Tag Archives: Debenhams

‘Market Matters’ – September 2018

Buying companies as a going concern is fun. Sometimes. Despite purchasers’ best efforts when sniffing around accounts, staff contracts, order book, supply contracts and other ‘due diligence’ they inevitably spend a couple of years digging up buried bodies:‘ Oh sorry, didn’t you know the HQ is built over an old mineshaft? Well tough luck – the legal concept of ‘caveat emptor’ applies. In other words ‘buyer beware’ or ‘tough luck – you should have asked the locals’.  

One of the biggest liabilities for a purchaser is often staff pensions.

One of the biggest liabilities for a purchaser is often staff pensions. Hence the unholy row when Sir Philip Green’s Arcadia Group sold BHS for £1 complete with a large hole in it’s staff pension fund. Then BHS went bust. Valuation theory says the price paid by a purchaser reflects the liabilities it has assumed and the seller is home and dry now someone else is carrying the can. That’s the theory, but life is more complicated than that.

Mike Ashley is arguably the best corporate retailer of his generation

The Chinese have a saying: ‘The best time to collect firewood is after a storm’ i.e. timing is everything. Mike Ashley, billionaire owner of Sports Direct is an expert at timing. He bought the 59-store House of Fraser chain for £90m hours after it went into receivership thus avoiding liability for the staff pension fund and £70m of unpaid bills owed to suppliers. This was his latest strategic bet at buying financially-distressed retailers. Since he founded Sports Direct in 1982 he’s never been able to resist a bargain. He bought heritage brands Karrimor, Lonsdale and Everlast to promote as own-label merchandise then sold-on Dunlop to the Japanese for a tidy profit.  Mike Ashley is arguably the best corporate retailer of his generation – a successor to Ralph Halpern of Burtons and Sir Philip Green of Arcadia.

 Mike hasn’t got a gong (yet)

Just like them he is famously combative. He refused to appear in front of a Parliamentary inquiry to answer questions about working practices at his distribution warehouses. After arm-twisting with threats of gaol in the Tower of London he did appear but unlike Philip Green he didn’t call for the resignation of Frank Field MP, Chairman of the ‘biased’ Work and Pensions select committee. As Mike hasn’t got a gong (yet) there was no kickback from the Commons Forfeiture Committee to have his knighthood annulled.

Frank Field MP is one of the most experienced and widely-respected members of Parliament

Frank Field MP is one of the most experienced and widely-respected members of Parliament and doesn’t want another public inquiry punch-up. He politely suggested this is an opportunity for the new House of Fraser owner to cover himself in glory. ‘Mike Ashley should take responsibility for the pension scheme’said Mr Field. ‘It is in surplus and…he would be smelling of roses compared to his rivals on the High Street.’ That was one way to offer unwanted advice and twist the knife in Sir Philip at the same time – despite Philip’s voluntary donation of £360m to the BHS pension scheme. Sir Vince Cable, LibDem leader and former business secretary was worried the Government Pension Protection Scheme will have to fund another bail-out.He proposed administrators be made to report on large deals e.g. House of Fraser to MPs. ‘The danger is an agreement which is reached is unfair to one or other parties. It could be the unsecured creditors like the suppliers, or it could be the taxman, or in this case there are worries that it’s unfair to the pensioners’. Quite so – but what reporting to MP’s would achieve is unclear.

‘The new Harrods of the High Street’

Many High Street Landlords had been terrified at the thought of business rates on empty properties and lost rent with H of F closing down. They breathed a collective sigh of relief at the buy-out then cracked open another Bollinger when Mike announced he would create ‘the new Harrods of the High Street’. Ashley certainly has the financial muscle to do so but has left staff and suppliers wondering if it will be at their cost. Wholesale suppliers only get paid after goods are delivered and there is – allegedly – £70m owing to them and sales floor concession-holders are only paid after goods are bought by customers. Albert Arkwright, nice but rather dim leader of Mudford-on-Sea Council said: ‘Phew that’s a relief – for a moment I thought our Mudford store might be for the chop…’

Other troubled retailers are worrying about a potential takeover

Other troubled retailers are worrying about a potential takeover, particularly those in whom Ashley holds a stake e.g. Debenhams. He has a 29% holding in the chain and their credit rating was downgraded last month when credit insurer Euler Hermes reportedly reduced cover at concerns over inability to pay bills in full and on time. Debs are holding redundancy talks with staff whilst Chief Exec. Sergio Bucher attempts to secure £10m of cost savings this financial year and double that each year in the future.

Mary Portas, business commentator and so-called ‘Queen of Shops’ has relaunched her retail consultancy service

Meanwhile Mary Portas, business commentator and so-called ‘Queen of Shops’ has relaunched her retail consultancy service by affirming her belief in SME’s (Small and Medium-sized Enterprises) at ‘Business Spotlight’ sessions sponsored byNatWest Bank.

‘British means well-designed and well-made. China is desperate to achieve that recognition but ‘made in China’ just doesn’t cut it’.

