Baugur Group hf

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Baugur Group hf

Tungoetu 6
Reykjavik, 101
Iceland
Telephone: (+354) 530 7800
Fax: (+354) 530 7801
Web site: http://www.baugur.is

Private Company
Incorporated: 1989 as Bonus
Employees: 62,000
Sales: $16.14 billion (2005)
NAIC: 422330 Women's, Children's, and Infants' Clothing and Accessories Wholesalers; 445110 Supermarkets and Other Grocery (Except Convenience) Stores; 448120 Women's Clothing Stores; 448150 Clothing Accessories Stores; 523999 Miscellaneous Financial Investment Activities; 551112 Offices of Other Holding Companies

Tiny Iceland's Baugur Group hf has grown into one of Northern Europe's leading retail and investment companies. Baugur operates the Hagar retail group, which includes Iceland's retail leader Hagkaup as well as discount pioneer Bonus and convenience store chain 10-11. Through Hagar, Baugur also operates stores under the Debenhams, Topshop, Utilif, Zara, Adfong, and Hysing names in Iceland, Sweden, and Denmark. The Hagar group operates more than 80 retail stores. Other Icelandic and Scandinavian operations include building materials leader Husasmidjan in Iceland; the Smaralind shopping mall; the Faroe Islands-based SMS supermarket chain; and, in Denmark, department store group Magasin du Nord and electronics store chain Merlin. Baugur also owns a number of investment and real estate subsidiaries in Iceland, Sweden, and Denmark.

Since the early 2000s, however, Baugur has targeted further expansion in Northern Europe, and especially into the buoyant retail sector in the United Kingdom. Into the mid-2000s, Baugur has built an impressive list of a number of leading British retailers, including Oasis, Coast, Karen Millen and Whistles (grouped within subsidiary Mosaic Fashions Ltd., held at 42 percent by Baugur); MK One; Jane Norman; famed toy shop Hamleys; The Shoe Group; Iceland, a frozen food specialist; Goldsmiths, the second largest jewelry retailer in the United Kingdom; Julian Graves, a luxury foods retailer; and tea and coffee specialist Whittard of Chelsea, among others. In June 2006, Baugur has also been negotiating the possible takeover of the House of Fraser retail group. Baugur's international expansion is largely the work of company President and CEO Jon Asgeir Johannesson, who formed the company with father Johannes Jonsson in 1989. Baugur is a private company controlled by the founding family.

DISCOUNT PIONEER IN ICELAND IN 1989

Johannes Jonsson and son Jon Asgeir Johannesson joined together to open a single store in 1989 and quickly revolutionized Iceland's economic landscape. The elder Jonsson's father had been a grocer, and Jonsson himself had spent much of his career as an executive overseeing the supermarket operation of farmers' cooperative Southern Slaughterhouse Association. Jonsson often traveled to Germany and Denmark, meeting with food exporters, and becoming acquainted with the new discount supermarket concepts introduced in those countries in the late 1970s and 1980s. Jonsson recognized an opportunity to import the discount grocery format to Iceland, where food prices were traditionally high.

Jonsson waited for his son to graduate from business school, which Johannesson did in 1989 when he was just 20 years old. Yet by then, Johannesson had already built up years of experience, starting as a boy when he worked as a stock clerk for his father. At the age of 14, Johannesson sold popcorn, and at 16, traveled to Germany with his father. There, Johannesson bought 20 mechanical rides, which he set up in front of the cooperative's supermarket chain. The rides helped support Johannesson during his studies.

In 1989, Jonsson and Johannesson each put up $4,500 to open their first discount store, named Bonus, in an industrial zone outside of Reykjavik. The father-son team sought out means to drive down costs, in order to cut prices on the goods they sold. For example, rather than invest in costly refrigerators and freezers, and the electricity to run them, the pair converted one room of the two-room store into a cold room. They also invested in bar-code technology, a first in Iceland, which represented significant cost savings. As Jonsson told Institutional Investor: "That's the key to our success. Bar codes allowed us to enter income and costs automatically into our books. That basically meant we could run the store with a minimum of manpower."

With just three employees, including Jonsson and Johannesson, the store sold products at discounts of 25 percent or more. The appearance of the discount store in economically troubled Iceland, which still depended almost entirely on its fishing industry at the time, played an important part in revolutionizing not merely the country's retail sector, but its economy altogether. Until then, the island country, with a population of just 250,000 people, had been dominated by just a few prominent families. The appearance, and rapid success of Bonus, signaled the start of a new entrepreneurial era in the country, and a number of Icelandic groups broke free of the country's borders and emerged on the international scene.

The company looked for other means of controlling costs. For one, the Bonus stores only accepted cash from its customers, eliminating the store's credit card fees. The availability of ready cash flow also allowed the company to pay cash on delivery to its suppliers and demand further price reductions. Importantly, the company also broke the domination of the country's two main shipping companies, which each were aligned with the country's two major political parties. Instead of following a party line, Bonus installed a bidding system, shifting the balance of power from importers to distributors. In this way, the company was able to undercut the country's existing supermarkets, which remained politically aligned with the shipping companies. The willingness to buck the political system was, however, to have consequences for the family in the future.

