How Sports Direct won a place in the premier league of retail

April 14, 2014 5:18 pm

How Sports Direct won a place in the premier league of retail

By Andrew Hill and Andrea Felsted

Sports Direct has no official outpost in Verbier. But most weeks in winter, Mike Ashley, the sporting goods retailer’s mercurial founder, rewards small groups of top-performing staff with a stay in his chalet, complete with private chef. The association of the upmarket Swiss ski resort and the value-driven chain – with its racks of discounted trainers and tracksuits – feels unlikely. But the chalet perks are emblematic of the group’s unorthodox management, inbuilt contradictions and extraordinary ambition.

Sports Direct has become one of Britain’s fastest-growing retailers by harnessing the experience of a group of long-serving senior executives to the energy of its youthful staff, some of whom benefit from generous incentives and exceptional autonomy. Through its stores – 400 in the UK, 260 in the rest of Europe – its website, and its clever handling of its brands such as Dunlop and Karrimor, Sports Direct has gained enormous influence in a growing market, even with big suppliers such as Nike or Adidas.

A more than twentyfold share price increase since 2008 has propelled Sports Direct into the FTSE 100 index of blue-chip UK companies. But it is dogged by mutual misunderstanding between investors and executives about governance and how the company works.

As the group smartens its shops and service and pushes into new territories, will the idiosyncratic Mr Ashley and his team be able to keep the low-cost reputation that helped Sports Direct annihilate rivals? Or will expansion stretch its “wafer-thin” management model to breaking point?

Work-hard, play-hard culture

In hard hat and steel-toed shoes, Karen Byers, Sports Direct’s head of retail, is explaining how the group operates at its new Oxford Street store in central London, while keeping an eye on contractors refurbishing the cavernous former theatre around her. The pace is unrelenting. The previous night at 10pm, Ms Byers called the project manager’s home from the store to insist he demolish a wall to create a new children’s section.

“I pride myself on my people: we work hard to make sure the staff work hard,” says Ms Byers.

That ethos comes from the founder. Mr Ashley “works hard and has fun and he expects other people to work hard and have fun”, according to one former executive. The former squash coach started with one shop in 1982 when he was 17, backed by his parents. Meetings about store design used to be held in the Ashleys’ kitchen. His mother Barbara designed a ballet dancer motif that until recently could still be seen in older stores.

Mr Ashley himself is press-shy. He would not speak to the Financial Times for this article and since a flurry of media appearances after listing the shares in 2007, he has had a higher profile as the billionaire owner of Newcastle United football club than as Sports Direct’s executive deputy chairman, the unorthodox title he holds. He takes no salary, but the board recently proposed an incentive plan to grant him up to £70m worth of shares, infuriating institutional investors, then scrapped it. Sports Direct’s aggressive expansion has prompted probes into alleged anti-competitive practices – all eventually dropped.

But people who know Mr Ashley say he remains indispensable for his insights and obsessive eye for detail, particularly in the back-office retail arts of sourcing, supply chain and inventory management, which he assesses with the help of statistics analysts he refers to as his “stattos”.

Sports Direct still operates, though, like a family business, run for more than 20 years by the same close-knit team. They include Mr Ashley, Ms Byers, Sean Nevitt, head of buying, and Dave Forsey, the chief executive. Mr Forsey says his “primary function is to protect Mike, [not involving him in] things where we are going to get less out of him. We use our time with him on the more challenging topics”.

This senior group – sometimes augmented by others such as Mike Ashley’s brother John, who runs information technology, and Niall Sutherland, head of ecommerce – crams a week’s worth of meetings into three intensive days at the group’s 70-acre head office site near the old Derbyshire colliery village of Shirebrook. It is common to find them debating web-buying or brand strategy over a drink in a company-owned hotel in the early hours of a weekday. They then fan out across the business to implement what has been agreed.

Zero-hours contracts

The footsoldiers in Sports Direct’s army of 20,000 UK staff are some 17,000 casual workers, mainly in stores and the Shirebrook warehouse (where all signage is in English and Polish, for the benefit of the many eastern European workers).

Unite, the union, expressed concern last year about the treatment of rank-and-file Sports Direct staff, including the extensive use of “zero-hours” contracts, which have no set minimum hours. Sports Direct executives see the use of casual workers as necessary, however. One person who has worked closely with the company says the message is: “If you work hard and do well, we will reward you with a bonus, but if you just want to take a wage and don’t contribute, you will be on a zero hours contract.”

