Step one: pick up the pieces

MFI was a by-word for flatpack furniture long before Ikea invaded Britain, but that was back in the Sixties. Now it intends to shake off its decidedly ungroovy image by concentrating on fitted kitchens and bedrooms. So can the ailing giant re-assemble its once-formidable reputation?

As Britain's battered retailers suffer from an unseasonal sales chill, one manufacturer is using fitted kitchens and bedrooms to make an unexpected comeback into your home. MFI Furniture, the traditional purveyor of self-assembly flatpack wardrobes and cabinets, is shaking off its downmarket deadbeat Sixties image and reinventing itself for the new millennium. For the past few months, a new management team has been engaged in what the chief executive, John Hancock, calls "a period of intense activity". The ailing group is finally getting the corporate makeover it desperately needs.

As Britain's battered retailers suffer from an unseasonal sales chill, one manufacturer is using fitted kitchens and bedrooms to make an unexpected comeback into your home. MFI Furniture, the traditional purveyor of self-assembly flatpack wardrobes and cabinets, is shaking off its downmarket deadbeat Sixties image and reinventing itself for the new millennium. For the past few months, a new management team has been engaged in what the chief executive, John Hancock, calls "a period of intense activity". The ailing group is finally getting the corporate makeover it desperately needs.

The next few weeks will be crucial, if this relaunch is to be deemed a success. The group's hectic winter sale period begins immediately after Christmas. Although sales may be hit by the extra millennium bank holiday, the housing boom has created the right climate for the company's products, and the mood in the revamped boardroom is optimistic.

This is welcome news for investors, who have never expected items of MFI furniture to be prized in some Antiques Roadshow 50 years from now, but had become fed up with the company's ability repeatedly to disappoint its shareholders. John Richards, the retail analyst at Deutsche Bank, describes MFI as "probably the most maligned stock in the UK retail sector".

That reputation had been well earned. In the Eighties, the company forged an unworkable merger with Asda, the supermarket chain. This was unscrambled via a management buyout. Then in 1992 the shares were re-floated on the stock market with a £500m price tag for the company. Today the value of the business is just £276m. Profits plunged from £70m in 1996-97 to a mere £17m last year. The shares are down from a 206p peak to 46.5p.

Despite all this, MFI remains the largest manufacturer and retailer of kitchen and bedroom furniture in Britain. It has also replicated its operations significantly in France and Spain, and there are intriguing outposts of its empire in Hong Kong, Norway and Dubai.

Finally, last week came the first hard evidence that a remarkable revival may be on the cards - a half-year bulletin revealed profits before tax showed a near-50 per cent recovery to £12.1m on sales of £431m.

Mr Hancock, appointed as chief executive in March this year when he was 49, arrived in the driving seat via what he calls "a slightly odd way". He says: "I was appointed a non-executive director in the summer of 1998 and attended my first board meeting in November that year." He was well qualified to offer impartial advice, with a 25-year background in retailing. This had included Fine Fare supermarkets, the Do It All DIY chain and running the US operations of WH Smith.

He had hardly been on the MFI board any time before he was being sounded out by two other non-executives. Though he had put down family roots in Atlanta where WH Smith has its American HQ, he was ready for a career move because he had been passed over in favour of Richard Handover to run the whole of WH Smith. Last week's half-year statement represents in his eyes the completion of the first step in MFI's rehabilitation. He credits the previous management under Derek Hunt and John Randall with having already achieved a great deal before he got there. Most importantly the format known as Homeworks, where the product range had been widened, was abandoned as a failure. In its place is a much more focused approach - just 5,000 product lines instead of the previous 12,000, which had included items such as pots and pans and soft furnishings.

"My first major task was to decide whether the group should continue in manufacturing" he says. "I spent a long time looking at the issue and decided there were major benefits both to customers and shareholders." Crucial to that decision was the condition of the manufacturing operation. "It is state-of-the-art," he says. "Certainly the best in Britain and probably the best in Europe. The previous management looked after that side of things pretty well."

