Matalan founder puts his own head on the block

John Hargreaves promises to leave the discount retailer if the new management fails to work

The founder of Matalan, the discount retailer, yesterday pledged to quit the group if his second change of management in two years failed to work.

John Hargreaves, who founded Matalan as a market trading operation 18 years ago, made the promise after the business ousted Paul Mason as chief executive after just 15 months in the job. His departure is a result of a rift between the two over the day-to-day running of the rapidly growing retailer.

Mr Mason follows Angus Monro, who left Matalan two years ago after his own disagreement with Mr Hargreaves.

Mr Hargreaves, whose family controls 52 per cent of the shares, said: "I will say now that if this doesn't work then I've got two years and then I'm out. My head could be on the block. This was a huge decision and we knew we would take a pasting on the shares and take a lot of criticism. I accept the challenge and the responsibility."

It is understood Matalan's non-executive directors considered whether the business should be put up for sale but they sided with the founder instead.

On the collapse of his relationship with Mr Mason, Mr Hargreaves said: "It is fair to say our relationship had become a bit strained and we had differences of opinion on how the business should be run. I was no longer being kept in the loop and was worried about how things were going. Paul is a great man for strategy and the big picture but I thought we needed a lot more hands-on control. This is not a complicated business but was in danger of getting complicated."

However, the Liverpool-born entrepreneur, denied he would try to take the former high-flying retailer private. "I think that's the coward's way out," he said.

Mr Mason, a former Asda chief executive, goes with a £450,000 pay-off. Also going is Andy Clarke, the retail director, who gets £300,000.

Matalan has named John King, 40, as its new chief executive. He is currently trading director and head of Matalan's Lee Cooper subsidiary.

Matalan shares plunged 26 per cent to 144.5p on the news as analysts digested the shake-up. One analyst said: "There is a credibility problem now. To lose one chief executive could be considered unlucky. To lose two looks like carelessness." Another said: "This company looks like a classic owner-driver business. The founder pretends he isn't running it. But really, he is."

However, Matalan moved to reassure investors that there was no trading problems saying profits for the year to 1 March, will be in line with City expectations of £115m to £120m.

Mr Mason's departure comes after months of speculation that all was not well between him and Mr Hargreaves. The Independent put this to the company on at least two occasions in January and February but it denied it.

Jamey Hargreaves, one of the founder's sons, walked out of the company before Christmas citing frustration over the way it was being run. He has never returned though he remains in the payroll. John Hargreaves said yesterday: "He felt you should be able to question things and not be pooh-poohed off, though the problem was more with Andy Clarke. I told Paul that he should deal with it. He could leave him [Jamey] on the payroll for six months while he did a business course, or fire him. But I said: 'do you want to face a constructive dismissal claim from a member of the Hargreaves family?'" The decision was made to leave Jamey Hargreaves on the payroll.

Meanwhile the relationship between Mr Hargreaves senior and Mr Mason continued to deteriorate. The two parties both spoke separately to the group's non-executive directors in January. Last Friday Mr Hargreaves called a meeting of the non-executives saying a decision needed to be made.

Mr Hargreaves was at pains yesterday not to denigrate Mr Mason, whose achievements at Asda made him a highly regarded retailer. "Paul's a very bright guy and very good at strategy, the big picture. He would fit into a big corporate very well."

It is understood Mr Mason was upset by the decision and felt he might have received more support from the non-executives. He also felt he had been open with Mr Hargreaves about the way he planned to run the company and with institutional shareholders about his strategy. This involved moving Matalan from a small, entrepreneurially-led trading group to a larger company with better systems and more defined management infrastructure.

Mr Mason's departure is the latest in a series of shocks in Matalan's brief spell on the stock market. The company was seen as a retail star when it floated five years ago, delivering huge gains in sales and profits as its combination of low-priced merchandise sold from large out-of-town warehouses, caught on. Mr Hargreaves made £23m from the float and sold a further £232m of shares three years ago.

At one point in autumn 2000 Matalan was valued at £3.2bn. But in January the following year the group delivered a shock profits warning with its Christmas trading statement saying margins had suffered. Just four months later Angus Monro, the chief executive, was ousted after saying to Mr Hargreaves that he only envisaged staying with the group for another three years. The group now has 160 stores and has been gradually expanding from its northern base. It still prides itself on its prices being up to 40 per cent cheaper than the high street. A pair of Lee Cooper jeans is £20. Fleeces start at about £8.

Questions are certain to be asked about the quality of Matalan's corporate governance. Two of Matalan's four non-executives fail the Higgs review test of independence and it seems certain that Mr Hargreaves will be forced to change the boardroom structure of the company he has built.

Charles Thompson is from a venture capital group which backed Mr Hargreaves in Matalan's early days. David Shipley is a former senior partner at the company's auditors, PricewaterhouseCoopers. Mr Hargreaves own position is unusual. He is executive chairman but only works two or three days a week.

One shareholder said: "We need assurance that John King [the new chief executive] is going to be there for more than six months. We felt that we were getting a strategy to go from a small company to a large one. We desperately need stability."

Other shareholders questioned whether Phil Dutton, the finance director who Mr Mason brought in from Asda, would be happy to say on. "Is he really going too but the company doesn't want to say so now because it would look so bad," one fund manager said.

Mr King said he planned to keep to Matalan's core values. "The core proposition and strategy remain the same but we will look at timescales and costs," he said. "I have a good relationship with John and I'd like to stay in the job a long time. It's a question of getting back to trading the stores and keeping it simple."

However some analysts expressed concern that this would mean returning Matalan to a "fly by the seat of the pants" retailer rather than a maturing, large business.

Mr Hargreaves denied he was difficult to get on with. "I'm a very easy-going person," he insisted. "I've never fallen out with anybody, well, apart from two chief executives."

THE STAR THAT FELL TO EARTH

1985: John Hargreaves opens first Matalan store in Bamber Bridge, Preston.

1996: Angus Monro becomes chief executive.

May 1998: Matalan floats on London Stock Exchange. The shares are priced at the equivalent of 58.75p valuing the company at £197m.

March-December 1999: Share price continues to soar as sales and profits rise rapidly.

May 2000: John Hargreaves sells £232m of shares at 500p per share. Angus Monro locks in gains on £11m of shares.

January 2001: Shares plunge on shock warning on falling margins over Christmas and problems with new store openings.

April 2001: Angus Monro ousted after telling John Hargreaves he does not envisage remaining chief executive beyond three years.

August 2001: Paul Mason, former chief executive of Asda, named as chief executive. He joins in January.

August 2002: Matalan announces that Ian Smith will step down as finance director. Phil Dutton brought in from Asda to succeed him.

December-January 2003: Rumours grow of bust-up between Paul Mason and Hargreaves family.

March 2003: Paul Mason and retail director Phil Clarke, retail director, ousted. John King, trading director, promoted to chief executive. John Hargreaves promises to quit within two years if it does not work.