View from City Road: In need of a strategy change

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Spring Ram told a story that was too good to be true. Despite the harshest recession in the building industry in living memory Spring Ram, maker and supplier of kitchens and bathrooms, posted better and better profits.

Profits grew from pounds 1m in 1982 to pounds 12.5m in 1988. And when practically everyone else barely managed to tread water, Spring Ram increased profits 23 per cent in 1989, 26 per cent in 1990 and 32 per cent in 1991.

The company boasted that the key to its success was its management structure. It operated a decentralised series of small kitchen and bathroom companies. Each company - there were 20 named in the 1991 accounts - occupied a particular segment of the market and was encouraged to fight its own little corner. That, said the Spring Ram founder chairman, Bill Rooney, was how entrepreneurial spirit was preserved, and how overall group profits managed such impressive profits.

The profits miracle was matched by the share price. Each pounds 100 invested in 1983 turned into nearly pounds 5,000 this time last year.

Then came the fall. Rumours circulated that Spring Ram was not quite all it was cracked up to be. In November, Spring Ram had to admit there had been serious financial 'irregularities' at its Balterley Bathrooms subsidiary.

Yesterday's results confirmed that all was not as it seemed at Spring Ram. Overall taxable profits fell to pounds 25.6m from a re-stated pounds 33.6m. Curiously, the kitchens part of the business made a remarkably solid operating profit of pounds 12m against pounds 13.5m. But the bathrooms bit, after stripping out the cost of the Balterley affair, slumped from pounds 5m to pounds 2m. Are the two markets really that different?

Mr Rooney maintains that despite the Balterly Bathrooms affair, there is nothing wrong with the decentralised structure.

But the case graphically proves the decentralised approach was inappropriate. Until there is a clear change in strategy, and full transparency to the accounts, the shares at 75p should be avoided.