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The Icelandic raider's cool-headed conquests

As fashion giant Baugur unveils its new superstore concept, its retail boss Gunnar Sigurdsson talks about the Icelandic group’s investment philosophy.

Gunnar Sigurdsson is sitting in the changing rooms in Baugur’s new concept store, Souk, his statuesque frame leaning back on a chair. Despite being one of the most powerful men on the UK high street, there is not one iota of the self-aggrandising air that usually afflicts men of his ilk.

In three hours’ time Souk will open for business in downtown Stockholm, and the formidable partnership of Baugur chief executive Jon Asgeir Johannesson and managing director of retail Sigurdsson will tick yet another venture off their retail shopping list.

Souk is a huge multi-branded young fashion store and reflects the Baugur ethos. The site was transformed from a Debenhams into a temple of young fashion housing Baugur’s brands in just nine weeks, with all the pace and aggression of a typical Baugur deal. Souk also features Topshop and Topman franchises, and Arcadia boss Sir Philip Green has since flown out to visit Souk to ensure his businesses are being represented to his liking.

Once it is fully extended in August, Souk will trade across 62,000 sq ft of space. Until then, says Sigurdsson, the concept will be honed. “It’s a great location and we wanted to house all of the Baugur brands,” says Sigurdsson.

Although not an obvious concept for the UK, he would not rule out a one-off in this market. “In the UK there are a lot of stores with this type of space, so there would be an opportunity to convert something if it is a concept that works really well.”

Baugur is booming, with turnover of £10 billion and 3,800 stores in about 35 countries. Since arriving in the UK in 2003, the Icelandic powerhouse has swept the high street, buying staple members of the UK retail line-up, including House of Fraser and Mosaic brands Oasis, Coast and Karen Millen. It has also built up stakes in French Connection and Moss Bros.

Market speculation also suggests Baugur could bid for department store group Debenhams, and when pushed Sigurdsson does not rule it out. “Debenhams carries a lot of our brands - Mosaic and Jane Norman are in there in a very big way. It could make sense but that is future music,” he says.

Most of the group’s retail businesses are based in the UK, with some in Iceland, Sweden and Denmark. Its UK business is its largest and the company has plans to streamline the retail portfolio, aiming to float or sell something this year or next. It is keen to prove that as well as excelling at acquisitions, it can also offload businesses successfully. “In the next few years the portfolio will change. Something will come out. Some of the businesses have fantastic growth plans and others are more mature,” says Sigurdsson.

House of Fraser is a young investment, just four months old, and he says changes are afoot in the next six to eight months. HoF currently turns over about £1bn, as does Mosaic, and the Baugur property portfolio is something of a goldmine.

Sigurdsson is content with the group’s growth and the impression it has made on the market, both in terms of its financial clout and its industry status. Now ensconced in the UK retail glitterati, Sigurdsson, Johannesson et al have traded with some of the most high profile players in the industry. But where do the group’s high-street raiding roots lie?

Baugur began in 1989 with a discount food concept unique to the Icelandic market, and Johannesson began to put his family retail background to good use. The Icelandic economic climate - with its healthy state pension fund, young population, and supportive banks - was conducive to success. Adding entrepreneurialism to the mix provided the perfect model, says Haflidi Helgason, business editor of Icelandic newspaper Frettabladid. “Icelandic people are all fishermen and farmers in spirit, so they are inherently entrepreneurial,” he says. “They take risks, and to fail is not an embarrassment - you just try again.”

The strong hold that Baugur now has over the UK high street started with a 20% stake in Arcadia, which turned into a £55 million return when Sir Philip Green bought the group in 2002.

Sigurdsson worked in banking until he joined Baugur in 2003. He starts his day at 6am and hits the office by 7.30am, skinny latte in hand, ready to spend 85% of his week in meetings at Baugur’s London head office, just off Oxford Street. The rest of his time is spent on the shop floor, either touring Baugur’s portfolio or sizing up the competition.

His investment criteria are crystal clear, targeting businesses with a proven concept and strong incumbent management teams. If the smaller brands can translate into a retail concept and be leveraged into the existing portfolio, then so much the better.

