Interview: Paperchase boss Timothy Melgund writes the retailer's future

Technology has undoubtedly transformed the way consumers shop, read and communicate. But that does not mean traditional habits have been obliterated, as is shown by stationery and greetings card retailer Paperchase. It is preparing to post a rise in sales and profits, driven by traditional products such as the humble notepad.

“We’re always trying to move away from a cookie-cutter approach to retailing”

Timothy Melgund, Paperchase

“We sell more notebooks than we’ve ever sold before,” says media-shy Paperchase chief executive Timothy Melgund in an exclusive Retail Week interview.

“If you think about the use of stationery it’s completely counterintuitive with all these electronic devices. Hardly anybody uses an electronic device to take notes in meetings,” he adds.

So despite the growing popularity of digital products, Paperchase is managing to hold its own. Last year sales surged 9% to £84.9m and EBITDA increased 9% to £5.8m in the 53 weeks to February 2, 2013, excluding exceptional costs.

Pre-tax profit excluding exceptional items increased 5% to £1.4m last year, as investment was made in the business.

Paperchase is soon to reveal its latest set of results in the next few weeks and Melgund says: “EBITDA has grown considerably and so has pre-tax profit.”

And with an expanding base of UK stores – opening at a rate of 10 to 15 new shops each year – Paperchase shows no signs of slowing. At present it trades from 107 UK shops and 30 concessions, and 21 stores and 14 concessions in six overseas markets.

Pushing the envelope

So what is it about Paperchase that is keeping physical writing alive?

A key element is the retailer’s product designs and patterns, which are created by its in-house team. Melgund refers to Paperchase as a “fashion retailer, but we don’t sell clothes”, so it seems fitting that it recently tied up with Asos to sell its products on the fashion giant’s website.

“We control virtually all the design and creativity in the Paperchase range,” says Melgund. “Retail is about differentiation. They say you make your own luck and if you keep it all in-house you can effectively do whatever you want.”

Paperchase’s stores often get people talking because of their sense of theatre and style. The flagship store on London’s Tottenham Court Road covers three floors and sells home decorations, bags and accessories, scrap books and the usual stationery items. It houses a coffee shop and is almost always busy, says Melgund.

“Customers’ interest in shopping and the experience hasn’t changed one bit,” he maintains. Consumers still enjoy discovering products that they may not have realised they needed.

But Paperchase’s smaller stores are just as important. In February it opened a small store in Piccadilly to cater for the more upmarket local clientele, and Paperchase plans to open a third central London store.

“We’re always trying to move away from the cookie-cutter approach to retailing,” Melgund says. He cites the example of using one wallpaper design in no more than three shop interiors.

Melgund is particularly hands-on when it comes to the stores. That may not be surprising considering he originally trained as a chartered surveyor.

“Stores are the biggest single projection of the brand. I think unless you’re really involved in that you don’t really get behind the brand,” he says.

The way Melgund speaks about Paperchase, one might assume that he founded the business himself (it was actually launched by art students Judith Cash and Eddie Pond in 1968).

It seems like the brand reflects his positive personality – he has been the driving force behind the brand with his colleague with whom he has worked for 26 years, brand director Robert Warden.

Melgund was charged with running Paperchase when he worked at bookseller and stationer WHSmith, which then owned the business. Melgund, Warden and the current management team then bought it from WHSmith in 1996, backed by private equity firm Graphite Capital. The private equity firm then sold it to US bookseller Borders in 2004. Borders wanted to use Paperchase to distinguish its offer in a challenging bookselling market.

Through the deal Paperchase opened in every Borders store across the world, including the US and New Zealand.

A business without Borders

When Borders UK collapsed in 2009, Paperchase’s 38 concessions in its UK stores closed and Melgund led a management buyout of Paperchase from Borders Inc, which was still trading in the US.

“It was tough,” he recalls. “To some extent the writing was on the wall, you could see what was happening to the book industry. You could see Borders was getting into more and more trouble.

“We lost a lot of turnover in the US but we didn’t lose a lot of margin. In the UK we did lose a lot of margin.”

According to Retail Week Knowledge Bank, Paperchase’s retail operating margin has fallen to 1% in 2013 from a high of 14% in 2008 under Borders UK ownership.

Melgund says: “It was quite emotional when we were able to do the deal and buy the business back because not only did it protect everybody’s jobs here, it meant that with a new owner we were going to develop a business without Borders.”

But Paperchase, which is now backed by private equity firm Primary Capital, has since made a full recovery. “We replaced the sales in 18 months and the EBITDA in three years,” he says with pride.

Despite Melgund’s belief in the brand, he admits that he never expected to operate so many stores.

“When we bought it we thought ‘right, we’ll have about 20 shops’,” he laughs. “We had no idea that it would get to this size.”

Despite his initially modest ambitions, Melgund’s horizons have expanded as he looks overseas for further growth. “I can see no reason why Paperchase shouldn’t become a global business,” he says. “Every country uses paper in a slightly different way and individuals use it in a very different way so it transports very well.”

Already, the retailer has a handful of stores and concessions in Europe and the Middle East and last year it returned to the US as part of a deal to supply Target stores with an exclusive range. In March it relaunched its UK website and opened US and European websites.

Evolving ambitions

Melgund also has long-term plans to open standalone stores in the US, probably starting on the East Coast, but that isn’t a priority at present.

Melgund has continued ambitions for the UK, where he has previously cited his aim to operate 200 stores. He says the evolution of high streets and shopping centres, as some retailers focus on online and others on physical shops, has opened up new markets for Paperchase.

“British retailing is incredibly dynamic. There are [retail locations] now that five years ago you wouldn’t have even got out of bed for,” he says.

“It’s not just about developers building new centres, it’s also about the way that customers decide that they want to shop. And there are some markets, particularly the smaller, quality markets, that generate really significant sales that a few years ago people wouldn’t go to.”

But Paperchase faces competition in the UK greetings cards, gifts and stationery categories. Australian kids’ stationery retailer Smiggle entered the UK earlier this year and value greetings card and gift retailer Card Factory floated on the stock market last month and has ambitious plans for growth.

Melgund is extremely complimentary about Paperchase’s UK rival.

“Card Factory is a phenomenal business. It has the strength and the power to move the needle in the greetings card industry that no-one else has got.

I bet you more greetings cards are sent now than were sold a few years ago because of it.”

But Melgund is confident that Paperchase will be unaffected by Card Factory’s growth. “We like to think that we are the most creative part of the market that we’re in. We innovate at a rate that is considerably faster than anyone else in the category.

“Just over a year ago we opened a shop directly opposite a Card Factory.  Everyone was saying, ‘you’ve got to watch out for Card Factory,’ and I thought it was a wonderful opportunity to prove [we didn’t need to]. We took £1m in our first year. And you know something – I shouldn’t think we dented their sales at all.”

Despite a recent flurry of retail IPOs, including those of Poundland and Pets at Home, Melgund says he doesn’t think Paperchase would be a natural fit as a listed company.

While Card Factory may serve the more price-conscious customer, the recovering economy could boost Paperchase further and Melgund is eyeing market-share growth.

It seems that as long as customers live in a physical world, Paperchase’s growth is unlikely to be stationary.