For the first part of the 1990s, in the meantime, Jonsson and Johannesson expanded the Bonus format into a network of stores. By 1992, the company had already opened some six stores, covering much of the country. Yet Bonus faced a new threat in that year, when the country's leading supermarket group, Hagkaup, announced its intention to develop its own discount supermarket format. Jonsson and Johannesson reacted quickly, and surprisingly, offering to sell a 50 percent interest in their company to Hagkaup. The supermarket group agreed. Nonetheless, under terms of the merger, Jonsson and Johannesson retained control of the discount operations, and eventually took control of Hagkaup itself.

In 1993, the two companies formed a combined purchasing subsidiary, named Baugur, ancient Icelandic for "ring of strength." With control of a significant part of the country's retail sector—Hagkaup alone accounted for more than 30 percent of all grocery sales—Baugur was able to negotiate still lower prices from its suppliers.

COMPANY PERSPECTIVES

Baugur Group's main policy is to focus on investments in the retail, service and real estate sectors, in Iceland and northern Europe. The company seeks out shares in companies that have a strong market position yet also have the potential for further growth. Baugur Group looks primarily to companies whose operations have thus far been a success and are run by a strong team of managers who are interested in cooperating with the company. This arrangement leads to effective collaboration, in which we provide our managers with unconditional support while demanding excellent performance in return.

While Jonsson became the company's public face, Johannesson worked behind the scenes to expand the company into a true retail empire. In 1994, the company traveled to the Faroe Islands, where it formed a joint venture, SMS, with the islands' major retail group, Rumfatalagerinn. SMS became that market's dominant supermarket group, with two supermarkets and six Bonus stores.

Back in Iceland, however, Bonus ran into a new setback, when the government enacted new antitrust legislation in 1975. In large part, the new laws were drawn up in order to halt the supermarket company's growing dominance of the country's retail sector. As Johannesson told the Financial Times: "I do have to spend a lot of time in political circles persuading people that a big company in a small market is not necessarily controlling."

Nonetheless, by the end of the 1990s, the Jonsson/Johannesson family's control of the retail sector had reached its limits. In 1998, after the death of the founder of Hagkaup, Jonsson and Johannesson raised the funds to buy out their partner, acquiring full control of the company and its subsidiaries, including luxury department store format Nykaup, among others. The parent company was then renamed Baugur and listed on the Iceland stock exchange. Soon after, Baugur acquired another Icelandic retailer, Voruveltan, which operated the country's largest chain of convenience stores under the 10-11 name. Also in 1998, Jonsson stepped down from the company, placing Johannesson as group president and CEO.

Unable to continue its foods retailing expansion, Baugur turned toward other sectors. In 1999, for example, the company acquired the sporting goods chain Utilif. Baugur later expanded that format with two additional stores, at the Smaralind mall in 2001 and in the Kringlan shopping mall in 2004. Baugur later added a number of other retail operations, including the Husasmidjan building materials and hardware retail chain, the leader in its sector.

INTERNATIONAL RETAIL POWERHOUSE IN THE NEW CENTURY

At the turn of the century, however, Baugur's domestic growth appeared clearly at the end of the line. The company set its sights on international expansion. Baugur at first targeted the United States, setting up a U.S. branch of its Bonus operations, called Bonus Dollar stores, in 2001. The company then bought bankrupt chain Bill's Dollar Stores, based in Florida, with some 470 stores in the Southeast. Baugur set out to turn the discount store chain around, and initially appeared to have some success, posting a profit by September 2002. Baugur also attempted to introduce new formats under the Bonus name. Yet by 2003, the company's effort appeared in vain, as the Bonus Dollar operation once again headed toward bankruptcy. In that year, Baugur decided to exit the U.S. market and instead focus its attention on its northern European expansion.

KEY DATES

1989:: Johannes Jonsson and son Jon Johannesson open Iceland's first discount grocery store, Bonus, outside of Reykjavik.
1992:: Bonus agrees to merge with supermarket group Hagkaup, with Jonsson and Johannesson remaining in control of discount stores.
1994:: Company launches joint venture to open grocery stores in Faroe Islands.
1998:: Jonsson and Johannesson acquire full control of Hagkaup/Bonus group, which they rename Baugur and list on the Iceland stock exchange; company acquires 10-11 convenience store chain.
1999:: Baugur acquires Utilif sporting goods stores; company acquires Scandinavian concession for Arcadia (U.K.) stores, opening Miss Self-ridge and Top Shop stores in Sweden and Iceland.
2000:: Baugur establishes Bonus Dollar in the United States and acquires bankrupt company Bill's Dollar Store in the Southeast.
2001:: Company begins acquiring stake in Arcadia, but is forced to withdraw from takeover offer amid fraud allegations.
2002:: Baugur acquires stake in Big Food Group, owner of the Iceland retail chain in the United Kingdom.
2003:: Baugur acquires stake in House of Fraser and Mothercare; company acquires Hamleys toy store in London and Oasis and Julian Graves, also in the United Kingdom.
2004:: Company acquires full control of Big Food and Denmark's Magasin du Nord.
2005:: Company acquires Jane Norman in the United Kingdom, Illum in Denmark, a stake in investment group FL Group, and U.K. jewelry retailer Mappin & Web.
2006:: Baugur acquires Whittard of Chelsea in the United Kingdom.