As Sports Direct has matured, however, it has recognised that undertrained staff could undermine it. Malcolm Dalgleish, a former non-executive director, says the group does not aspire to be like John Lewis, the employee-owned retailer known for its service, because it competes on price. But it is trying to improve performance with training.

Above the 55,000 sq ft store at Shirebrook, Sports Direct runs a training “academy” in collaboration with Nike and Puma, complete with mini-AstroTurf penalty areas to try out products, a giant training shoe and a statue of the Greek goddess Nike. On a recent visit new store managers – in Sports Direct manager strip of blue and red short-sleeved shirts and tracksuit bottoms – were undergoing a two-week induction course. It is not all classrooms and flipcharts: downstairs, Sports Direct also bloods recruits in practical skills such as how to handle pre-dawn stock deliveries.

Juicy incentives for some

The opportunity for promotion meshes with other perks, including tickets to events and the opportunity to meet sporting stars. Last year the bonus scheme the company established in 2009 paid out about £75,000 in shares to a typical full-time employee on a £20,000 annual salary. Mr Forsey says the scheme has helped full-time staff retention. One Shirebrook employee says the recent share peak has “blown us out of the water – we are loving it. When it hit 900p, that [was] amazing – it’s all down to us.”

The bonuses are based on group results. Mr Forsey says when Mr Ashley changed group branding to SportsDirect.comin 2007, “we just said, look, if we make less in the stores and we make more on the web overall we’ll do better as a company so let’s all target ourselves on group numbers”.

The fact the current scheme covers only 3,000 staff risks an “us-and-them” culture. But Ms Byers – who got her break after selling Mr Ashley a pair of jeans when managing a store he later bought – says most of her area managers were originally part-timers.

Autonomy at a tender age

The group offers a degree of responsibility to teams of young employees at head office unusual in UK retail. As head of buying, Mr Nevitt insists his team members learn about stock control first. Contrary to retail orthodoxy, he does not run separate teams of buyers, merchandisers and allocators of stock. Everyone is responsible for all aspects of a product range: “We don’t run it like a relay race, where someone can drop the baton.”

“It’s an incredibly flat structure – it’s pancake flat”, says Norman Pickavance, a board adviser who was brought in by Mr Forsey last year to review Sports Direct’s commercial operations. Teams are urged to experiment and if they “make a mistake, move on”, an approach that echoes Facebook’s “move fast and break things” maxim. “It creates a culture with a lot less fear and trepidation than with an organisation that’s trying to get it just right,” he adds.

Early warning system

Sports Direct has a network of specialist stores: it owns 51 per cent stakes in Swimshop, a swimwear website, for instance, and jodhpurs-to-jump poles retailer Robinsons Equestrian, and has close links with Soccer Scene, the Carnaby Street football specialist. Critics say this creeping control is obliterating independent sports shops, but it enriches Sports Direct’s expertise. The group tries to give managers of these companies responsibility for the same category within the business as a whole or uses them as an early warning system for customer trends.

Shortly after Sports Direct started collaborating with Soccer Scene, the family owners were invited to share their insights with the group’s football strategy. Assuming Sports Direct, with its high market share, must have a reason for not selling goalkeeper pants, the Soccer Scene team asked why. “I said, ‘Because we’re idiots’,” recalls Mr Nevitt. “And now we sell 25,000 pairs.”

The challenge ahead

A note by analysts at Liberum has identified 1,000 stores with total sales of €2bn as possible targets for Sports Direct in Europe. But expansion will put the Sports Direct management style to the test.

Norman Pickavance, board adviser, fears the “wafer-thin” top management could be overstretched, particularly if any of the top team are unable to continue. One of the senior group, Bob Mellors, chief financial officer, has stepped down due to ill health. The finance function is easily reinforced but building deeper management takes time.

Dave Forsey, chief executive, says “having too many layers” can suppress information: “Retail, as well as being detail, is normally hard work and lots of issues and you need to know about those issues quickly.” Instead of adding bureaucracy to the group, he says he is strengthening the “bench” of potential successors below the senior team, bringing on existing staff and integrating the second generation of managers from family businesses it controls.

Mike Ashley’s own position poses a threat, however – not only because of the “key man” risk created by Sports Direct’s dependence on him. Sports Direct’s recent purchase of small stakes in retailers Debenhams and House of Fraser unsettled even some of his fans. The group’s shares have fallen almost a fifth since he sold £200m worth of his shares this month. The company has also just scrapped its second attempt to link his performance to the award of up to £70m in stock – after being rebuffed by institutional investors.