One major change instituted by his predecessor was to switch to a new distribution system. The old MFI outlet, with a vast array of stock on site and ready for customers to lug onto their car roof racks has gone. In its place is a home-delivery-only system based on 14 regional home delivery centres with a total of one million square feet of storage space. Mr Hancock thinks the next two years could bring cost savings of £10m to £15m a year from the distribution system. It is all part of a simplification of what still remains quite a complex business. "At one stage it was an inventory nightmare, with parts for as many as 40 kitchen ranges held in nearly 200 stores," says Mr Hancock.

Now the focus is very much on fitted kitchen and bedroom furniture using the Hygena and Schreiber brand names which have given the group a UK lead position, with a 25 per cent market share in both cases. Only one third of turnover is a mix of beds, dining room and office furniture.

Although MFI's reputation is built on self-assembly, a quarter of all customers ask the company to put the kit together for them. Mr Hancock says: "Kitchens and bedrooms are expensive items and they are complex and time-consuming to sell. The customer only does it every seven or eight years but, like a house or a car, they are also a fashion statement."

The most rapidly growing bit of the group is Howdens, supplying trade buyers and small builders with kitchens and joinery products. Sales have risen from £16m to £70m in two years and latest half year sales were up a further 57 per cent at £55.4m. Profits rose from £2.8m to £5m.

If things are looking up on the trading front, almost as important have been moves to stabilise the group's finances. A sale and partial leaseback of 10 retail units plus the sale of Hygena Packaging which, among other things, supplied the containers for takeaway pizzas, has altered the group's financial position by raising some £145m. Net borrowings are down to £60m and Mr Hancock intends to cut borrowings further. The complex borrowing relationship with 15 banks has been replaced by a £200m loan from a single bank.

Richard Rattner, retail analyst at brokers Seymour Pierce, says: "Hancock has done the most obvious thing in dealing with the debt. The fact that the previous management did not do it shows how badly it was being run." Rowan Morgan of brokers Teather and Greenwood agrees. "This is creating stability. The company is always going to be highly geared operationally - linked to the ups and downs in the housing market. For it be highly geared financially was very dangerous. It meant every time business suffered a dip, the company was hit by a double whammy."

Mr Hancock says he has been very clear since taking the job that he wanted "to stabilise the trading platform of the business after so many huge changes. I want now to pace and phase the changes needed in future. We are not after all in a steady market like selling baked beans. It is very volatile and it is quite hard to provide protection through specialisation".

What may reassure the financial markets most about the new MFI is the quality of the team Mr Hancock has hired. Key executives include finance director Michael Williamson (ex-SmithKline Beecham) and marketing director Mark Horgan (ex Mars), operators from giant company backgrounds. They have a key decision to make on re-branding the business. Many outsiders think they should scrap the MFI name with its poor image and promote the Hygena and Schreiber brands. (The French operation is known as Hygena Cuisines.) Mr Hancock is committed to a survey of some 3,000 customers to see what they think.

He is not at all sure that it would be right to drop it. "Some £200m or more has been invested in advertising and promoting the MFI brand over the past 10 years. It is still a top retail brand and you can rehabilitate it. Tesco and Asda achieved that in the Eighties and even the Woolworth brand has been revived, though not to the same extent." Replacing a retail brand can be both expensive and ineffective and Mr Hancock cites the conversion of Gateway to Somerfield as a prime recent example.

Longer term, Mr Hancock remains "delighted" with MFI's success in France. "Overseas is a graveyard for most British retailers," he says, "but MFI has made a success of it." The group now has more than 100 Hygena stores selling just kitchens. The French stores are providing a model for an experimental store in west London which is aiming at the higher-spending customer who would not normally be seen dead at MFI and is willing to spend more than £3,000 on a new kitchen or bathroom. As part of shedding the old downmarket image, Mr Hancock's team is looking at ways for customers to plan their kitchens on the MFI website.

"We already know we have a world-class manufacturing business," he says." Two years from now we could be looking at eastern European markets such as Poland or Hungary. In Asia, there is huge potential though you would need different designs. But we already have a test market presence in Hong Kong."

Mr Hancock, who has just celebrated his 50th birthday, has plenty of financial incentive to do well for the long suffering MFI shareholder. He has bought 140,000 shares and has options on 1.5m more. To intensify the pressures on him, his wife has also put her money behind his reputation. She bought 350,000 MFI shares when he was appointed last March.