City to roll out carpet for Sir Phil: Jason Nisse previews the stock market flotation of Carpetright, which has been turned round by Sir Philip Harris and Derek Hunt

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The Independent Online
SIR PHILIP HARRIS is one of the best-known figures in British retailing, but he also arouses controversy.

There is a camp that thinks he is one of the greatest retailers the UK has ever produced, with a feel for the carpets market few can beat.

Others point to the overburdened structure that he built at Harris Queensway, which was one of the main contributors to the subsequent collapse of Lowndes Queensway, the group formed to buy out Harris Queensway for pounds 450m in 1988.

Frank Neale, a partner at PhilDrew Ventures, falls into the former camp. His instincts in backing Sir Philip in his latest venture, Carpetright, look set to bring PhilDrew a 400 per cent return on the pounds 2.5m it invested, which has been matched by NatWest Ventures (nee County NatWest), when Carpetright is floated on the stock market later this year.

The flotation is expected to value Carpetright at between pounds 70m and pounds 80m. The proceeds will be used to pay PhilDrew and NatWest their pounds 5m and could leave their respective 14.5 per cent stakes worth as much as pounds 11m each.

The story started in a wine bar just off Lowndes Square in London's West End. Mr Neale had been talking to two former directors of Harris Queensway about backing a buy-out of Poundstretcher, the discount retailing chain, from Lowndes Queensway. (The buy- out was unsuccessful: Poundstretcher was sold to Brown & Jackson in a pre- emptive bid.)

After a meeting with the Lowndes Queensway people, Mr Neale went for a drink. In the bar was Sir Philip, who was introduced to Mr Neale. He explained he had a brilliant new concept for carpet retailing through out-of- town sites. He jotted down some figures on the back of a napkin, and one of the former Harris Queensway directors joked to Mr Neale: 'That's his business plan.'

It was no joke. The figures gave a rough guide to Sir Philip's plans for the expansion of Carpetright - or Carpetwise as it was then called.

The business had been started by Sir Philip with the backing of MFI, the furniture retailer. Both had put in pounds 500,000, but they wanted expansion capital to start an ambitious store opening programme.

Mr Neale was impressed. PhilDrew soon agreed to put in pounds 1m to fund expansion alongside NatWest Ventures, which had an historical relationship with Sir Philip.

The plan was to open 50 stores in new shopping-centre developments, or other out-of-town locations, in the first year, and then continue expanding.

The stores would be around 12,000 square feet in size and would be pitched slightly above, say, Allied Carpets or Carpetland, the former Lowndes Queensway carpet division. Sir Philip took the post of chairman, although he had no direct role in the day-to-day management.

Within a year, it seemed that things were not going too well. While stores were opening - and Carpetright was able to obtain very good sites quite cheaply, because of the difficulties in retailing - the group appeared unable to capitalise on the initial euphoria surrounding each outlet. The shops were too large, the range and display too 'middle-class' and the stock control systems too muddled for the group to make any real money in an increasingly difficult market.

In mid-1990 it became apparent that Carpetright was performing well below target, and Sir Philip decided to institute management changes. The most crucial was to take day-to-day control of the company himself, as chief executive, with Derek Hunt of MFI taking over the chairmanship. There was also a recapitalisation of the company with a further pounds 2m - pounds 1m from Sir Philip and pounds 500,000 each from PhilDrew and NatWest.

Sir Philip changed the format substantially. He slowed the store opening programme to a snail's pace - Carpetright already had 60 stores - took what was on offer downmarket and tried either to cut the size of the shops or to ensure that space was used more efficiently.

He also revamped the way Carpetright bought carpets - using the skills he had acquired at Harris Queenway and cutting the price the group was paying, to improve margins. Mr Neale subscribes to a view held throughout the industry, that nobody buys carpets as well as Sir Philip.

The group made a loss in its first year of trading - May 1989 to April 1990 - of around pounds 1.8m. But in the following year, Sir Philip was able to show a small profit.

Once the company was sorted out, it was time to start expanding again. During 1991 and 1992, the company opened a store every two weeks, so that by the end of last year it had 108. Nearly all are stand-alones, and the average size is now around 7,000 square feet. A few are stores within stores, mostly MFI, Harvey's or Furniture World.

The profit in the year to April 1992 was pounds 2.68m, which is a good return on pounds 9m of capital. But the expected profit for the year about to end will make the return on capital exceed 50 per cent.

The flotation should crown the success of the turnaround. Mr Neale admits that it was not PhilDrew's usual type of investment - it tends to invest larger amounts and, consequently, does not usually invest in development capital.

When it does invest in start-ups, it goes for companies in difficult markets with managers of proven ability.

It is a formula that seems to work.

(Photograph omitted)