Icelandic investor Baugur has changed the face of UK retail over the past five years. But with tougher times approaching, Amy Shields asks if it has overstretched itself

Almost 10 years after the break-up of once-legendary store group Sears, some retail watchers are asking whether its model is being replicated in the 21st century.

Icelandic investor Baugur, which has built an empire that spans department stores, food, fashion and jewellery, is at risk of becoming a sprawling conglomerate, its critics argue. They fear it could become so unwieldy that retail success may eventually prove as evasive as it was for Sears, which was audaciously bought and then broken up by an emerging Sir Philip Green in 1999.

Sears controlled swathes of UK retail. Its vast interests included department store group Selfridges, the then-mighty British Shoe Corporation, mail order business Freemans and womenswear chains such as Warehouse and Miss Selfridge. However, once cracks began to appear in particular businesses, it was not long before the store group suffered disastrous losses.

Today, Baugur’s control of so much of the high street, as well as signs that some of its chains are underperforming, are causing observers to draw unwelcome comparisons with Sears.

It is a suggestion Baugur firmly rejects. Since its first UK acquisition – Hamleys, in 2003 – Baugur has added to its portfolio relentlessly: there is Mosaic Fashions, which comprises womenswear chain Oasis and other shoe and fashion stores; snack retailer Julian Graves; coffee specialist Whittard of Chelsea; value fashion group MK One; frozen food retailer Iceland; and, most recently, department store business House of Fraser.

While some of these retailers, such as House of Fraser, Iceland and Hamleys, are doing well, others have found things harder. Whittard and Julian Graves were refinanced to the tune of£11.2 million last year, while fashion retailer MK One, like its value peers generally, is finding life tough. Earlier this month, Baugur hived off its Whistles brand from Mosaic to retail entrepreneur Jane Shepherdson, while maintaining a majority stake, and other Mosaic brands are said to be performing poorly.

At the same time, Baugur is developing shared resources for its investments and has brought in more central staff, leading critics to argue that a Sears-style centralisation is occurring. One retail director with a close knowledge of Sears draws the comparison. He says: “Baugur started as an investment trust rather than a retail group, but as they add people to the centre, the more the centre wants to add its influence and they get closer to becoming a retail conglomerate. In that situation, it can be difficult to preserve the individuality of the retail fascias, which is what happened to Sears.”

Beginning of the end?

He cites British Shoe Corporation as an example of a loss of brand identity that disappointed consumers and shareholders alike. “Although BSC’s product was sold under different names on the fascias, the product in some cases was identical,” he says. He wonders whether the demerger of Whistles last month may be the first sign that Baugur has become too large and generic.

“You hear of the same people at Baugur becoming involved with the same businesses,” he continues. “Public retail conglomerates like Sears, Burton and Kingfisher have been out of fashion for 15 years. Baugur is reconstituting it in the private sphere. The central core has to decide whether it is an investment trust or a retail group.”

But Baugur chief executive Gunnar Sigurdsson rejects the comparison and insists that the Icelandic group remains a focused investment vehicle.

“Comparing Baugur with Sears is like comparing apples with oranges,” says Sigurdsson. He points out that Baugur usually invests between 40 and 50 per cent in a business with partners, which spreads financial risk and creates focus. It then works with management teams to create value and offer the benefits of its retail networks across Scandinavia, as well as the UK.

“I think people who don’t know how Baugur works are expressing concerns about Baugur,” he says. “Sears was a brand owner, but it was an operating company, not an investment vehicle like us.

“We don’t operate the brands. We own them in conjunction with other partners and a key part of our strategy is to work with retailers strategically through their boards.

“We are not a conglomerate. We are not putting the brands into one group – each business operates independently. We need to keep our focus on retail; retail in food and retail in fashion. We have a multitude of different types of sectors. Clearly, we keep our focus and are well-resourced,” explains Sigurdsson.

Baugur’s finances and financial structure have been the crux of its success and are key differences from the quoted Sears. While Sears had to answer to increasingly frustrated shareholders, Baugur does not have to do its sums or justify its performance in public.

Pali International analyst Nick Bubb says that a comparison between Baugur and Sears is wide of the mark, but believes the Icelandic investor may be under pressure. “Baugur tells people that it is financially robust and can do deals, but people are writing it off as a busted flush. Perception may be more important than facts,” he says. “There is a lot of suspicion about the strength of the Icelandic banks at the moment. Baugur looks a bit overstretched and perhaps it hasn’t judged the scale of the economic downturn.”