Unlike its attempt to enter the United States, Bau-gur's European expansion had been swift and sure. The company interest turned especially to the U.K. market. In 1999, Baugur acquired the Scandinavian franchise rights for the retail formats of the Arcadia group. Bau-gur chose to develop Arcadia's youth-oriented retail stores, and especially Top Shop and Miss Selfridge, opening the first stores in Sweden to great success.

By October 2000, Baugur began building a stake in Arcadia itself, acquiring some 20 percent of the British retail giant. Baugur then launched a full-scale acquisition offer for Arcadia. Yet after Johannesson and other members of Baugur management, including his sister, were accused of fraud, the company was forced to pull back from the takeover. The company sold its Arcadia stake for a £55 million profit, however.

By 2002, the company was back in acquisition mode, this time acquiring a major stake in the Big Food Group, the operator of the Iceland frozen food store chain in the United Kingdom. By 2003, the company had acquired shareholdings in a number of other major British retail groups, including House of Fraser and Mothercare. In 2003, Baugur also began buying up a number of retailers outright, including Hamleys, the famed British toy shop chain, and taking controlling stakes in fashion retailer Oasis and luxury foods retailer Julian Graves. In 2004, the company bought discount fashion group MK One, and completed the buyout of Big Food. In that year, also, the company entered Denmark, buying up the Magasin du Nord department store group. These purchases were followed by the acquisition of U.K. fashion retailer Jane Norman, and Danish department store Illum in 2005.

Back at home, Baugur continued to face pressure from the Icelandic government, which had launched a long-running fraud investigation against Johannesson and Jonsson, as well as other members of its management. Faced with a hostile takeover offer from Mundur, the company decided to buy back its shares and delist its stock. Meanwhile, the political pressure on the company continued to build as it expanded its holdings into the media sector, buying up a stake in Frett ehf, a leading publisher, as well as the Northern Lights Group. Baugur also stirred political ire when it bought a 21 percent stake in Icelandair. Into the mid-2000s, Baugur expanded its range of investments into the real estate and property development sectors, and into mobile telephones, acquiring the license to operate the Vodafone service in Iceland.

The political pressure on the company finally came to a head in late 2005, when the Icelandic government brought charges of 40 counts of fraud against Johannes-son and other executives at Baugur. The accusations of fraud cast a pall over the group's expansion efforts; the company was forced to withdraw from what would have been its largest acquisition to date, the takeover of the Somerfields supermarket group in the United Kingdom. In the end, however, the judge handling the fraud case threw out all charges against Johannesson and the others.

With his name cleared, Johannesson was able to return his full attention to continuing Baugur's international expansion. By the end of 2005, Baugur had added a major stake in investment firm FL Group, and expanded into the British jewelry sector with the purchase of luxury retailer Mappin & Webb. The company also joined a consortium in the purchase of leading Danish electronics retailer Merlin that year. At the beginning of 2006, the company acquired another leading U.K. retail name, Whittard of Chelsea, a specialist in coffee and tea. With an ever growing, and increasingly diverse, portfolio of businesses, Baugur had clearly established itself as one of northern Europe's most dynamic holding companies.

PRINCIPAL SUBSIDIARIES

A/S Th. Wessel & Vett, Magasin du Nord (Denmark); Atlas Ejendomme A/S (Denmark); Booker (U.K.); Coast and Whistles (U.K.); Dagsbrun; FL Group; Goldsmiths (U.K.); Hagar hf.; Hamleys (U.K.); Husasmidjan hf; Iceland (U.K.); Illum (Denmark); Jane Norman (U.K.); Julian Graves (U.K.); Karen Millen (U.K.); Keops A/S (Denmark); LxB II (U.K.); Mappin & Webb (U.K.); Merlin A/S (Denmark); MK One (U.K.); Mosaic Fashions Ltd. (U.K.); Oasis (U.K.); Stodir; The Shoe Studio Group (U.K.); Whittard of Chelsea (U.K.); Woodward (U.K.).

PRINCIPAL COMPETITORS

Abercrombie & Fitch Co.; Arcadia Group plc; Benetton Group S.p.A.; Debenhams Plc; Diesel SpA; Esprit Holdings Limited; Guess?, Inc.; H&M Hennes & Mauritz AB; Harrods Holdings; Hot Topic, Inc.; James Beattie Plc; Marks and Spencer Plc; N Brown Group Plc; New Look Group plc; NEXT plc; Otto Versand Gmbh & Co; The Gap, Inc.