Just as the sun began to set over the halcyon days of the British Empire, a
different sun was rising over one of the stalwarts of British business, Great
Its motivations were also Empire-like (after all, back then size really did
matter) and under the stewardship of Isaac Wolfson, its managing director and
later chairman, the group showed an appetite almost as voracious as the British
Empire’s. Within 30 years of Wolfson joining in 1932 it had absorbed more than
80 companies from across the globe.
Today, Great Universal Stores is a very different beast. It was renamed GUS
in 2001 in an attempt to remove the colonial and, frankly, rather dull image of
the old business. In the not too distant future, even the name GUS is unlikely
to exist as the company completes a metamorphosis of epic proportions.
Chief financial officer, David Tyler, has been getting his hands dirty with
the transformation since joining the company in February 1997. Sandwiched either
side of his appointment were the acquisitions of the two businesses that are
destined to outlive the current company: Argos and Experian. They will soon have
separate boards and separate market listings. So why systematically pick apart a
“The dominant reason for this is that if you’re a shareholder you want to
have choice. And you want to have choice today whether you want to be investing
in UK retail [or a business information company],” says Tyler. “You may be happy
to be invested in both, but today you don’t have that choice to adapt your
portfolio. You’re taking the mix that the board of GUS decides to give you.”
Of course it’s not the only reason. Since Wolfson retired in 1987 there have
been a number of challenges, from stock market crashes to dotcom booms to the
internet revolution. Many of GUS’s transformations over those two decades (see
timeline, page 24) have been made in an attempt to deal with the business
environment of the day.
Right now, Tyler’s focus is split evenly between Argos Retail Group (ARG) and
Experian. In fact on the day our interview took place, GUS also announced the
$485m acquisition of American price comparison site PriceGrabber.com. Two days
before the interview took place, GUS divested its remaining 65% stake in
Burberry. Never a dull day!
Tyler is almost twitching when he arrives for our interview, 15 minutes late.
He had been answering analyst’s questions about the day’s news and, it is fair
to assume, would have been operating on a heady mix of caffeine and adrenaline.
“We completed on Monday night, Californian time,” he says. “This is another
development of Experian in the interactive space as we call it, which is a very,
very important development in our business.” The acquisition brought to an end a
hugely successful year for the Experian part of GUS’s business, which saw sales
to 31 March 2005 increase by 18% and profits by 16%. Interim results to 30
September 2005 saw an even more impressive sales increase of 29%, married to an
increase in profits of 36%.
Tyler concedes that when the separation of ARG and Experian goes ahead (he
would not be drawn on timing), it will be job done. “That will be the end of
that process, absolutely,” he says. “It doesn’t mean it will be the end of the
process for Argos Retail Group, which has tremendous scope to expand and grow.
There’s even more scope for a global business like Experian to expand and grow,
and the acquisition of PriceGrabber.com is just one example of that.” (Since our
interview, GUS has also announced Experian’s acquisition of customer counting
company, Footfall, for between £30m and £40m.)
The PriceGrabber.com acquisition went down well with analysts. Despite GUS
valuing the company at more than eight times sales and 20 times EBIT, the online
price comparison market is expected to grow so rapidly over the coming years
that the purchase was seen as something of a coup. But, despite expectations, it
is still a gamble. “The black art of valuing internet companies has conjured
many an arcane multiple,” waxed the Financial Time’s Lex column the day
following the announcement.
But Tyler remains bullish. “That’s what capitalism is all about, there’s a
risk,” he says. “We think the risk is very low and that’s why we’re prepared to
pay this price because we think we can make good money for our shareholders.”
The individual value of the GUS portfolio is now expected to far outstrip its
group value, so those very same shareholders are sure to be pressurising the GUS
board to split the business sooner rather than later. That hadn’t happened by
the time Financial Director went to press, but we still hadn’t ruled out an
announcement before we landed on readers’ desks.