La Portas suggested a new breed of boss is emerging; one who is more fun, more thoughtful and freer of the old hierarchies which hold back innovation. And they’re not worried about Brexit because there is ‘huge equity and power in the British brand. British means well-designed and well-made. China is desperate to achieve that recognition but ‘made in China’ just doesn’t cut it’. But she also said the Government should be doing much more to help small businesses export their goods and servicesShe also encouraged Local Authorities to support the ‘tide of innovative and creative new enterprise’ by building cheaper operating spaces in towns and cities. ‘I wish the Government would support them by building bricks and mortar spaces’ she said. Maybe she had overlooked Market Halls.

‘Any brand that connects with women in a deep and meaningful way is going to win’ 

Mary suggested British businesses are strong innovators in food, wellbeing, health and beauty.‘Anything that makes us feel and look better’ she said. More should be be done to sell to the female half of the population. ‘Any brand that connects with women in a deep and meaningful way is going to win’ she opined. Future businesses will be more inventive, more principled and less restricted than those of today. ‘I just wish I could be around in 50 years’ time to see it all happen’ she said.

Mary who…?’

When asked to comment, Mike Ashley reportedly said:‘Mary who…?’

‘Market Matters’ – August 2018

Consider the UK’s High Streets. Hard on the heels of House of Fraser’s announcement of dozens of closures and the rumours about Debenhams you could almost forget how long they’ve been a bad news story. It was back in 2012 the penny finally dropped they were in trouble and it couldn’t be blamed on the 2008 banking collapse or the previous Labour government. Grant Shapps MP, the keen young DCLG Housing and Local Government minister launched the ‘Portas pilot towns’ competition backed by David Cameron and Mary Portas banging on about Markets as the saviour of High Streets. But what happened then? Not much. The money and policy initiatives fizzled out as attention shifted to Brexit and Cameron and Shapps disappeared faster than a Blockbuster store.

The traditional heart of a town survives despite the oversupply of ‘Bricks ‘n Mortar’ retail and Landlords bleeding to death on empty rates.

And yet somehow the High Street still staggers along. The traditional heart of a town survives despite the oversupply of ‘Bricks ‘n Mortar’ retail and Landlords bleeding to death on empty rates. Here are a few Losers, Movers and Bruisers we’ve seen over the last few years….

The Losers:

Woolworths: Founded in 1909, 830 UK stores in 1995 then administration in 2008. What happened?

Our Price: Crashed out of Vinyl, DVD’s and Cassettes in 2004 thanks to online streaming. At about the same time Radio Rentals (remember them?) finally threw in the towel, followed by Blockbuster Video in 2013.

British Home Stores: Closed it’s 160 stores in 2016 amidst allegations that owner Philip Green starved it and the staff pension fund of investment. Well over half the former BHS stores still remain empty today.

Poundland: Owned by South African retail giant Steinhoff with 700 stores, many being former Woolworths units. Currently involved in a major accounting scandal – rather like Tesco 18 months ago.

New Look, Carpetright, Monsoon and Mothercare: planned closures announced.

The Movers:

Marks & Spencer: 280 stores in 1997 and now over 1,000 – shifted from fashions and clothing to luxury foods at edge of town locations.

Argos: 380 stores in 1996, now some 850 mainly at edge of town and retail park locations. Bought by Sainsbury and central to the Asda merger because of their excellent distribution network.

Currys/PC World/Carphone Warehouse: Merged then downsized and bailed out of the High Street to retail parks where they’re doing OK. Mind you Carphone Warehouse on the High Street is having a rough time with 100 closures expected.

Boots Chemists: More than doubled their town centre outlets from 1,000 in 1995 to 2,500 today by adding another 1,500 edge of towners.

The Bruisers:

Charity shops: over 11,000 in the UK at the last count. Welcomed with open arms by High Street Landlords desperate to avoid empty rates liability.

Coffee shops: Costa now have 2,200 stores across the UK. Don’t mention Starbucks, Vat and Corporation tax in the same sentence.

BooHoo: Doing very nicely online thank you amongst 16-30 year-olds thanks to no business rates and ‘Bricks ‘n Mortar’ overheadsA fine example of how to target a specific consumer group and their lifestyle.  

Mergers, consolidation, moving online and relocating to the edge of town is THE pattern

What this shows is just how little sentiment there is amongst the big boys. Mergers, consolidation, moving online and relocating to the edge of town is THE pattern. According to the Centre for Retail Research the number of online retail sales as a proportion of total retail sales has risen from 2.5% in 2004 to 22% in 2018. That is a simply staggering growth rate and any retailer who ignores the trend is dead in the water.

So who will replace multiples on the High Street?

So who will replace multiples on the High Street? The Centre for Retail Research says don’t despair – it will become a social centre. It will shift from commerce to leisure with more space given over to restaurants, ‘artisan’ foodstores, health & beauty and ‘lifestyle’ outlets. Less errr…’glamorous’ locations such as Mudford-on-Sea will have to make do with Charity shops, bookmakers and vape stores. ‘Lifestyle’ retailers such as Joules and Ted Baker are doing well, but only in top 100 towns. Future casualties will to be shoes, household goods, furniture, textiles and music/games. Those offers are increasingly replaced with Amazon collection boxes.

