Writing a retail success story at Paperchase

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Writing a retail success
story at Paperchase
The stationer's chief executive Timothy Melgund speaks exclusively to Tiffany Holland
T
echnology has undoubtedly
transformed the way consumers shop, read and communicate. But that does not mean
traditional habits have been obliterated, as is shown by stationery and
greetings card retailer Paperchase. It is
preparing to post a rise i n sales and
profits, driven by traditional products
such as the humble notepad.
"We sell more notebooks than we've
ever sold before," says media-shy
Paperchase chief executive Timothy
Melgund i n an exclusive Retail Week
interview.
"If you think about the use of stationery it's completely counterintuitive
with all these electronic devices. Hardly
anybody uses an electronic device to
take notes in meetings," he adds.
So despite the growing popularity
of digital products, Paperchase is
managing to hold its own. Last year
sales surged 9% to £ 8 4 . 9 m and
EBITDA increased 9% to £5.8m i n the
53 weeks to February 2, 2013, excluding exceptional costs.
Pre-tax profit excluding exceptional
items increased 5% to £1.4m last
year, as investment was made i n
the business.
Paperchase is soon to reveal its latest
set of results i n the next few weeks and
Melgund says: "EBITDA has grown
considerably and so has pre-tax profit."
A n d w i t h an expanding base of
UK stores - opening at a rate of 10 to 15
new shops each year - Paperchase
shows no signs of slowing. At present it
trades from 107 UK shops and 30 concessions, and 21 stores and 14 concessions in six overseas markets.
Pushing the envelope
So what is it about Paperchase that is
keeping physical writing alive?
A key element is the retailer's product designs and patterns, which are
created by its in-house team. Melgund
refers to Paperchase as a "fashion
retailer, but we don't sell clothes", so it
seems fitting that i t recently tied up
w i t h Asos to sell its products on the
fashion giant's website.
"We control virtually all the design
18 Retail Week June 6, 2014
PAPERCHASE AT A GLANCE
Results for the 53 weeks to February 2,2013
TOTAL SALES
£
Pre-tax profit
excluding
exceptional
to
£84.9m
Retail operating margin 1%
EBITDA exceptionals
exc,uding
+9%
£5.8m
£L4m
UK STORES
m
107
and creativity i n the Paperchase
range," says Melgund. "Retail is about
differentiation. They say you make
your own luck and if you keep it all inhouse you can effectively do whatever
you want."
Paperchase's stores often get people
talking because of their sense of theatre
and style. The flagship store on London's Tottenham Court Road covers
three floors and sells home decorations, bags and accessories, scrap books
and the usual stationery items. It
houses a coffee shop and is almost
always busy, says Melgund.
"Customers' interest in shopping and
the experience hasn't changed one bit,"
he maintains. Consumers still enjoy
discovering products that they may not
have realised they needed.
But Paperchase's smaller stores are
just as important. In February it opened
a small store i n Piccadilly to cater for
the more upmarket local clientele, and
Paperchase plans to open a third central London store.
"We're always trying to move away
from the cookie-cutter approach to
retailing," Melgund says. He cites the
example of using one wallpaper design
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BIG STORY
PAPERCHASE
in no more than three shop interiors.
Melgund is particularly hands-on
when it comes to the stores. That may
not be surprising considering he originally trained as a chartered surveyor.
"Stores are the biggest single projection of the brand. I think unless you're
really involved in that you don't really
get behind the brand," he says.
The way Melgund speaks about
Paperchase, one might assume that he
founded the business himself (it was
actually launched by art students
Judith Cash and Eddie Pond i n 1968).
It seems like the brand reflects his
positive personality - he has been the
driving force behind the brand w i t h
his colleague w i t h w h o m he has
worked for 26 years, brand director
Robert Warden.
Melgund was charged with running
Paperchase when he worked at bookseller and stationer WHSmith, which
then owned the business. Melgund,
Warden and the current management
team then bought it from WHSmith i n
1996, backed by private equity firm
Graphite Capital. The private equity
firm then sold it to US bookseller Borders i n 2004. Borders wanted to use
Paperchase to distinguish its offer i n a
challenging bookselling market.
Through the deal Paperchase opened
in every Borders store across the world,
including the US and New Zealand.
A business without Borders
When Borders UK collapsed i n 2009,
Paperchase's 38 concessions i n its UK
stores closed and M e l g u n d l e d a
management buyout of Paperchase
from Borders Inc, which was still trading i n the US.
"It was tough," he recalls. "To some
extent the writing was on the wall, you
could see what was happening to the
book industry. You could see Borders
was getting into more and more trouble.
"We lost a lot of turnover i n the US
but we didn't lose a lot of margin. In the
UK we did lose a lot of margin."
According to Retail Week Knowledge Bank, Paperchase's retail operating margin has fallen to 1 % i n 2013
from a high of 14% i n 2008 under
Borders UK ownership.
Melgund says: " I t was quite emotional when we were able to do the deal
and buy the business back because not
only did i t protect everybody's jobs
here, it meant that w i t h a new owner
we were going to develop a business
without Borders."