Following the split, it is likely that Experian will be listed on the New
York Stock Exchange, while ARG is almost certain to stay on these shores, where
it will remain a “substantial” FTSE-100 4 company. (Sarbanes-Oxley may still
influence the decision of where to list Experian, however. GUS doesn’t have to
comply and Tyler says the company “certainly didn’t” adopt it as best practice
because “that would have cost quite a lot of money and not really added a great
Argos Retail Group includes the Homebase DIY chain, which GUS acquired from a
Permira-backed management buyout team in November 2002. Tyler explains that the
board recognised some clear synergies and value-creating potential in the
Homebase acquisition, which would allow them to return value to shareholders
relatively quickly. He refers to three themes: improving the company’s retail
disciplines, which he says was helped with the implementation of SAP; enhancing
the business through organic growth; and gaining synergy benefits through the
merger with Argos, especially in the supply chain. ARG maintains a beady eye on
the efficiencies of its suppliers, a situation forced upon the group by the
continuing retail slump. “We’re planning on the assumption, certainly for the
next nine months or so, that like-for-like sales in our market will probably
show a decline still,” he says.
One aspect of the supply chain potential that Tyler saw in Homebase was the
lack of any major players. “It’s an area where the retailer [Homebase] has quite
a lot of power,” he says. “If you go and negotiate with Sony or Hitachi or JVC,
you’re dealing with someone who’s got quite a lot of power. It was another
element of our thought process when we were going through the decision as to
whether to buy the business.” But another hugely significant factor in the ever
important supply chain is the rise of China to become, as Tyler puts it, the
“factory of the world”.
“Homebase has benefited enormously from that,” he says. “About 8% of its
goods, when we bought it three years ago, came from China. Today it’s 21%.” But
the rise of China has also had massive implications for Argos.
“In Argos, it’s about pulling down the price to consumers and that’s come not
just from happenstance, but from a huge amount of work in improving our supply
chain, particularly in China, where we get a huge percentage of the goods that
you buy in Argos,” says Tyler. Today, about 27% of Argos products are sourced
directly from China by GUS. The same again comes through other supplier’s supply
chains. And none of that includes the likes of a Toshiba or Hitachi, which might
also be manufacturing in China. He says this compares to just 10% of products
that were sourced from China only three years ago. “And that’s bringing down the
cost to British consumers substantially,” he says.
Tyler expects Argos to increase on the 17,700 products it already sources
itself from China. “Given their labour costs are so much lower and given their
efficiencies have improved out of all proportion over the past 10 to 15 years,
naturally they can produce things much more economically,” he says.
But Tyler is not limiting himself to China, and his staff are scouting out p
otential manufacturing centres and product bases “all the time”. “Their job is
to be doing that full time, searching the world for the best place to buy things
from. Searching the world to find the best ideas.”
As it is, Tyler describes ARG as a “tremendous return on capital business”,
which puts it in an excellent position going forward. “Broadly, the business
made about £300m last year on about £600m of capital,” he says. “So it’s about a
50% pre-tax return, which is tremendous. It’s a wonderful record. It’s a great
business, has wonderful operating characteristics and has low costs.”
It’s that financial strength that has allowed the group to plan for robust
future growth. In 2005 it opened almost 70 new stores, helped by the acquisition
of 33 Index stores from Littlewoods in April. While that store opening rate will
drop next year to the more usual rate of about 35, it represents a significant
commitment considering the current economic climate. “Fortunately, we’re strong
enough as a business to be able to ask whether something makes sense over a
five- or 10-year period, and if the answer is yes, then we will do it,” he says.
Trying to look into the future is a big part of Tyler’s job by no means is
he a CFO who is only interested in numbers. “Strategy is quite a big element of
it [his job] in one way or another,” he says. “It’s not just the bottom line
you’re looking at, it’s what’s driving the bottom line, because that’s the real
issue.” In terms of the more technical side of his role, such as the switch to
international financial reporting standards, Tyler hands the credit to his
“excellent team” as well as to external advisers.
It is difficult, however, to predict what will be left of GUS in five or
10-years’ time. Tyler shows no emotional attachment to the name itself,
describing it as a “subsidiary question” that has “no relevance to the consumer
at all”. It is also clear that shareholders are Tyler’s number one priority
above and beyond anything else. “They’re the owners of the business and that is,
of course, what one is in business to do,” he says. “To serve their needs.”
And in an era of growing investor power, GUS could well become a case study
of how modern, public companies are run. As pressure to split the group mounts,
Tyler and the GUS management could only resist for so long, even if they wanted
to. “The right thing now is for us to remain flexible and not have any hostages
to fortune until the moment we want to actually make something happen,” he says.
If you were to ask your average GUS investor, that moment is now.