Toy story: Inside the Hamleys heist
The fun and games at Hamleys in SA took a dark turn when its founder, Philip Paphitis, stole about R20m from the business and later shot himself. Now new owners believe they can make a success of it
Some time in late December 2018, security cameras picked up Hamleys SA founder Philip Paphitis pushing a shopping trolley into his company offices, on the 12th floor of Joburg’s Bedford Centre, in the middle of the night. On entry, he switched off the cameras and, with that, disappeared from sight — along with R20m from the toy company’s coffers.
"Perhaps it was foresight, perhaps not, but in December 2018, Paphitis set about a new plan extricating himself from the business in a most unconventional manner," business rescue practitioner Stefan Steyn says in his papers on the company, narrating the sequence of events.
Things had not been going well for Paphitis. Eight months before his "unconventional" exit, he told CNBC that the 258-year-old UK brand had expanded faster in SA than any other foreign brand after it launched at Joburg’s Greenstone Shopping Centre in 2015. In the first three years he oversaw the opening of 10 stores of at least 1,000m² each. The growth, he said, was "ahead of the curve".
But when Paphitis made his shopping trolley escape, his stores were in the red, the company had failed to file tax returns and it was R157m in debt. The R6.2m profit Hamleys SA turned in 2017 had become a R14.9m loss one year later.
Hamleys was supposed to be a "fantasy" — or at least that’s what Paphitis told CNBC in that 2018 interview, which marked the opening of its Sandton City store. A troupe of characters, including the Hamleys Bear and SpongeBob SquarePants, paraded from Nelson Mandela Square to Sandton City to launch the toy store, along with a gaming outlet and adjoining children’s movie theatre.
And it is a fantasy. Children enter the store down a large red slide — Magic Faraway Tree style. If obliging parents shell out R25, their child can ride a carousel in the store. Or they can drive a remote-controlled car around a large track at R10 a loop. Outside the store, a R1m Hamleys train takes children on fleeting rides in the shopping centre.
"Kids walk into a fantasy world," Paphitis said. "That is the big difference between us and the [competitors] … It is pretty much going into a fantasy world and reliving our childhood dreams that we remember as adults."
But Paphitis seemed to take his own fantasies too far. According to the business rescue documents, he stole exactly R20,398,261 from the company. He also used the business bank account to fund a R1.4m Range Rover, pay the hefty legal fees for his divorce, travel business class on "nonproductive travel" and pay for life insurance policies. He also had a car shaped like the Batmobile built for himself.
Meanwhile, the situation at the company was a nightmare. It had been crippled by head office expenses, excessive store installation costs and 4% profit royalties to be paid to Hamleys UK — an account already in arrears. Rent, which cost Hamleys R6.9m in 2017, had jumped to R31m in 2018 (it reached R41.2m in 2019). And administration costs ballooned from R716,189 in 2017 to R5.9m the next year — a 723% increase.
By January 2019, Investec had taken the company to court, and Hamleys SA was placed in business rescue. Thereafter, Steyn worked to secure the stolen funds from Paphitis, laying fraud charges against him in November. (He believes a significant amount of money is offshore; the Panama Papers state Paphitis had an account in the British Virgin Islands.)
Then, this month, Paphitis shot himself dead after police tracked him down in Cape Town and arrived to serve a warrant of arrest.
But the story isn’t over for Hamleys SA.
After initial scepticism, Rand Outfitters director Riad Laher and Faheem Mahomed, owner of homeware store Osbro, have taken over. In a joint venture called Antares, Mahomed and Laher have pumped R13m into the business, according to the business rescue documents — along with some common sense.
"We understand retail," Mahomed tells the FM at Antares’s head office. "We are just applying basic retail principles that we know from our business … stock management and stock control."
If this sounds simplistic, the business rescue document reveals that the pair have already achieved some easy wins. A complete lack of stocktake in some stores had resulted in "shrinkage" — the loss of goods due to theft, breakages and cashier error — reaching levels of 10%-20% (against a global standard of 2%). Antares has now reinstituted stocktakes. It’s also introduced a different product mix, reduced stock and renegotiated agreements with suppliers.
