‘John Menzies’ is dead long; live John Menzies

By Ian Fraser

Sunday Herald

July 4th, 1999

IT IS rare for a business leader to become involved in a form of exorcism. But when David Mackay, chief executive of John Menzies, presents the former newsagents’ annual results at nine o’clock on Tuesday morning, part of his job will be to banish the spectre of a previous incarnation.

As a company, John Menzies remains best-known in the eyes of the public as a retailer which, since early Victorian times, has been operating railway bookstalls and high street newsagents in Scotland.

Mackay, however, holds little truck with this heritage and is well down the road to transforming the company into a fully-fledged logistics business, with a specific focus on ground-handling at the UK’s leading airports.

It sounds a dramatic leap, but he insists that there are tremendous synergies between the company’s core business of distributing newspapers and magazines, which by their nature are time-sensitive products, and shipping cargo and passengers around airports.

The metamorphosis started with John Menzies’ first tentative moves into air cargo in 1993, but it started hurtling down the runway in late 1997, after Mackay persuaded the company’s then chairman, John Menzies, that the way forward would be to off-load the 230-strong newsagent chain that bore his name.

Mr Menzies, then in his final few months as chairman, agreed – perhaps a little reluctantly.

In May 1998, the retail chain was sold to WH Smith for an apparently knock-down price of £68 million.

“When I was appointed chief executive (in September 1997), it quickly became apparent that we were going nowhere fast in retailing,” said Mackay. “The shops were struggling against major competition. We lacked critical mass and we were pouring in money, but shareholders were getting nothing in return.”

Mackay admits that actually selling the core retail chain was a “hellishly difficult” step to make, since it meant redundancy for many of the retail staff, particularly those at head office.

He accepts that in some areas he became a “hate figure”.

“But at the end of the day,” he said, “we had to think of the greater good of all the Menzies staff, not just the retail staff, and all the shareholders. I now know it was the right decision to take, however painful it might have been.”

Traditionalists will doubtless lament the loss of an iconic Scottish high street name, which will be eliminated by WH Smith before the year is out.

Mackay, however, seems happy that WH Smith has chosen to expunge the John Menzies name and replace it with its own. He believes the decision to call time on the name, which Tim Blyth, Smith’s director of corporate affairs, says was based on “listening to what customers want”, will lessen confusion.

The company’s next disposal is likely to be the Early Learning Centres, which lost its way when rivals started to imitate its range. The toy store chain’s management reacted by branching out into children’s clothes and nursery items, where they found they were head-to-head with the might of John Lewis, Marks & Spencer and Mothercare.

Mackay replaced the store chain’s entire management team in September 1997 and anecdotal evidence suggests that Early Learning Centre has turned the corner.

Nonetheless, it is expected to unveil losses of £1m on Tuesday and is unlikely to climb into the black before 2001.

“We will demerge when it’s appropriate to do so,” said Mackay. “It could be a management buy-out, a trade sale or a flotation, but this is not a fire sale. Bottom trawlers are wasting their time.”

In January 1998, the parent company was reclassified by FTSE as a distributor rather than a retailer, and a couple of months later sold its other high street asset, upmarket stationers Smythsons, to a management-backed team for £2.9m.

Last June, Mackay, an urbane 56-year-old from Kirkcaldy, was obliged to give shareholders some pretty appalling news. The accounts were devastated by an exceptional charge of £62.6m, while the Early Learning Centre subsidiary was a sea of red ink.

Overall, the company announced pre-tax losses of £28.6m.

However, the company’s decision to extricate itself from retailing to focus on distribution appears to be bearing fruit and is starting to win Mackay some friends in the City.

THIS Tuesday will probably mark a turning point. According to Barra Global Estimates, pre-tax profits for the year ending May 1999 will reach £27.5m, while earnings per share are going to be 34p. For the year ending May 2000, Barra forecasts pre-tax profits of £37.5m and earnings per share of 34.7p.