But Paperchase, w h i c h is n o w
backed by private equity firm Primary
Capital, has since made a full recovery.
"We replaced the sales i n 18 months
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June 6, 2014 Retail Week 19
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and the EBITDA i n three years," he
says with pride.
Despite Melgund's belief i n the
b r a n d , he admits that he never
expected to operate so many stores.
"When we bought it we thought
'right, we'll have about 20 shops'," he
laughs. "We had no idea that it would
get to this size."
Despite his initially modest ambit i o n s , M e l g u n d ' s h o r i z o n s have
expanded as he looks overseas for further growth. " I can see no reason why
Paperchase shouldn't become a global
business," he says. "Every country uses
paper i n a slightly different way and
individuals use it i n a very different
way so it transports very well."
Already, the retailer has a handful of
stores and concessions in Europe and
the Middle East and last year it returned
to the US as part of a deal to supply Target stores with an exclusive range. In
March it relaunched its UK website and
opened US and European websites.
Evolving ambitions
Melgund also has long-term plans to
open standalone stores in the US, probably starting on the East Coast, but that
isn't a priority at present.
Melgund has continued ambitions
for the UK, where he has previously
cited his aim to operate 200 stores. He
says the evolution of high streets and
shopping centres, as some retailers
focus on online and others on physical
shops, has opened up new markets
for Paperchase.
" B r i t i s h retailing is i n c r e d i b l y
dynamic. There are [retail locations]
now that five years ago you wouldn't
have even got out of bed for," he says.
"It's not just about developers building new centres, it's also about the way
that customers decide that they want to
shop. And there are some markets, particularly the smaller, quality markets,
retail-week.com
"I CAN SEE NO
REASON WHY
PAPERCHASE
SHOULDN'T
BECOME A
GLOBAL
BUSINESS"
Timothy Melgund,
Paperchase
that generate really significant sales that
a few years ago people wouldn't go to."
But Paperchase faces competition in
the UK greetings cards, gifts and stationery categories. Australian kids'
stationery retailer Smiggle entered the
UK earlier this year and value greetings
card and gift retailer Card Factory
floated on the stock market last month
and has ambitious plans for growth.
Melgund is extremely complimentary about Paperchase's U K rival.
"Card Factory is a phenomenal business. It has the strength and the power
to move the needle in the greetings card
industry that no-one else has got.
I bet you more greetings cards are sent
now than were sold a few years ago
because of it."
But Melgund is confident that Paperchase w i l l be unaffected by Card Factory's growth. "We like to think that we
are the most creative part of the market
that we're in. We innovate at a rate that
is considerably faster than anyone else
in the category.
"Just over a year ago we opened a
shop directly opposite a Card Factory.
Everyone was saying, 'you've got to
watch out for Card Factory,' and I
thought it was a wonderful opportunity to prove [we didn't need to]. We
took £ l m i n our first year. A n d you
know something - 1 shouldn't think we
dented their sales at all."
Despite a recent flurry of retail IPOs,
including those of Poundland and Pets
at Home, Melgund says he doesn't
think Paperchase would be a natural fit
as a listed company.
W h i l e Card Factory may serve
the more price-conscious customer,
the recovering economy could boost
Paperchase further and Melgund is
eyeing market-share growth.
It seems that as long as customers
live i n a physical world, Paperchase's
growth is unlikely to be stationary.
PAPERCHASE'S MARKET AND THE COMPETITION
was up from a £ 1 0 m loss in the yearto July 2011.
The UK greetings card market was estimated to be
worth £1.4bn in 2012, growing at a rate of 1.4% a year
between 2009 and 2012, according to strategy
consultants OC&C. And Card Factory management has
estimated the gifting market is worth f l b n to £2bn.
The greetings card market has had its ups and
downs in recent years. Clinton Cards fell into
administration in 2012 because of a number of
factors including the difficult economic environment,
too many stores and the growing strength of value
greetings card retailer Card Factory.
Card Factory generated EBITDA up 9.2% to £ 8 0 . 4 m
and sales grew 9% to £ 3 2 6 . 9 m in the yearto January
31, 2014. It listed on the stock exchange last month
but many observers found its debut disappointing - its
20 Retail Week June 6, 2014
And Schurman Retail Group, which operates the chain
on American Greetings' behalf, last month opened the
doors of new premium fascia Jolie Papier in Kent's
Bluewater shopping centre.
Melgund estimates the stationery market to be worth
£6bn and other retailers want a piece of the pie. In
share price lost 1 1 % in the first two days of trading
and it is still well below its debut level.
Clinton Cards continued trading after it was
February Australian stationery retailer Smiggle opened
its first store in the UK and it has plans to open up to
300 here. Meanwhile, colourful kids' stationer Blott,
rescued by US greetings card manufacturer and
which was founded in 2011 by former Chelsea Football
retailer American Greetings. In documents filed at
Club commercial managing director Chris Manson,
Companies House last year, the retailer revealed that
operates 13 stores and aims to have 40 by 2016.
in the eight months to February 2, 2013, it generated
pre-tax profit of £ 5 . 6 m across its 386 UK stores. That
However, Paperchase has carved its own niche,
and intends to exploit It.
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