The Hut Group: Matthew Moulding and John Gallemore

The new owners of Zavvi on breathing life back into the fated brand and competing with the online entertainment giants

The Hut Group put its name on the map when it bought Zavvi out of administration earlier this year. Its founders explain to Growing Business how they have used white-label deals to square up to online retail heavyweights Amazon and Play.com

For all its achievements over the past six months – eighth in the Sunday Times Tech Track, winning the Bank of Scotland Entrepreneur Challenge, resurrecting Zavvi and narrowly missing out on buying Woolworths – The Hut is hardly a household name in online retailing. But founders Matthew Moulding and John Gallemore have steadily grown their business to revenues of £25m last year, since setting up in 2004. They’re expecting to bring home three times that in 2009 after relaunching Zavvi online and landing a succession of major clients. Haven’t heard of The Hut? That’s all set to change if Moulding and Gallemore get their way.

While the business may not be particularly well known, its partners certainly are. As well as operating its own website, TheHut.com, it’s steadily amassing market share by opting for a white label approach – building and running websites to sell entertainment and other products for the likes of Asda, Tesco and Argos. As consumers shun the high street in favour of bargain hunting on the web, the market for online entertainment is a potential goldmine. But even back in 2004, it was pretty much cornered by Amazon and Play.com.

So, instead of ploughing marketing spend into building a challenger brand, fostering partnerships has enabled them to scale up to a point where they can become a serious contender – giving them market reach without the cost or risk of promoting a new brand, and the ability to sell their products under big names that consumers know and trust.

Survival instinct

But this was more than just a cunning growth strategy. Moulding says it was a matter of survival. “You need scale,” he says. “To try and set up and brand your own business and get to the scale we’re at now would have been very expensive in terms of marketing.”

With scale comes volume, efficiency and better buying terms. “Because the margins are not that good in entertainment, without the buying terms, you can’t compete. You’re thwarted. The only way around it is to bring partners on board,” Moulding adds.

The business now has around 15 partners, including Asda, Tesco, WHSmith, Dixons, Currys, PC World, Phones 4U and Lovefilm. The relationship is mutually beneficial. For the most part, entertainment is not the partner’s core offering and this enables them to enter a market where Play, Amazon and HMV own 80% with relatively low risk and expense. At the same time they can offer customers a wide range and stand more of a chance of capturing more of their spend.

“You need to have entertainment as an offering, because so many people shop for it online,” says Moulding. “You can attract a lot of people to a site, and they might not necessarily buy an entertainment product, but could go on and buy something else.”

Inspiration for the business came from rival Play.com. Coming from a finance background (chartered accountants Moulding and Gallemore met while working at mobile communications firm The Caudwell Group), the founders knew little about buying CDs and DVDs, and even less about retail, but they could see the potential value of the online entertainment market. “We interviewed some staff from Play.com and saw they were making large profits on a first-mover advantage online,” Moulding recalls. “A lot of the big retailers weren’t even operating online, and yet it was a much lower overhead operation, and the products could be sold much cheaper.”

Dirty business

Setting up a web business after the fallout from the dot-com crash wasn’t easy. Despite pumping half a million pounds of personal finance into the company, raised through previous bonuses and remortgaging their houses, suppliers were still reluctant to work with yet another web start-up. “The internet was fairly dirty back in those days,” says Gallemore. “It was a ‘here today, gone tomorrow’ view from suppliers, so we had to convince them that we were credible.”

Moulding adds: “Suppliers were getting these calls every day from people. So, instead of trying to beat all the retailers, we were ringing them all up and saying: ‘Why don’t we go and do it together?'”

Entertainment was just a starting point. The plan was always to build up a large customer base they could then sell other products to. The Hut now covers a range of categories, including books, clothing, flowers, perfume and even lingerie.

The founders have also extended the range of Zavvi, the ailing brand that they bought out of administration earlier this year. Buying a failed business is always a risk, and when it’s one that was once owned by Richard Branson, there’s not much chance of its performance being kept out of the spotlight. But the founders acknowledged the risk of brand erosion, and are combating this with price and excellent service. “The guys in the office are driving a lot of online promotion, and it’s just exceptional value,” says Moulding.

Natural buzz

High-street retailing of low-margin products is a tough place to be in a downturn, and Zavvi suffered a fatal blow when its main supplier, Woolworths, went under at the end of last year. However, The Hut did not take over any of the stores or even buy any stock. Instead, it bought the brand, domain names, a database of more than a million people who had shopped there in the last 12 to 18 months, and the hardware and code for the website.

While confidentiality agreements bind the pair from disclosing how much they paid, Moulding says: “The Zavvi deal has been exceptionally good for us so far.” The online side of the business was actually doing rather well. “It was probably heading towards £20m for the full year, but they were spending an awful lot of money marketing it,” says Gallemore.

