DESIGN AND FALL

Edward Whitley wonders why

the high-street heroes are running into trouble

TWO years ago, Benlox, a small engineer- ing company, made a takeover offer for Storehouse, the large retailing company which comprises Habitat, Mothercare and the old British Home Stores. Benlox argued that Storehouse was a shambolic company run by directors who were unable to make profits, incapable of organising the distribution of merchandise and where Sir Terence Conran was continually sack- ing his fellow directors. In their defence against these accusations the Storehouse directors loftily assured their shareholders that 'we know the profit opportunities that are available to our businesses'. They advised shareholders that by 'accepting the offer you would risk inflicting untold harm on the Storehouse business and, conse- quently, on the value of your own invest- ment', Sir Terence was relaxed enough to spend most of the offer period on holiday in France, but he occasionally appeared at press conferences wearing a tee-shirt with the motif 'Terence was away'.

No doubt buoyed up by such rosy assurances, the Storehouse shareholders voted to stay with Sir Terence and his team and reject the Benlox offer. His sharehol- ders took comfort that Sir Terence had that unquantifiable quality — flair, if no longer in the width of his trouser at least in his vision of the retail market. Who else has been knighted for his avant-garde taste in red teapots? Yet in the two years since the Benlox bid the value of their shares has fallen by 75 per cent. They presumably console them- selves that this is somehow better than the `untold damage' darkly -hinted at by Sir Terence. The 'profit opportunities' prom- ised in 1988 when profits were £120 million materialised as exactly halved profits in 1989 and the forecast of halved profits was again down to £30 million in 1990. The disappointing Storehouse results this week will be a further proof of the slump in its fortunes. As for the strong management team which asked for their support, only Sir Terence himself and someone with the Welsh designer name 'Kevyn Jones' have continued as directors. The rest of the board have changed.

Sir Terence is understandably anxious to be remembered as the dynamic retailing tycoon to put the 'Great' back into Great British design. In his next correspondence to shareholders after the bid in June 1988 Sir Terence made light of the failure of Habitat, Mothercare and BhS (which com- prise 95 per cent of Storehouse) to match their previous year's results and much of the success of Blazer, Richards and Anonymous which he described as having `unique identity based on their design'. Here at least was a glimpse of that old flair shaking its leg again. Sir Terence promised that 'in the next 12 months we will demons- trate very significant progress'.

Storehouse shareholders have been dis- appointed in their assumption that 'prog-

ress' implied upward progress. Twelve months later they met the designer. concept of halved profits. Sir Terence pre-empted any criticism of his management by laying the blame for his failures on the Govern- ment. He wrote: 'The efforts of the man- agement have been severely hampered by the deterioration in trading conditions in the UK following the Chancellor's actions in 1988 to reduce consumer expenditure.'

In his mind's eye, the British consumer had been thwarted from buying his mer- chandise by a penny-pinching Chancellor. There they stood outside his shop, their noses pressed against the glass, their credit cards just useless plastic in their pockets.

`Profit opportunities', 'strong manage- ment', 'significant progress' and the 'value of your investment' came to nothing and the blame for the collapse of the company had been laid on that fashionable scapegoat 'high interest rates'. In fact if it had fallen into the same trap as Next and Harris Queensway, but which Burton had narrowly avoided. The trap? The belief that someone with a good idea is qualified to run a large company — particularly if endOwed with a knighthood.

Sir Terence Conran, Sir Ralph Halpern, Sir Phil Harris and the as yet unknighted George Davies all rose to fame in the High Street. They were responsible for trans- forming the weekly shopping trip from an exhausting chore for the housewife to a `leisure activity' for all the family. 'Shop- ping' became a viable Saturday afternoon alternative to sport or visiting museums. On the strength of a huge wave of consum- er credit, Britain finally emerged from the dark ages of polyester raincoats and heads- carves into the brightly spotlit age of `Separates' and 'Accessories'. Surfing on the bow-wave of this headlong rush down the high street were the new retail tycoons. It became fashionable to be fashionable and it became fashionable to be rich. The retail tycoons became both. As shoppers flocked to spend money which they did not have, they began to read more about the new knights of the realm to whom they were entrusting it: Sir Ralph Halpern, Sir Phil Harris and Sir Terence Conran. Mrs Thatcher opened the new Next offices but George Davies was inexplicably omitted from the Honours. The retail tycoons also began spending money which they did not have, so their shareholders financed a succession of major takeovers. Sir Ralph changed Burton into 'Top Shop' and ac- quired Debenhams, George Davies changed Hepworth into 'Next' and ac- quired Combined English Stores and Sir Terence bought BHS and renamed it `BhS'.

Spending money is a great morale- booster and the retail tycoons loudly took the credit for the new mood of euphoria both monetary credit from their shoppers and adulatory credit from the press and their shareholders. Sir Ralph Halpern be- came Britain's top-paid executive with a salary of £1 million. Sir Terence Conran's wealth was celebrated at over £100 million and Sir Phil Harris sold his company for £450 million. George Davies had slightly cheaper taste and just insisted on a com- pany helicopter. As the retailers boasted, prosperity was all about creating wealth.

Sir Phil Harris sold his company. This was when the penny should have dropped. Whenever a carpet salesman assures you that you have just bought a bargain always ask the question: At whose expense? James Gulliver, anxious to join the race of retail tycoons, paid £450 million for Harris Queensway. Predictably he found himself on the wrong end of the best carpet bargain of the season. One year later, the pennies have really dropped. The same company, renamed Lowndes Queensway, is valued at just £45 million and has debts of £160 million. The annual profits of £10 million have vanished with the loss of Sir Phil and the business is losing £17 million a year.