Danish brand Day Birger et Mikkelsen is one of Baugur’s most recent investments. With a store in London’s Sloane Street and two department store concessions, the group believes there is room for several stores in the market. Since the investment, the label has polished up its operations, says founder Keld Mikkelsen. “As a business we are sharper.”

Those who are in the Baugur gang have all profited from the association. “We are very pleased with how we have managed to integrate into the UK’s retail society,” says Sigurdsson. “We work with people like Don McCarthy, Tom Hunter and Kevin Stanford - we bought a business from Kevin and now he is one of our closest partners. It’s about being open with people and allowing them to prosper alongside you.”

So how does Baugur pick its partners and what kind of a person do you have to be? “Honest,” Sigurdsson says bluntly. “You get to know people and you use your gut feeling about someone. It is not a big market so everyone is known; people have a positive or negative reputation.”

Baugur’s theory is that good retailers make a strong investment, and by keeping their management teams in place the group can harness market knowledge. It also helps Baugur to keep the businesses at arm’s length, says Sigurdsson. “One day we might have to sell them so they can’t be too connected. We are an investment group, not a mother company to the businesses.”

However, HoF and MK One have been an exception to the management rule. Dominic Galvin took the reins at the latter from Irish food chain Superquinn, and Don McCarthy and John King were installed from Shoe Studio Group and Matalan respectively to head HoF.

McCarthy says Baugur is made up of good business people. “They are good partners and they enjoy what they do,” he says. “They’ve built good relationships within the UK community.”

As part of the strategy to keep the businesses autonomous, Baugur has no plans to centralise its UK operations to cope with the expanding portfolio. However, it has set up a resource infrastructure for these businesses, known internally as ‘plug and play’, to provide e-commerce support, for example, or to help with international growth.

Aside from this, the businesses are kept separate - if fashion brand Criminal wanted to go into HoF on a concession basis, for instance, “it would have to sort that out itself”, says Sigurdsson. But there are clearly opportunities to utilise the power of the group. Last year, for example, the businesses took out a group insurance policy. “There were quite good savings that came from that,” he adds.

The portfolio is certainly varied, from wholefood businesses to jewellers, but all have a common thread. Baugur is not interested in a turnaround nor in building up a business from scratch, says Sigurdsson, although London toy store Hamleys and HoF were both in need of some TLC upon acquisition.

A pool of investment cash is there to be used when an opportunity comes up. Sigurdsson will not reveal how much is available, but Baugur is neither meek nor mild, and if the return and the exit are viable then an investment will be made. “We are aggressive. When we go into an investment we have to think about our exit. I ask, can we float this? Will somebody buy it from us? What is the best way to get the money out?”

Despite working on a private equity model, Sigurdsson is keen to impress that Baugur is not a strip-it-out and sell-it-on business. “We do look at a three- to five-year window, but we also like to build the businesses,” he explains. This obviously helps to maximise investment. With no investors to answer to bar themselves, the mainly family-owned group operates at a phenomenal speed, rapidly turning around deals.

At present Baugur owns stakes in Moss Bros and French Connection, and seems to be waiting for activity to start brewing in both businesses before it makes its next move. It is one of the group’s key tactics - Baugur owned a 10% stake in HoF before it eventually bought the business for £351m. “Stake-building provides us with a mixture of opportunities,” says Sigurdsson.

But it must be frustrating when some are performing poorly. French Connection is not coming up to scratch, admits Sigurdsson. “The price at the time was attractive, but it’s a very interesting brand. We will see what will happen with that,” he says.

Talking about young fashion while sitting in a changing room decorated in floral print wallpaper, Sigurdsson seems totally at home. “I’m happy with it. It will evolve as a concept and now all I need is for it to be successful,” he says.

Although in need of some fine-tuning, this House of Baugur showcases how far the group has come and what a formidable operator it is.

 

BAUGUR’S UK GROWTH

2006: Baugur buys 50% stake in Day Birger et Mikkelsen; acquires a 40% stake in All Saints; and buys House of Fraser

2005: Buys 1.5% stake in French Connection, now understood to be built to a 13.7% holding

2004: Acquires stake in Moss Bros via investment vehicle Unity; also buys Jane Norman and MK One. Mosaic is formed after the group buys Karen Millen and Whistles

2003: Oasis acquired

2000: Baugur begins building a stake in Arcadia.

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