re moving upmarket.”

Anything to get the sale, anything to close the contract, anything to win the day. And in doing so they lose the war. A company and a product can’t be everything to all people and accepting every potential customer is a surefire way of diluting a product’s long term value proposition. It leads to feature creep, cost creep and organizational bloat. Picking a small specific target market and sticking with it has built many successful companies, even if they aren’t as visible as the FANGs of the world, while chasing the largest total addressable market has led to many failures.

Howdens has grown from nothing – no name, no product, no building, no staff. Today it has more than 690 depots, 460,000 accounts in the UK and over 9,500 staff.

The lesson to take away from Howdens is that the success of a business often depends on what it decides not to do. Howdens is successful because it doesn’t serve retail customers, not in spite of it. If Howdens decided one day to serve DIYers this could ring the death knell of the business. All of the Howdens organization and culture imperative is geared towards serving trade customers. It’s written right into their culture and purpose. This level of focus and specific customer service is admirable and uncommon. Other organizations could learn the long term value of customer focus from Howdens, even if it means leaving some customers out in the cold.

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