The best kept secret in retailing

In 1985, a former market trader opened a store in Preston called Matalan, selling cheap clothes. Today, his company has nearly 100 outlets, is worth more than Debenhams and is set to start selling cars, insurance, loans and pets. And even southerners are starting to wake up to this success story

THE FOUNDER of Britain's fastest growing retailer is standing in his head office building in Skelmersdale near Wigan, indulging in one of his favourite pursuits; comparing his clothing ranges with those of rivals.

THE FOUNDER of Britain's fastest growing retailer is standing in his head office building in Skelmersdale near Wigan, indulging in one of his favourite pursuits; comparing his clothing ranges with those of rivals.

"Look at this viscose shirt," he says, holding up a shimmering green creation. "This one from Asda's George label is £24.99. Ours is £14. And look at this fleece top from Gap. Theirs is £30. Ours is £12. The design is almost identical but ours is better because it's a heavier-weight fabric."

And so he goes on, pulling out chenille jumpers and Lycra tops from the likes of Debenhams ("ìt's easy to beat Debs on price") and Dorothy Perkins to make further comparisons.

Welcome to the world of John Hargreaves, the 58-year-old founder and chairman of Matalan. Two years ago, few had heard of Matalan outside its heartland in the North-west. Now it is retailing's hot growth story. It has quietly built a portfolio of almost 100 large out-of-town stores selling low-priced clothing with men's shirts on offer for as little a £5 and V-necked fleeces from £12. Modelled on membership clubs in the United States, like Sam's Club owned by Wal-Mart, Matalan shoppers pay an initial £1 to be a member and receive regular mailshots. Matalan has 3.7 million active members with the database growing all the time.

After a successful stock market flotation in May last year the shares have soared from their initial 235p to over £14. Matalan is now valued at £1.2bn, which makes it bigger than Debenhams, with Mr Hargreaves' controlling a 66 per cent stake worth more than £700m.

The group has bold plans. Within five years it wants to be Britain's second biggest clothing retailer, second only to struggling Marks & Spencer. It is looking to expand into financial services such as loans, insurance for cars and pets, and home shopping catalogues. And a link-up with a supermarket would be "a natural fit", Mr Hargreaves says.

The group's winning formula has not gone unnoticed, although one industry insider called it "the best-kept secret in retailing". In 1994 Matalan was courted by Kingfisher, the Woolworths and B&Q group, before Kingfisher had a change of heart. And it has had two takeover approaches in the past two months, both from publicly quoted UK retailers. The overtures have been politely refused after the first phone call. "We talked about them at our regular Monday meetings," says Angus Munro, the group's quietly spoken chief executive, formerly a Kingfisher director. "But we couldn't see what (the deals) would add."

The confident attitude is no surprise. Matalan is on such a roll and its low priced approach so in-tune with these budgetconscious times, that it must be the envy of the high street sector. "I've always known the potential of this business," Mr Hargreaves says. "Everyone wants value for money, I don't care who they are."

Matalan's figures show he is right. Profits are tipped to hit £45m this year on sales of £380m. And a trading update earlier this month showed that underlying sales, excluding new openings, were up by a staggering 20 per cent on last year.

The Liverpudlian founder knows all about value for money. A natural entrepreneur, he started his working life as a "runner" for a Jewish tailor in Liverpool before setting up his own market stall in the city. He would buy "seconds" (slightly faulty goods) from Marks & Spencer and sell them at rock-bottom prices. Angus Munro says: "He would drive to M&S suppliers like Dewhirst and Baird and buy goods directly. That way he got the best prices, cutting out the middle man."

It was this philosophy that was to provide the basis for Matalan's business model. Mr Hargreaves used the experience to set up Matalan with a single store in Bamber Bridge, Preston in 1985. With a holiday home near Los Angeles, he had seen Sam's Club, part of the mighty Wal-Mart. He decided to bring the idea to the UK. While the idea of charging a nominal sum for membership was borrowed, his buying style was all his own and it remains the cornerstone of Matalan's success. The concept is to buy direct from factories and cut out middlemen, agents and distributors, who would want their cut. It is the single biggest reason why Matalan is able to offer prices it claims are 40 per cent below those on the high street.

Mr Hargreaves remains head of buying in addition to his role as chairman and he still spends several months a year travelling to factories in the Far East and Middle East, securing product deals from family businesses he has known for more than a decade.

It works like this. Matalan's buyers travel four times a year to the Far East, spending two to three weeks on each trip. They work directly with the factories, though they employ agents to handle production schedules and quality control. The "classic" items, jeans and polo shirts, are sourced early in each season from factories in Taiwan, South Korea, China and India. The more fashionable ranges, which need to be bought closer to the season, are ordered from Egypt and Turkey so Matalan can adapt to fashion tastes.

Though Mr Hargreaves loves talking about the business, he prefers not to talk much about himself. He dislikes interviews and turns the limelight on his chief executive, Mr Munro, and his finance director Ian Smith. Like many owner-entrepreneurs Mr Hargreaves professes that Matalan is his life. "This is my business. I've got no hobbies." He is happy spending days on end in a Turkish factory in 100-degree heat. "I like nothing better than going out and finding a new factory," he says.

