Corporate Profile: MFI - Step one: pick up the pieces

As Britain's battered retailers suffer from an unseasonal sales chill, one manufacturer is using fitted kitchens and bedrooms to make an unexpected comeback into your home. MFI Furniture, the traditional purveyor of self-assembly flatpack wardrobes and cabinets, is shaking off its downmarket deadbeat Sixties image and reinventing itself for the new millennium. For the past few months, a new management team has been engaged in what the chief executive, John Hancock, calls "a period of intense activity". The ailing group is finally getting the corporate makeover it desperately needs.

The next few weeks will be crucial, if this relaunch is to be deemed a success. The group's hectic winter sale period begins immediately after Christmas. Although sales may be hit by the extra millennium bank holiday, the housing boom has created the right climate for the company's products, and the mood in the revamped boardroom is optimistic.

This is welcome news for investors, who have never expected items of MFI furniture to be prized in some Antiques Roadshow 50 years from now, but had become fed up with the company's ability repeatedly to disappoint its shareholders. John Richards, the retail analyst at Deutsche Bank, describes MFI as "probably the most maligned stock in the UK retail sector".

That reputation had been well earned. In the Eighties, the company forged an unworkable merger with Asda, the supermarket chain. This was unscrambled via a management buyout. Then in 1992 the shares were re-floated on the stock market with a pounds 500m price tag for the company. Today the value of the business is just pounds 276m. Profits plunged from pounds 70m in 1996-97 to a mere pounds 17m last year. The shares are down from a 206p peak to 46.5p.

Despite all this, MFI remains the largest manufacturer and retailer of kitchen and bedroom furniture in Britain. It has also replicated its operations significantly in France and Spain, and there are intriguing outposts of its empire in Hong Kong, Norway and Dubai.

Finally, last week came the first hard evidence that a remarkable revival may be on the cards - a half-year bulletin revealed profits before tax showed a near-50 per cent recovery to pounds 12.1m on sales of pounds 431m.

Mr Hancock, appointed as chief executive in March this year when he was 49, arrived in the driving seat via what he calls "a slightly odd way". He says: "I was appointed a non-executive director in the summer of 1998 and attended my first board meeting in November that year." He was well qualified to offer impartial advice, with a 25-year background in retailing. This had included Fine Fare supermarkets, the Do It All DIY chain and running the US operations of WH Smith.

He had hardly been on the MFI board any time before he was being sounded out by two other non-executives. Though he had put down family roots in Atlanta where WH Smith has its American HQ, he was ready for a career move because he had been passed over in favour of Richard Handover to run the whole of WH Smith. Last week's half-year statement represents in his eyes the completion of the first step in MFI's rehabilitation. He credits the previous management under Derek Hunt and John Randall with having already achieved a great deal before he got there. Most importantly the format known as Homeworks, where the product range had been widened, was abandoned as a failure. In its place is a much more focused approach - just 5,000 product lines instead of the previous 12,000, which had included items such as pots and pans and soft furnishings.

"My first major task was to decide whether the group should continue in manufacturing" he says. "I spent a long time looking at the issue and decided there were major benefits both to customers and shareholders." Crucial to that decision was the condition of the manufacturing operation. "It is state-of-the-art," he says. "Certainly the best in Britain and probably the best in Europe. The previous management looked after that side of things pretty well."

One major change instituted by his predecessor was to switch to a new distribution system. The old MFI outlet, with a vast array of stock on site and ready for customers to lug onto their car roof racks has gone. In its place is a home-delivery-only system based on 14 regional home delivery centres with a total of one million square feet of storage space. Mr Hancock thinks the next two years could bring cost savings of pounds 10m to pounds 15m a year from the distribution system. It is all part of a simplification of what still remains quite a complex business. "At one stage it was an inventory nightmare, with parts for as many as 40 kitchen ranges held in nearly 200 stores," says Mr Hancock.

Now the focus is very much on fitted kitchen and bedroom furniture using the Hygena and Schreiber brand names which have given the group a UK lead position, with a 25 per cent market share in both cases. Only one third of turnover is a mix of beds, dining room and office furniture.

Although MFI's reputation is built on self-assembly, a quarter of all customers ask the company to put the kit together for them. Mr Hancock says: "Kitchens and bedrooms are expensive items and they are complex and time-consuming to sell. The customer only does it every seven or eight years but, like a house or a car, they are also a fashion statement."

The most rapidly growing bit of the group is Howdens, supplying trade buyers and small builders with kitchens and joinery products. Sales have risen from pounds 16m to pounds 70m in two years and latest half year sales were up a further 57 per cent at pounds 55.4m. Profits rose from pounds 2.8m to pounds 5m.

If things are looking up on the trading front, almost as important have been moves to stabilise the group's finances. A sale and partial leaseback of 10 retail units plus the sale of Hygena Packaging which, among other things, supplied the containers for takeaway pizzas, has altered the group's financial position by raising some pounds 145m. Net borrowings are down to pounds 60m and Mr Hancock intends to cut borrowings further. The complex borrowing relationship with 15 banks has been replaced by a pounds 200m loan from a single bank.

Richard Rattner, retail analyst at brokers Seymour Pierce, says: "Hancock has done the most obvious thing in dealing with the debt. The fact that the previous management did not do it shows how badly it was being run." Rowan Morgan of brokers Teather and Greenwood agrees. "This is creating stability. The company is always going to be highly geared operationally - linked to the ups and downs in the housing market. For it be highly geared financially was very dangerous. It meant every time business suffered a dip, the company was hit by a double whammy."

Mr Hancock says he has been very clear since taking the job that he wanted "to stabilise the trading platform of the business after so many huge changes. I want now to pace and phase the changes needed in future. We are not after all in a steady market like selling baked beans. It is very volatile and it is quite hard to provide protection through specialisation".