Weak corporate governance was already a problem in the wake of the 2007 listing, when the share price slumped. At the time, Mr Ashley attacked the City’s “cry babies” and predicted Sports Direct would reward investors who stayed put. It has. Malcolm Dalgleish, former director, says the group and its founder have “gone from zero to hero”.

But by the standards of most FTSE 100 companies, Mr Ashley still operates with minimal constraint from the board. Jonathan Pritchard, analyst at Oriel Securities, says the group’s disclosure has improved since the early days when the only data in public documents “was the phone number of head office”, but there remains a “mistrust” of the City. This is fine in the good times, he says, but if performance were to wane, even in the short-term, Sports Direct could once again find itself with few friends.

If that happens, it seems likely Mr Ashley himself would not care. He would fall back, as he always has, on a tight-knit group of associates. Mr Forsey, who worked as a Saturday assistant in Mr Ashley’s first shop in the 1980s, says the entrepreneur “will always be unhappy with what we’re doing, [is] underwhelmed pretty much constantly with the performance, and challenges everything”. The obstacles ahead are higher than those the founder and his friends have cleared. But as Karen Byers, his loyal head of retail, says: “At Sports Direct, your destiny is up to you . . . Your skill and will [moves you] on to where your destiny is.”

 

April 14, 2014 5:32 pm

Bigger, better brands

By Andrew Hill and Andrea Felsted

Lonsdale is not usually mentioned in the same breath as Gucci or Burberry. But a few years ago, Sports Direct’s best-known brand faced a threat similar to that encountered by the Italian fashion house in the 1980s, when its logo was devalued by overeager licensing, or the British luxury group in the early 2000s, when its distinctive beige-check was adopted by “chavs” and football hooligans.

Sean Nevitt, head of buying, says Sports Direct’s executive team realised around 2009 that “literally everyone” owned one of its blue Lonsdale hooded sweatshirts. They had moved the brand into too many areas: “We learnt from that and thought ‘We can’t let that happen again’.”

The episode is symptomatic of the care Sports Direct now takes with its brand management. How it runs properties such as Lonsdale, Dunlop, Slazenger, Karrimor, Everlast and Sondico is a core strength. But one of its challenges is to ensure that its own-brand strategy does not antagonise important third-party suppliers such as Nike and Adidas.

Its recent handling of the Dunlop and Karrimor brands is a case study. Karrimor

, associated with climbing and hiking equipment, was also the brand used for Sports Direct’s safety range (such as steel-toed boots and heavy-duty jackets).

But the group thought Karrimor was too thinly spread and chose instead to play on Dunlop’s association with heavy-duty tyre manufacture and apply that brand to the safety range.

Mike Ashley, the founder, Mr Nevitt and Karen Byers, head of retail, conceived the commercial idea, and delegated it to a small team, who took three to four months to develop it, testing early ideas through the website.

Meanwhile, in a similar process, Sports Direct took Karrimor upmarket in the hiking footwear range. It used another brand, Campri, for its “good” walking shoes, and Karrimor for its “better” and “best” ranges.

It now aims to sell a pair of top Karrimor boots at about £90, significantly less than the third-party brands such as Scarpa and Merrell, but with similar claims to technical superiority. Dave Forsey, chief executive, says some highly specialist brands welcome the proximity of Sports Direct’s “best” range because they believe it expands the market and encourages enthusiasts to trade up to their equipment.

In a research note issued last month, Goldman Sachs estimated that 50 per cent of Sports Direct’s retail sales were generated by its own brands, but more than three-quarters of its earnings before interest, tax, depreciation and amortisation.

The bank said it expected the company’s drive to sell more “better” and “best” products to increase margins further – and to give the company a big advantage as it tries to push up its share of the European market.

The relationship with Nike, Adidas, Puma and other top third-party suppliers means, however, that the group needs to strike a delicate balance.

Sports Direct works closely with these brands on store design – a strategy Ms Byers describes as “premiumisation” – staff training, and commercial plans. Teams from the big third-party brands are located at the Shirebrook head office, for instance.

Sports Direct’s expansion into fashion retail – through the acquisition of the USC and Republic chains – was partly intended to offer a further outlet for the high-end leisure footwear and clothing lines promoted by Nike and others.

But when it comes to developing its own brands, Mr Forsey acknowledges that Sports Direct establishes more of a buffer zone between its brands and those of Nike, Adidas and Puma than with some other high-end brands.

Even so, Goldman describes the danger that third-party brands will limit supply as a “key risk” for the retailer and there is occasional tension: Adidas, for instance, is still refusing to allow Sports Direct to sell Chelsea FC’s 2014-15 kit – a stand-off which Mr Forsey describes as “ridiculous”.