The other passion he does confess to is a fanatical devotion to Liverpool Football Club and he makes the trip to Anfield whenever he can. Wouldn't he like a stake in the club (owned by the Moores family, which controls the Littlewoods empire). "Good God, no. If I did that I wouldn't be able to scream at them like I do. I'd have to sit there all quiet."

But if Matalan has made it all so simple, why are none of the other high street retailers operating this way? Can't the Matalan approach be copied easily? Mr Munro thinks not. "It would be a hard act to follow because we have been operating this way for 13 to 14 years. John has good relationships with these people."

But canny buying is not Matalan's only strength. Mr Hargreaves has recruited a good team, with three executive directors and a flat structure that means decision-making is fast. Though Mr Hargreaves is chairman, Mr Munro deals with the City and the media. "We do like to keep things simple," Mr Hargreaves says. Low overheads are a key feature. The group's head office and distribution centre are on an unglamorous industrial estate off the M58 near Wigan. The building is a refurbished former Thorn television factory. Its rental costs are £2.23 per square feet, about half the average for that part of the country.

Its store costs are also low because Matalan looks at locations other retailers would spurn - its store in Preston is at the rear of an industrial estate that backs on to a railway line. When a new site has been earmarked Mr Munro and Jim Wilkinson, head of retail operations, hire a helicopter and fly over to check the local road infrastructure and density of housing. The company keeps to a mix of stand-alone stores and retail parks but its average occupancy costs of £9 per square feet are far lower than the industry rate.

The stores, too, are simple affairs with several common features. They are often off main roads, with plenty of parking. And they are big. The average store size is 18,000 square feet, the same as a typical supermarket. But Matalan is developing stores of around 35,000 square feet and wants stores of up to 50,000 square feet. Inside the design and lay-out are simple and unfussy. Supermarket trolleys await the average customer, who tends to visit the store once every couple of months but buys more heavily on each visit.

For a retailer, Matalan is unusually vertically integrated. Short of actually making the products it does most else. It handles its own importing and distribution to protect its margins rather than improve someone else's. It has also invested £2m in a sophisticated distribution centre next to head office with a state-of-the-art hanging system which sorts garments for delivery to each store. "We are manic about costs and bureaucracy," Mr Munro says. "We won't have it."

Analysts are impressed by Matalan. Investec Henderson Crosthwaite says: "There is no reason why someone else can't copy Matalan's formula but they have a head start. The management team is extremely impressive and the stores are not selling on price alone. It is good value, decent quality merchandise. If they can continue as they are Matalan could end up being a big brand."

Rival retailers are also impressed. Allan Leighton, chief executive of Asda, which controls the George brand of clothing, says: "You look at the growth businesses in this sector and you come up with Next, George, New Look, Matalan and Gap. These are all relatively new." He also points out that most of them are at the value-for-money end of the market. The head of one fashion chain says: "I think Matalan can keep it up. There are lots of major towns they are not trading in (like Leeds, Norwich and Ipswich) and they have lots of space to adapt the merchandise. As long as they keep their eyes on the ball they should do well."

There are some hurdles Matalan will need to overcome. One is the Wal-Mart factor. The US giant's takeover of Asda earlier this year is a threat to Matalan's low-price position. The Matalan board is confident they can compete and describe Wal-Mart's clothing in its German stores as "rubbish". Another issue is whether Matalan concept will travel as successfully in the South as it has in the North. Some analysts are uncertain, though Matalan says its southern stores such as Sutton, south-west London, and Crayford, Kent, are trading well.

A further potential problem is whether Matalan will incur higher rental costs as it expands. "If they want to be in modern, up-to-date warehousing, rents might start to become an issue,"says one analyst.

A final point is the proportion of branded goods in the stores. Matalan tries to stock up to 20 per cent of well-known brands. But some suppliers, such as Ben Sherman shirts, have refused to supply any more because if felt Matalan's low costs were undermining the strength of the brand. The Preston store has Calvin Klein underwear sourced from the grey market and low-priced Wonderbras and Pringle socks, but few other major clothing brands.

And the future? Much depends on Mr Hargreaves. He is already under pressure to reduce his shareholding in the company to improve liquidity in the shares. He gave an undertaking at the time of the float not to reduce his stake until November.

The succession question is another issue. He has three children working in the business. Jamey is a menswear buyer, Jason works in ladieswear and Maxine on ladies' outerwear. He would love to build a dynasty with one of his children eventually taking the reins but he is not pushy.

"Angus has got plans to develop the role of the children," Hargreaves says. "The Hargreaves family has a knack for product. The children have worked with me in the markets. and as soon as they could drive they would be out buying products from suppliers. I'd be delighted if one day they would run the business.

"But there is no nepotism here. It depends what happens and what they want. With their stakes in the business they are independently wealthy."

Matalan may be snapped up before then, though predators may be deterred by the high price. Whatever happens, a new retail force has emerged.