With the exception of Burton, where Sir Ralph is forecast to maintain profits of around £200 million for each of the next three years, the other companies' profits have plunged. If this is really the fault of high interest rates, it seems strange that the profits of Marks & Spencer, Boots and W.H. Smith, who sadly lack the magic wand of 'designer flair', are all forecast to raise their profits over the next three years in the teeth of high interest rates and gathering recession by an average of 15 per cent.

A comparison between the management style of Sir Ralph Halpern and that of Sir Terence Conran and George Davies re- veals why Sir Ralph is worth an annual salary of £1 million, why George Davies was sacked and whether Sir Terence is right in believing that by remaining as chairman of Storehouse he is acting in his shareholders' best interests.

In 1986 all three men took the opportun- ity to acquire large tracts of the High Street. Interestingly enough they were each advised by Roger Seelig, the highly creative banker at Morgan Grenfell. Roger Seelig seems to have looked down upon the High Street simply as a larger than life Monopoly board and moved the players around as fast as they were prepared to go. Burton made the first move with a hostile bid for Debenhams. This was narrowly won on the casting vote of Gerald Ronson, who had built up a pivotal stake which he handed over to Burton in the last few days of the takeover. During the course of the bid, Sir Ralph teamed up with Sir Terence Conran and tried to introduce the `galleria' as the shopping concept of the future. This was met with such derision that it almost lost him the battle and as soon as he won control he jettisoned Sir Terence and his gallerias. Unlike Storehouse or Next, Bur- ton did not use the excuse of an extensive high street property portfolio to proliferate into every conceivable aspect of retailing. Sir Ralph established a management team who all understood that whilst hem-lines could rise or fall, the line of earnings per share had to rise every year. He gave both himself and his directors unprecedented levels of share options as an incentive to achieve this. Sir Ralph also substantiated the ephemeral concept of 'design' with a solid property portfolio, so that if design ever went out of fashion, there would be some literally concrete assets.

Unfortunately for anyone who invested in Next or Storehouse, neither George Davies nor Sir Terence learnt these les- sons. George Davies began his retail career as a stock controller at Littlewoods, and consequently became a skirt buyer. When he was passed over for promotion, he left to set up his own business selling school uniforms. This business went bankrupt. He joined another clothing business, Pippa Dee, which got into a bad state before it was taken over by another company and many employees were made redundant. Although he credits himself with redesign- ing the British high street, George Davies did not actually design Next. This was done by Conran Design who derived the idea from Benetton. On the success of Next, George Davies, a man with little manage- ment experience was eventually appointed as chairman and chief executive of J. Hepworth with responsibility for over 850 shops. Although not creative himself, he ushered in an era of great creativity. J. Hepworth was renamed Next and began to sprout along the High Street with the uncontrolled vigour of dry rot. It diversi- fied into hairdressing, watches, jewellery, gardening, British Satellite Broadcasting, newsagents and mail order. The expansion of Next had a notable financial consequ- ence — at one stage it was valued at over £800 million. The subsequent questions about 'creative accounting' derive from a belated understanding by the City of how Next accounted for this expansion. It appears that for accounting purposes any new venture was started in the last month of the previous financial year. Thus the start-up costs could be written off out of sight in the previous year's accounts, leav- ing the new venture free to make flying profits unaffected by the associated costs. The profits of £92 million which George Davies announced in his final year as chief executive have been assessed by some at £45 million.

Like George Davies, Sir Terence is a designer with no qualification to run a large company. When he acquired BHS it had freehold high street property portfolio 'We work behind enemy picket lines.' second only to Marks & Spencer and the best merchandise distribution system in the retailing industry. In order to fuel his continuing expansion along the high street, Sir Terence sold a great deal of property and bought cheaper and therefore larger and more plentiful leasehold sites. The result of this decision is that Storehouse's rents now account for 8 per cent of the company's sales, compared with Marks & Spencer where the corresponding figure is 0.5 per cent of sales. This means that the new BhS is unable to compete with Marks & Spencer on a pricing competition with- out losing. money. Sir Terence also ignored the benefits of the old BHS's experience in merchandise distribution. No BHS direc- tors remained on the Storehouse Board just 12 months after the friendly merger. The distribution system of Storehouse is in such chaos that car-parks have apparently telephoned the company to ask what should be done with the trailers of clothing and furniture left standing there.

In his defence document advising share- holders not to accept the Benlox bid, Sir Terence wrote, 'Design is a real economic tool for profitable business development. Your Board is totally confident that we can meet the demanding targets we have set ourselves.' Shareholders may be able to accept the reduction of the value of their shares by 75 per cent and the value of the company's forecast profits by 90 per cent if they believe that they are investing in design genius. But the latest market sur- veys have reported that shoppers prefer Marks & Spencer to BhS because the clothes are better designed (and they have your size), children often tear the labels out of any clothing they are given from Mothercare and shoppers believe that the furniture at MFI is as well designed as at Habitat. MFI! If the grand designs of Sir Terence Conran can now be compared with MFI, the butt of music-hall jokes, what future can Storehouse have? If all the Storehouse shops were miraculously to vanish overnight and the rest of the High Street close ranks above them, none of the shoppers would notice their absence. Given the diminished value of their shares, neither might the Storehouse shareholders.

The fundamental difference between the careers of Sir Terence Conran and George Davies is that Sir Terence was knighted and George Davies was sacked. In this respect Sir Terence joins a tradition where- by whatever financial troubles ensue, the public still believes in the myth of his genius. Thus he follows the footsteps of Sir Freddie Laker and Sir Clive Sinclair as a champion of the public's interests, a great pioneer who was just somehow unlucky. Perhaps his investors did not take a suffi- ciently long-term view, perhaps the Gov- ernment did not offer him adequate sup- port. The public will believe him when he blames high interest rates. But when it comes to shopping, they will probably choose Marks & Spencer.