What may reassure the financial markets most about the new MFI is the quality of the team Mr Hancock has hired. Key executives include finance director Michael Williamson (ex-SmithKline Beecham) and marketing director Mark Horgan (ex Mars), operators from giant company backgrounds. They have a key decision to make on re-branding the business. Many outsiders think they should scrap the MFI name with its poor image and promote the Hygena and Schreiber brands. (The French operation is known as Hygena Cuisines.) Mr Hancock is committed to a survey of some 3,000 customers to see what they think.

He is not at all sure that it would be right to drop it. "Some pounds 200m or more has been invested in advertising and promoting the MFI brand over the past 10 years. It is still a top retail brand and you can rehabilitate it. Tesco and Asda achieved that in the Eighties and even the Woolworth brand has been revived, though not to the same extent." Replacing a retail brand can be both expensive and ineffective and Mr Hancock cites the conversion of Gateway to Somerfield as a prime recent example.

Longer term, Mr Hancock remains "delighted" with MFI's success in France. "Overseas is a graveyard for most British retailers," he says, "but MFI has made a success of it." The group now has more than 100 Hygena stores selling just kitchens. The French stores are providing a model for an experimental store in west London which is aiming at the higher-spending customer who would not normally be seen dead at MFI and is willing to spend more than pounds 3,000 on a new kitchen or bathroom. As part of shedding the old downmarket image, Mr Hancock's team is looking at ways for customers to plan their kitchens on the MFI website.

"We already know we have a world-class manufacturing business," he says." Two years from now we could be looking at eastern European markets such as Poland or Hungary. In Asia, there is huge potential though you would need different designs. But we already have a test market presence in Hong Kong."

Mr Hancock, who has just celebrated his 50th birthday, has plenty of financial incentive to do well for the long suffering MFI shareholder. He has bought 140,000 shares and has options on 1.5m more. To intensify the pressures on him, his wife has also put her money behind his reputation. She bought 350,000 MFI shares when he was appointed last March.

fact file

Market capitalisation: pounds 276 million

Turnover: pounds 810m for the year to 24 April 1999

Pre-tax profit: pounds 17.2m

Main business: MFI is Britain's largest manufacturer and retailer of fitted kitchens and bedrooms. The business also sells office furniture, beds and domestic furniture. As well as 200 stores in the UK, the group operates a chain of 100 Howden outlets in industrial estates supplying small buildings and tradesmen. It owns the 107-strong chain Hygena Cuisines in France, and six outlets in Spain. Other operations are in Hong Kong, Norway and Dubai.

Key executives: John Hancock, chief executive; Michael Williamson, finance director; Mark Horgan, marketing director; Gordon MacDonald,: group services director. Matthew Ingle, managing director, trade; Bob Wilson, managing director, manufacturing.

Number of employees: 9,200

putting it all together: how mfi built a brand

1964: MFI founded as Mullard Furniture Industries by Noel Lister and Donald Searle. They traded war surplus goods and had met frequently at auctions. They used maiden name of Donald Searle's wife, and started with cupboards, bookshelves, camping gear and basic furniture. They sold mail order off the national press pages or via Exchange & Mart. First year sales pounds 485,000

1967: First store opened, in Balham

1969: The number of stores had grown to nine, all on industrial sites in London and all cash-and-carry formats

1971: Floated on the Stock Exchange. The mail order business faltered with many damage in transit claims, and was closed. Jack Searight became new joint MD with Noel Lister.

1975: The company reached 33 stores and 1,000 employees. Sales were pounds 15.2 million

1976: The co-founder Donald Searle was killed in glider accident. New purpose-built distribution centre opened in Bedford, and own vehicle fleet launched

1977: Sales reach pounds 33 million from 52 stores. The company moved away from warehouse image and increased emphasis on fitted kitchens and bedrooms

1980: By now there were 77 stores, 2,300 staff and sales of pounds 127 million. Acquisition of Status Discount (66 stores in the North) gave MFI national coverage

1981: Year ended with 2.4 million square feet of selling space, 116 stores and 3,000 staff

1982: Hygena jointly acquired with Humber Kitchens from Norcross

1984: Sales reach pounds 334 million from 132 outlets. Derek Hunt (above), managing director since 1981, replaced Arthur Southon as chairman

1985: Merger completed with Asda, with MFI valued at pounds 560 million. Sales were pounds 386 million from 136 stores.

1987: The unhappy marriage led to a management buy-out which, at pounds 717.5 million, is still the biggest in UK corporate history. Bought control of Hygena for a further pounds 200 million. Asda retained 25 per cent of MFI. Hygena Kitchens began trading in France

1988: Acquired Schreiber Furniture for pounds 35 million. Partnership established with Sir Phillip Harris in Carpetright with MFI initally taking 49%, later cut to 33%

1992: Reflotation on the stock market of MFI shares at 115p a share valuing the company at pounds 562.5 million

1993: 175 stores in UK and 38 in France, and a total staff of 7,500. Stake in Carpetright sold

1994: Launched new Homeworks format. John Randall, finance director, succeeds Derek Hunt as chief executive, and Mr Hunt becomes chairman. By end April the group had 181 stores in UK. Some 52% of sales supplied by own factories and 85% of products sourced in the UK. Fiftieth French store opened

1995: Howden chain launched with 14 stores supplying the building trade. Some 27 MFI stores converted to Homeworks format

1997: Hygena becomes largest furniture manufacturer in Europe with seven factories. New format to replace faltering Homeworks idea. Focus now on kitchen and bedroom furniture, and store warehouses removed

1998: New format and home delivery rolled out. Pilot scheme of five stores in Spain launched, and France store total hits 109

1999: New management team under John Hancock installed. Substantial half-year profits recovery announced in December