Matalan pays the price of success

Whatever specific causes lay behind the mysterious dismissal of City cynosure Angus Munro, one thing seems clear. The glory days of nineties’ retail phenomenon Matalan, of which he was chief executive, are drawing to a close.

A gloomy trading statement earlier this year, a collapsed share price and a chorus of analysts predicting stalled growth over the next two years might conclusively round off the classic portrayal of a star stock burning out on re-entry.

All the same, it is not clear as to what extent these problems stem from Matalan’s peculiar corporate circumstances, as opposed to those facing the discount retailing background from which it sprang. The distinction is important.

The surprise with discount retailers, including New Look and Primark, is that they have continued to do so well for so long. The budget formula, which was tailor-made for the recession-strapped UK in the early nineties, was less obviously appropriate to the unprecedented consumer prosperity that marked the close of the decade. Yet the discounters, and especially Matalan, successfully bucked the economic cycle and continued to expand at a dramatic rate. Why?

Value for money always has its attractions, of course. But what distinguished Matalan was its careful merchandising; it ensured that it also appealed by offering a surprisingly diverse choice of styles. This at a time when the middle market, represented by the likes of Bhs, C&A and most spectacularly Marks & Spencer, had begun to flounder. The discounters profited from reading market circumstances much better than their stodgy mid-market high street competitors. There has been a change of mood among shoppers, away from loyalty towards a promiscuity which shows little respect for long-established brands. Of course, the discounters were not alone in spotting this – Gap, Next, French Connection and H&M all benefited from the same insight – but additionally they have managed to scalp the lucrative mail-order sector on price and availability.

The trouble is, the discount market cannot go on expanding. Some mid-market retailers are now staging a come-back, with better merchandising and superior instore design.

So as the competition gets fiercer, it’s back to the strategic drawing board for Matalan. One possibility being mooted is expansion overseas. But this would be an expensive and precarious option. The European retail scene is much more attuned to discounting than the UK. Another possibility is product diversification into, for example, car retailing and financial services. Again, this is a high-risk strategy.

It may be there is no low-cost way back into City grace. Sometimes, in fact, chairman and principal shareholder John Hargreaves must bury his head in his hands and pray for a recession. That, at least, would be an uncomplicated way of pulling a rabbit out of the hat.

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