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Robert Peston goes shopping and Carpetright

Last night a new series of TV programmes called “Robert Peston Goes Shopping” was launched on the BBC. It told the story of how a few individuals changed the nature of retailing in the UK in the 1950s and 60s. People such as Stanley Kalms of Dixons who was interviewed, Marcus Sieff of Marks and Spencer, Jack Cohen of Tesco and the Sainsburys. Typically these were dominant and self-driven personalities who adopted new methods to attract retail customers from their competitors. Jesse Boot was a similar kind of character. Apart from being an interesting programme for all students of business (and for stock market investors who invest in such businesses), it was particularly topical because one person from the same mould returned to lead the business be founded on Friday.

To be successful in a retailing business requires a single-minded approach and a strong focus on cost control, which is why forceful personalities who dominate the business can be winners when “corporate” teams often fail.

Although this programme did not mention him, Phil Harris (now Lord Harris of course) resumed the role of Executive Chairman at Carpetright on the day before (Friday the 4th October) after Darren Shapland, the CEO, resigned.  Reportedly Lord Harris was not aware of the reason for the resignation (he was actually abroad at the time), but on the same day the company gave a Trading Update that was effectively a profit warning. Like-for-like sales were down 2.5% in the 10 week period and overall sales down 4.1%, with particularly weak figures in the overseas operations in Europe.

Mr Shapland had only been in the job since May 2012 when Lord Harris moved to the “non-executive” Chairman role. Business has been difficult in the carpet sector for some years and Carpetright looks quite a “mature” business with few growth opportunities. Lord Harris has effectively been running it since it was founded 25 years ago – and before that he ran a similar business called Harris Carpets (which later became a listed company under the name Harris Queensway) after his father died when he was aged 15. He developed the model of using a central carpet cutting warehouse at Harris Carpets now used at Carpetright, which enabled operational cost efficiency and low cost buying, and hence competitive retail prices, while ensuring quick delivery to customers. At present Carpetright has the biggest carpet warehouse in Europe and a lot of investment in the cutting operations, but that does result in high operational gearing, i.e. profits are sensitive to volumes, which have been weak of late.

The author of this piece worked for Harris Queensway for some years, and Lord Harris certainly ran that business in a dominant manner – it was not so much a strong management team as a one man band with acolytes following. This style did not seem to change much at Carpetright, so management succession was always going to be a problem. But Lord Harris is now 71 years old, so relinquishing the role of CEO surely made sense. But as any Corporate Governance expert will tell you, moving to Non-Executive Chairman is far from ideal, particularly when with such a large shareholding he would obviously not be “independent” plus has a relative on the board. Such dominance over so many years in an executive role, with no doubt strong personal relationships with other staff in the company, makes it very difficult for anyone else to come in and really take charge of the business. Did the real decision maker change as planned? Or was Lord Harris still interfering in the operations of the business and not allowing Mr Shapland to really lead it? It does seem likely to me that this was more the cause of his resignation.

But whatever the reason, for Lord Harris to take back the role of Executive Chairman makes no sense. For the good of this company, they should look for a proper successor as CEO and a new independent and non-executive Chairman.  However much I respect Lord Harris for the quality of his past abilities in building this business, it is surely time for change.

Other founders of retail empires mentioned at the start of this article eventually had to face up to the succession problem – some more successfully than others. Carpetright also faces some strategic challenges that diversification into selling beds and into a few continental countries surely do not solve. It probably needs a substantial overhaul with some new ideas that only new leadership can provide. But will Lord Harris with his family’s substantial holding allow it to happen?

Meanwhile the share price fell over 8% on Friday after the trading statement, valuing the company at £455m but even that might be optimistic. The share price was over 1300p back in 2007 but is now 616p – there was a loss last year and the prospective p/e is 43. The share price seems to continue to lead a peculiar life perhaps because of the shares being closely held, not just by the family but by those who respect Lord Harris from his past success. But the latter might lose patience after a while unless there is some real change. And as we have seen at Victoria (another carpet company), if the founder bows out for any reason, even the family members can become unhappy if their dividends are threatened and the business gets into difficulty.

Yes it’s surely time for a real change at Carpetright rather than a reversion to the old guard.

Roger Lawson

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