However, for the current year, profits from wholesale – which remains the company’s core business and is otherwise known as newspaper and magazine distribution – are expected to be marginally down at £32m.

This is partly due to John Menzies’ decision to focus on long-term contracts with key publishers, including Scottish Media Group, publishers of the Sunday Herald.

“They are opting to trade margin for certainty,” explains a distribution analyst. The picture at “THE”, Menzies’ entertainment distribution business is a little less rosy.

THE lost contracts to distribute CDs, tapes, videos and books to Boots the Chemist stores and the former John Menzies outlets and has been deluged with unwanted stock. To deal with the resultant stock overhangs, John Menzies wrote-off £15m last time.

The business, based in Staffordshire, has since seen the arrival of a new management team and has made a significant £3m investment in automation and packing systems, which will see it shed 40% of its staff.

It is also trying to set itself up as a UK fulfillment house for global internet traders. But the worst is now over, according to Mackay.

“The disaster is behind us. It’s been dreadfully painful and dreadfully embarrassing, but the buck had to stop with me.”

Associated company, THE Games, which has an exclusive distribution contract to supply Nintendo computer games to retailers in the UK, Ireland and Malta, performed well last year, mainly thanks to currency fluctuations and strong sales at Christmas.

It is only when we get around to discussing Menzies Transport Services, the airport services division, that Mackay’s eyes really seem to light up.

However, he seems genuinely riled when asked whether a Servisair-type operation sits comfortably in the John Menzies portfolio.

“We have more than 175 years experience of fast-critical distribution for competing suppliers. We recognise that airlines are outsourcing more and more of everything they do, apart from flying aircraft and selling bums on seats.”

Also the deregulation of airports and airlines across Europe will see more and more monolithic continental players putting some peripheral activities, including cargo-handling, into outside hands.

After acquiring a couple of wholesale businesses in 1993, John Menzies later paid £9m for Concorde, a business that trucks goods around airports and was used by airlines Cathay Pacific and Virgin. It has since expanded its transport services division from Heathrow to English provincial airports with a string of further acquisitions and joint venture deals.

Essentially, the aim is to win contracts for ground-handling of cargo, passengers and baggage from the world’s major airlines, and it has so far won business from Lufthansa, SAS, Aer Lingus and Qantas, among others.

“It’s transporting everything from the Sultan of Brunei’s Roller to dead bodies,” said Mackay. “We’re turning aircraft around fast and we have a reputation for quality so we’re winning business.”

Turnover for airport services is currently about £50m, but industry sources expect this to reach at least £100m within the next 12 months.

“From a standing start in two years we are the second biggest cargo-handler at Heathrow. We’re up to 360,000 tonnes of cargo and 60,000 passenger aircraft flights.

“With low gearing and high interest cover, the company has a war chest, therefore you could expect us to be acquisitive. If there are appropriate targets, these are likely to be in airport services.”

By the time Mackay retires, in 2003, he expects the airport-related business to “match” the newspaper and magazine wholesale business. Other observers predict that by then, Menzies Transport Services’ contribution will have far exceeded that of the wholesale division.

However, since this is business which Menzies is “building for the long-term”, it seems that profits this time around are going to be unspectacular.

Mackay, who in Who’s Who lists his recreations as golf and walking, remains very true to his Fife roots and says he cannot envisage the company relocating its head office south of the Border.

“Although I spend half my life in London, I love getting home to Fife. I live in Charleston and the kids go to school at Dollar, so on Friday night, when I see the sea and pull my tie down, I’m happy – until I catch up with my e-mails!”

CATCH-UP

John Menzies opened his first bookshop at 61 Princes Street, Edinburgh, in 1833. Two years later, Gray’s Edinburgh Directory described John Menzies as a Bookseller, Stationer and Print-seller. By 1958, the chain had 26 shops and it went public in 1962. In 1993, it moved into air freight, forming Air Menzies International. In 1998, the chain of newsagents was sold to WH Smith for £68 million.

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