However, Sigurdsson maintains that Baugur is not under pressure from the banks to realise cash. “We are in good shape,” he says. “There is no requirement by banks lending for Baugur to have loans repaid. The businesses that we are involved with are well-funded.”

Each brand in Baugur’s portfolio has loans secured on the cashflow of the individual brand and not on Baugur. “They are well-financed and paying back their interest, but there is no requirement to pay back the loan. Baugur has the same relationship,” Sigurdsson says.

One Icelandic banking source says: “I don’t think Baugur and Sears are comparable, because Baugur has ambitious plans that don’t sit on the property basis that underpinned Sears. Baugur is becoming more active and making positive decisions about its brands and whether to invest more.

“Baugur has got plenty of sources of funding. It has got a whole raft of sensible strategies in place. It has got passive investments in listed vehicles, as well as private investments. It is miles apart [from Sears],” he says.

Yet does the demerger of Whistles signal the start of a reshuffling of Baugur’s portfolio of brands, in the same way that Sears was forced to do?

Bubb says: “I suspect Baugur will need to prune back its exposure if the downturn is painful and prolonged. I am not sure that it has the kind of muscle, especially if its partners are also in trouble.”

Sir Tom Hunter, a veteran Baugur partner, announced at the end of January the decision to focus on larger investments over small entrepreneurial ventures and has sold off fashion retailer d2 and is looking for a buyer for shoe chain Qube.

However, Sigurdsson says: “If you put it in the context of an investment company, you will see some churning of the portfolio all the time. We are a private company and privately funded. We can work with brands or exit as we wish and there is no pressure to exit.

“Having said that, there are some [brands] that are more strategic than others, but it won’t be a wholesale restructure of the group. A decision will be made on a one-by-one basis,” he adds.

One such restructuring is taking place at Mosaic, where Baugur will strengthen the management team across the brands.

The source familiar with Sears says: “To avoid heading down the route that Sears did, Baugur has to be certain to preserve the essence of brands – ask why it was created in the first place, at what point it was most successful and what were the things you felt made it successful.”

One source close to Baugur says that the highly respected Mosaic chief executive Derek Lovelock, a former head of Sears’ clothing business, would never allow the same thing to happen to Mosaic as happened to Sears’ brands. “The differences are clear,” the source says. “Sears was run by a bunch of men in suits. Baugur lets the retail guys get on with it.”

Bubb agrees. “I don’t think people should overdo the comparison between Sears and Baugur – Baugur lets its management do their own thing”

Another industry source says that, operationally, Sears was let down by leaders such as former chief executive Liam Strong. “If you have a conglomerate, you need a strong person at the top and then each brand has to have someone with passion and retail flair,” he says.

Despite turbulent high street conditions, Sigurdsson thinks that Baugur is more than capable of weathering the storm and says the group is focusing on bedding down its brands with the help of its new retail managing director Jeff Blue, who joined last autumn.

“We have got a pretty clear strategy,” says Sigurdsson. “We have been acquisitive and have accumulated fantastic brands. One of the biggest opportunities we have at the moment is to focus on their core strengths and achieve the value that they have.”

However, he does not rule out more UK deals once the credit crunch has played out. Sigurdsson says: “Our last investment was House of Fraser [in November 2006]. The reason we have not invested since was because values became high last year and we couldn’t make it work.

“To make it work, there has to be a lot of leverage. The banks were interested in providing that, but we want moderate investments with room for growth. We don’t like to finance investments with a lot of debt. Liquidity dried up at the end of the year, values are dropping again and it has been part of our strategy that our portfolio works. No doubt there are opportunities for new concepts, but we will be selective,” he says.

In keeping with its investment stance, Baugur has also built stakes in public companies such as Debenhams, in which it controls a 13.5 per cent holding through investment vehicle Unity. It has also announced its intention to launch a joint bid with Dubai retail group Landmark for US retailer Saks. However, talks are on hold while it gauges the state of the economy.

Sigurdsson says: “It is definitely a very interesting time for Baugur in the next few years. We need to invest at the right value and we have a number of things on our plate and we need to concentrate on them too.”

So is Baugur the new Sears? Emphatically not, says Sigurdsson. What’s more, despite some who are cynical, most people in the retail sector seem to agree with him.