By capitalising on the existing following, using more aggressive pricing and focusing on low-cost promotion through social media, they will be able to secure high revenues for a miniscule outlay of cash. “Just that level of activity means that, without really any marketing spend as such, it will blast through £10m for us, just in its first year,” Moulding says.

Twitter is also proving to be a triumph for Zavvi. The brand has 1,150 followers engaged in weekly debates over the best film of all time and asked for input on what items should be included in ‘Mega Monday’, another key promotional tool. Every Monday around 50 to 100 products are sold 50% cheaper than Zavvi’s rivals. “We try and find something that will be very attractive to the public at a crazy price,” says Moulding. “That creates a real natural buzz around your offering.”

The founders had similar plans to take Woolworths online. With a website ready to go, they fell at the last hurdle when their offer was unexpectedly rejected. “We nearly had Woolies on Christmas Eve, but the administrators decided, wisely actually, to reject our offer,” says Moulding. “At the time, we thought it was the wrong decision, but it has proved to be right for the creditors.”

Shop Direct, owned by the Barclay brothers, outbid The Hut in February (paying a reported £5m for the firm), and Woolworths is scheduled to relaunch online this summer.

Father figure

Winning the North West heat of the Bank of Scotland Entrepreneur Challenge was another key milestone for The Hut. It netted them an interest-free £5m bank loan, but perhaps more valuably, three major clients were landed shortly after the regional heats: Tesco, WHSmith and Argos.

You wouldn’t think it to meet Moulding and Gallemore, but they describe themselves as terrified of public speaking. The latter confesses that the prospect of doing a presentation in front of retail legend Sir Tom Hunter in the final of the competition made him physically sick. “We’re pretty insecure individuals by personalities, and that’s probably why we hid in finance to start with,” he says.

What didn’t faze them was the prospect of a question that they couldn’t answer. They strike you as people who would excel at anything they put their minds to. “We had fully researched [everything], but you live and breathe your business,” says Gallemore. “There’s not a second that you don’t think about it, so there’s very little that you can’t counter.”

The prize for winning was four days’ mentoring with Hunter, but what has emerged is a more natural and realistic relationship. “Mentoring is a broad term,” says Gallemore. “It covers a lot of things, such as opening doors for you and advice with situations. It’s just that ongoing line of communication, rather than sitting you down and telling you: ‘These are the lessons you need to learn.'”

This relationship certainly seems to be enduring. A week has yet to go by where Hunter hasn’t been in contact via text or phone. “He’s got some exceptionally strong contacts and experience in traditional retail, so he’s translating that on to us, because we’re not retailers, we’re people who are very good at execution,” says Moulding, who even likens his new mentor to a father figure. “Even though Tom’s only 10 years older than me, it’s like having either a very big brother or your dad looking after you.”

Skills and scale

Taking a walk around The Hut’s head office, it’s clear that their success has been catapulted by a culture where staff are truly valued. The friendly atmosphere is palpable, and the founders recently splashed out on brand new eco-friendly Toyota IQ’s for 15 of their star performers.

Their headcount now stands at around 100, and they’re putting together an impressive management team. “When we started, we were generalists who just worked really hard at it,” says Gallemore. “With scale, you get people who actually do know what they’re doing. And it really fuels the growth when you have experts in the business.”

They are now exploring a number of growth opportunities. One would see them move onto the high street with small, unstaffed retail units in shopping centres. They envisage these as stations that allow people to buy online, with glass doors that can be used as marketing estate. This will allow them to boost web traffic at weekends – the quietest period for e-commerce.

Any entertainment retailer will have felt the advent of downloads. But while The Hut will move into this space, there are no plans to make it a core part of the business just yet. “Our expectation of the revenue model is very limited,” says Moulding.

For now, they will focus on other growth opportunities, and they are confident of an enduring market for CDs and DVDs. After taking an initial battering from downloads, CD sales have actually picked up over the last couple of years, as the price of an item that was once overinflated has regulated in response. “Our average sales price on a catalogue CD is about a fiver now,” says Gallemore.

The massive growth spurt over the past few months shows no signs of abating, and they are now looking for £5m equity investment to continue their acquisitive strategy, while international expansion is also on the cards. But all this will be fuelled by a thorough knowledge and understanding of their business. As well as driving the strategy, the founders never lose sight of the detail.

“We talk to everyone,” says Moulding. “We ask questions all day. We will go and see all the pitches together, but also get into the details of why one customer’s account sales weren’t as strong as we expected for the day. A lot of it is intuition and understanding the business, and you put the resource where it’s needed.”

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