Antares is also changing up the supply chain. Mahomed says 90% of Hamleys’ stock has come from local suppliers that import it from elsewhere. "Local suppliers are doubling their money before they sell to Hamleys. We found massive potential in [importing directly], meaning better margins in the business. We can drop prices."
The business rescue process revealed further "favourable circumstances", says Mahomed. "Landlords agreed to lower rentals. Creditors agreed to write off large portions of debt and accept payments in terms."
But there are still significant debts to service. Antares has to pay Standard Bank R350,000 a month for 30 months to settle that debt — about 30% of the R36m the bank is owed. Of the R78m Hamleys SA owes other creditors, Antares has to repay about R7.8m, according to the business rescue plan.
This does not include the amounts initially claimed by property companies for leases that ended prematurely. Attacq, owner of the Mall of Africa, claimed R8.15m in cancelled lease penalties, but Steyn granted R1.89m. (When the Mall of Africa shop closed, it put up a sign saying: "We came. We saw. We played.")
[Hamleys] is a different environment that no other toy store has. The kids are experiencing something. It inherently has what all retailers are chasing right nowFaheem Mahomed
For now, Mahomed says it’s "all about getting the blend correct". To that end, he and Laher recently flew to India to meet staff from the parent company’s new international owner, Reliance.
In its 150 Hamleys stores in India, Reliance sells cheaper unbranded toys in lower-income malls, and different toys in high-end areas. Antares is working with Reliance to "get guidance" on the right mix for each store.
Steyn says success for Hamleys depends on two things. First is "buying the right product for the market" — something he says Hamleys in India seems to do well with its product mix. The other, he says, is securing the right "rent per square metre for different products".
But the 4% royalty fee is problematic for recovery, says Steyn. And Truworths veteran Derek Kohler, who led the turnaround as interim CEO at Hamleys, agrees. Steyn says the parent company will not budge on this.
Then there’s the issue of the country’s ailing economy.
Sasfin equity analyst Alec Abraham is sceptical about the toy market’s potential in current conditions.
"Spending on discretionary merchandise categories is suffering as consumers get poorer … Also tech devices, I believe, have and will continue to displace much spending on traditional toys."
His sentiments are echoed by market research firm Euromonitor International. "In the past few years growth has slowed slightly in the SA toy industry as a result of a weak economic climate," says Euromonitor analyst Peter Hirst. "This has forced consumers to cut back on nonessential products such as toys and games."
While the industry is still growing, that growth is concentrated in the video games segment, says Hirst. For traditional toys, demand is "largely driven by increased availability in large grocery retailers such as Pick n Pay and Checkers". He doesn’t foresee much change in the next few years, as "economic growth is not expected to improve".
But Mahomed, who sees Checkers as Hamleys’ biggest threat, is optimistic about the brand, given the unique experience it offers. "It is a different environment that no other toy store has. The kids are experiencing something. It inherently has what all retailers are chasing right now," he says.
As part of that experience, the Hamleys outlet in Fourways Mall, which opened last month, is about to launch a human claw game. Traditionally, you pay to guide a metal claw to try and win a small toy. In this case, a child or adult is strapped in and becomes the claw, while someone guides them to pick a toy.
"We are giving the customer … a magical experience," says Mahomed.
Who was Philip Paphitis?
• Philip Paphitis described himself as a property developer and entrepreneur in a speech at the SA Property Owners Association convention in 2016, claiming to have brought 6,000 units to market between 1999 and 2008, and to have sold 222 Sandton units in just two hours.
• Companies & Intellectual Property Commission records show he owned an Aladdin’s Caves toy store in the Bedford Centre and in Eastgate before buying Hamleys. He was the owner of Eastgate Locksmiths until his death.
• He was a founder of successful property company Limestone Investments and a director of 31 companies — most of which have been deregistered.
• He was declared insolvent on January 22 2019.
• His four-bedroom, three-bathroom double-story house in Bedfordview was auctioned in June.
• The Panama Papers list him as the sole owner of an offshore account named Constance Equities Ltd, registered in the British Virgin Islands.