It is hard to underestimate the scale of the cataclysm playing out on UK high streets, changing town centres and the retail landscape forever.
Over the past decade, many well-known retail chains have disappeared from our high streets, entered into CVAs, undergone pre-pack insolvencies, changed hands (many more than once) or have radically slimmed down the number of outlets. Some have even gone on-line only.
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This trend seems to be accelerating rather than slowing - figures from the Centre for Retail Research are a real eye-opener. They show that figures for stores and employees affected in the first half of 2018 already exceed the whole of the 2017.
Retail failures over the past ten years. Source: The Centre for Retail Research
This is a retail extinction of almost biblical proportions. On that theme, here is is my interpretation of this modern day ten plagues of the high street, together with some advice for retailers pinched between Amazon, on one side, and high business rates, on the other.
1. The plague of rivers of blood - retail market sucked out of the high-street and onto the internet.
Whatever the condition of a retail chain before factoring web-selling into the equation, losing a large percentage of your sales to a rival is not good for your health.
In effect, this is like having a competitor open up right next door, with their shop window next to yours, but with lower prices. They have the exact same goods at lower prices and they will deliver to your customer's door. Worst of all, the shop front is in their living room.
There is no risk from speed cameras, moped muggers, traffic wardens and no parking charges just to visit the shop. Worse still, distance selling regulations enable web-shoppers to return stuff just because they don't like it. It is impossible to compete with this - but you have no choice.
Leveraged buyouts are completely legal but are a very thinly disguised theft of assets from parties that have no real control over their own destiny
2. A plague of frogs
It is well-known that you have to kiss a lot of frogs to find a prince (or princess) and this is happening all the time in your store.
An acquaintance who owned a piano emporium was fond of describing customers that would come into the store and ask to try out a specific instrument, often bringing in a piece of (paper) music to play. They would sit and tinkle away at the ivories for 15 or 20 minutes, then leave the shop with a wave and never come back.
There is a happy ending here: The vendor realised that the internet was actually delivering a captive audience to him, and took full advantage.
He looked up price and delivery times on the main competitive websites and displayed them on a show-card on top of the piano, making sure that his own price and terms were right there as well, just on the right side of competitive of course.
Even if the customer had found a better price than he had, he made it clear that he was happy to underbid all-comers;, taking advantage of the fact that a human can always outwit a fixed-price website, no matter how low the price.
3. A plague of lice
Retail landlords are the much-hated capitalist owners of two of the four socialist factors of production. It is their job to convert investment capital into more capital.
For many decades, a severe shortage of retail space empowered property owners and managers to name their price. The value of retail space was measured in hundreds of pounds per square foot per year and a small shop on a London high street near a tube station could easily cost between £75,000 and £100,000 in rent per year year, plus dilapidations and the perennially unfair business rates on top of that.
If you wanted to sell to the public, you had no choice but to pay the asking price under the auspices of a brutally one-sided lease contract. A feature of these leases was upward-only rent reviews. Agreeing to one of these means that any downturn in business can only come out of the retailer's pocket - never the landlord's.
Out of town retail sites (the first I saw was Brent Cross, opened in 1977) were typically owned by the same property companies (and our own pension funds) and made no real difference to the cost of good retail space - although they did gradually increase availability.
So, the advent of the first UK web-shop sites in 1994 offered a glimmer of hope that the cost of merchandising goods to the masses could at last be freed from the landlord monopoly over retail space.
But - be careful what you wish for! That first site was a collaboration showcase between Barclays Bank and Argos, called BarclaySquare, and had a grand total of 20 items for sale! It didn't do well, but in the following years, retailers have been divided into two main groups: those that developed an efficient omni-channel sales and fulfilment model and the rest who didn't.
A customer is only a customer when they pay their bills. If it looks like they may not pay their bills, cut your losses and cease supply
Most of the rest are no longer with us of course. The current rash of CVAs, pre-pack insolvencies and administrations are an inevitable outcome of usurious and one-sided leases, combined with commercial landlord's inability to wake up and smell the coffee.
