How Harris Scarfe was brought back from the brink: Five lessons

It’s been a long road for Harris Scarfe. After a tumultuous decade in which the company has faced administration, near collapse, and a private equity deal, the company has finally been acquired – and has intentions to keep growing.

It starts a new chapter for the 160-year-old company, and acts as a key lesson for other entrepreneurs on how small businesses can survive and adapt.

“We’d be one of the few retailers that have improved profitability, improved revenue, and have increased employee numbers, and that’s good,” Harris Scarfe managing director Joe Barberis told SmartCompany this morning.

“What this acquisition proves is that the company is very sound and has an enormous amount of potential.”

South African retail group Pepkor has acquired the 50-store chain, just five years after it was snapped up by private equity group Momentum.

Although the department stores were founded in Adelaide in 1849, the company ran into trouble during the late 1990s due to rising debts and management issues. In 2001, the business – which had been controlled by the Trescowthick family for years – was placed in receivership. It owed creditors about $200 million.

The situation surrounding the collapse was controversial – receivers discovered assets had been valued in order to hide losses. Shares were withdrawn from trading on the ASX.

But following a management buyout, the business got back on track, closing stores in Queensland and New South Wales. During the decade it started to slowly ramp up expansion, when finally in 2007 the company was acquired for $78 million.

The buyers, private equity firm Momentum, also raised another $40 million by selling new stores to Myer. It provided shareholders Kevin Jacobson, Roy Manassen and Peter Ivany with a significant return.

And now, South African retail group Pepkor has snapped up the chain for an undisclosed sum – although it has been reported the group will pay a multiple of 10 times earnings, which are reported to be about $15 million for the 2011 financial year.

“Our private equity owners have been very good, but they weren’t retailers,” says Barberis, adding the business has big ambitions.

So how did this company manage to escape from near-collapse to a multi-million dollar private equity deal, and then another acquisition?

1. Getting some critical mass

Following the management buyout in 2001, Harris Scarfe closed a number of stores in Queensland and New South Wales. But to get back on its feet, the company needed to gain a critical mass. So it bought a small network of stores – Allens – in South Australia.

“It was just slow expansion,” says Barberis. “But the company needed to keep growing and the way to do that was through getting that critical mass.”

2. Simplicity of product choice

Plenty of entrepreneurs have spoken about the power of simplicity. And in the case of Harris Scarfe, it’s actually worked. Barberis says following the management buyout, the company focused on four product “pillars”– men’s fashion, women’s fashion, homewares and manchester.

“That gave a good simplicity to the store, and that low cost base really allowed us to recover over time.”

3. Staying out of low-margin items

A lot of the pain being felt by department stores such as Myer and Harvey Norman is due to their exposure to low-margin items, including flat panel televisions, DVDs and other electronics products.

Barberis says Harris Scarfe made it a point to stay out of those categories, sticking only to its four-pillar structure.

“We’ve moved away from those departments that are now causing a lot of concern,” he says. “Even things like toys, gardening and hardware.”

“So we haven’t just focused on the simplicity, but we’ve actively stayed away from certain categories.”

4. Bring in the big guns

Although Barberis says being acquired by a retail-specific brand will help the company’s expansion, the private equity purchase in 2007 also brought some professionalism to the business. Having some extra expertise can never hurt.

5. Completely new branding

After the 2001 management buyout, Harris Scarfe completely rebranded itself with new signage and a new logo. After such a public event, the company needed to do something to appear fresh. A new look allowed the business to do two things – modernise itself and separate the new company in consumers’ minds from the older, troubled business.