4. Venomous snakes
These are the private-equity and hedge-fund asset-strippers, pre-packers, turnaround specialists and CVA specialists. There is a pretty well-established pattern of behaviour here.
First, find a victim with strong sales, but a weak balance sheet. Owning a retail property portfolio is a nice-to-have, but the main draw is a nice fat creditors' ledger.
It may seem odd that owing money is an attractive trait on a balance sheet. However, if you are going to treat the suppliers to a 100 per cent haircut, then their debt also represents a juicy disposable asset for the stock they originally supplied.
Your local neighbourhood asset stripper is always looking to ditch the liabilities and keep the assets and the poor old unsecured trade creditors will catch a cold every time. Very occasionally, commercial landlords are the unwitting victims brought along for the ride, too.
Extortionate rents will have dragged down profitability and made the victim cheaper to buy, so it is essential to ditch this unwanted burden ASAP in order to boost the apparent value of the enterprise. A CVA or administration will do this nicely.
The UK insolvency system works against landlords, because voting in a CVA is based on money owed. As most of the rental debt is in the future, they don't get much voting power in relation to their actual exposure (they may argue, not unreasonably, that the full value of the lease should define their voting rights).
Not all private equity and venture capital buyouts precede a business ‘restructuring' due to cashflow issues, but many do. This restructuring is not bad luck or an accident of fate - this is all part the plan.
Asset-strip warning signs (from a supplier's point of view):
- Property assets are stripped out of the balance sheet and securitised against loans or sold to a third party;
- Your debt insurers reduce cover or impose new terms (they usually have more information than you do);
- The business is loaded down with expensive debt, raised to pay off the original owner, or just to pay a whacking dividend into a numbered account in a bank in Monaco;
- New, longer payment terms are imposed on suppliers;
- You are asked to renegotiate your supply contract to include ‘volume rebates';
- The rebates are paid to an associated company in another jurisdiction (i.e. out of sight of both HMRC and the official receiver);
- The employee pension fund trustee committee is fired / overwhelmed by new appointees;
- Approaches are made to landlords to lower rents or offer rebates, with a CVA as the consequence for non-cooperation.
My advice - a customer is only a customer when they pay their bills. If it looks like they may not pay their bills, cut your losses and cease supply. If they are genuine, they will come back to the table with cash in hand. If they see your stock as a strippable asset, they will just look for another mug.
5. Diseased livestock
This is the modern-day plague of poor range planning.
Retail is a traditional business and many buyers, planners and merchandisers are still living in the last century when it comes to sizes and distribution curves. The inevitable outcome from poor range planning are end-of-line sales, huge stock-exits, outlet stores and fire-sale stock disposals at cost or less.
The perfect scenario in Formula One engine design is an engine that gets you on pole position for qualifying, wins the race because it is light and powerful, then wears out and explodes just before you switch it off in park fermé.
So it is with fashion and general apparel. If you bought the right size and colour distribution in the first place, the entire range would sell out simultaneously on the last day of the season, just as you are planning stock-exit. We know that these things can't actually happen - there are too many variables - but that should be your aspiration as a buyer. Stock exit is a failure, not an inevitable process in retailing.
The same goes for end of line sales. What is really hurting apparel retailers is a lack of good data about the sizes and colours that customers will buy. You can't completely rely on sales data, because you can only sell what is in stock. If you didn't buy the red shirt in size 2XX, then you can't sell any can you?
Here is the thing:
- It is poor business to run out of stock in sizes people will buy - that reduces revenue;
- It is poor business to get left with the sizes no-one will buy - that increases costs;
- It is much worse to have shipped that stock all over the country and then pull it all back - that could cost as much as buying the stuff in the first place.
I am one of the innocent victims of these policies. I know that I will never be able to buy a shirt, jacket, trousers or polo top in any high street store (or remaindered in TK Maxx) because my waist size is just two inches above the UK average. Their shelves and rails are chock full of unbought XXS, XS, S, M and L sizes. Buyers and merchandisers - wake up!
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