E-commerce is like one of those creepy robot lawnmowers

The CRR also highlighted the rise in ‘Showroom’ and ‘Concept’ stores. These are sparsely-staffed display units which allow Customers a hands-on experience but retain the cost advantage of selling online. E-commerce is like one of those creepy robot lawnmowers – it works for you 24/7 whatever the weather and if you’re a home producer selling on Ebay or Etsy gives you a physical showcase for your products.

Dyson have just launched an Oxford Street demonstration store where you can test drive their vacuum cleaners and hairdryers, helped by charming young men who can’t do enough for their lady customers – or for the men either come to think of it. Note the cunning combination of hairstylist and vacuum cleaner salesperson. Wow.      

You can’t underestimate how activity stimulates confidence

To attract leisure-users and investment High Streets need to differentiate– offer something which makes them more attractive than the High Street in the next town. The easy fix is to spend zillions on repaving and relighting but to my mind it is better to spend it encouraging small businesses. More rent and rates caps, pop-up shops in empty units, Town Council and landlord partnerships, events and Markets. You can’t underestimate how activity stimulates confidence. There are some towns where an energetic and innovative B.I.D or Town Centre Partnership is really making a difference.

Don’t feel you need to spend zillions on retail demand surveys

And finally, if you are a B.I.D. don’t feel you need to spend zillions on retail demand surveys. Henry Ford, the mastermind behind mass-produced automobiles was once asked what he thought about Customer research. He replied: “If I’d asked the public what they wanted they’d have said faster horses….’

 

Blockbuster

Boohoo

Alice and the red queen

In Lewis Carroll‘s ‘Through the Looking-Glass’ Alice takes part in a race with the Red Queen only to discover that despite running constantly she remains in the same place. The Red Queen is not sympathetic: ‘A slow sort of country!’ says the Queen. ‘Here you see it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast!”

Do you run to stay in one place or do you sprint to expand your business?

And that is the dilemma facing all Market businesses. Do you run to stay in one place or do you sprint to expand your business? You certainly can’t afford to be complacent and stand still or you’ll be going backwards. That same challenge is faced on a grander scale by the ‘Big four’ Supermarkets. Between them they sell some 70% of UK groceries – Tesco has 28% of market share, Sainsburys has 16%, Asda 15% and Morrison 10%. If you factor in the ‘LADS’ (Limited Assortment Discounters i.e. Aldi 7% and Lidl 5% ) then less than 20% of the UK groceries market is up for grabs and where do you run TO? They have to keep running to stay in one place and keep their shareholders happy. ‘Where next?’they constantly ask themselves

 If you are a truly international player like Walmart then you can play on an even bigger, global scale

Well, you can keep one step ahead by buying-up your competitors (Morrisons and Safeway) or buying better distribution (Sainsburys and Asda) or simply building more stores (Tesco in Eastern Europe). If you are a truly international player like Walmart then you can play on an even bigger, global scale. That seems to be one reason for the massive £12 billion Sainsbury/Asda merger announced at the end of April.

UK retail is arguably over-provided with supermarkets

Walmart bought Asda back in 1999 as a way to expand into the UK. But Asda has stubbornly lingered in third place because UK retail is arguably over-provided with supermarkets. The shift online has left many towns and shopping centres with ‘bricks ‘n mortar’ stores chasing Shoppers who have shifted online. This led to the downfall of Woolworths and BHS and has left House of Fraser and Debenhams struggling. As early as 2006 Walmart discovered their American retail formula did not work in Germany and sold-off 85 stores and took a billion-dollar hit.It clung on to its investment in Asda for another 10 years whilst privately conceding it was going nowhere so when Mike Coupe, the CEO of Sainsburys suggested a merger they must have jumped at it.

The merger of Asda and Sainsburys will with one leap knock Tesco into second place

The merger of Asda and Sainsburys will with one leap knock Tesco into second place. It will also enable Walmart to pocket £3 billion in cash whilst still retaining 42% of shares in the new business. That £3 billion can then beshovelled into the unconsolidated and rapidly-growing economies of India and China that ARE crying out for supermarkets. That’s globalisation for you.

And there’s another big reason behind the merger:  Amazon.

Go online and search for Amazon Fresh Grocery. Amazon is only now establishing itself in the UK groceries market but in the USA it has bitten big chunks out of Walmart. Amazon works on wafer-thin margins and is building seriously big distribution centres around the UK for next day deliveries – bicycles, baked beans or bread. Take your pick. It challenges the Big Four because it is all online without the bricks ‘n mortar overheads. There are rumours it could simply buy its way into the UK groceries market by purchasing Ocado.

You could almost feel sorry for the Big four

This has prompted wry comments from retailers such as Sebastian James, Chief Exec. of Dixons PC World and Carphone Warehouse. He has been widely praised for his mergers and relocation out of town to fight-off Amazon’s online dominance of the electrical goods market. He knows better than most what motivates Amazon and made the pointed comment that:“Why is Amazon getting into the food market? Does it really think it can make money by selling food online? Definitely not. It’s all about getting customers addicted to Amazon Prime and the rest of the Amazon online offer. Amazon doesn’t want to make money out of food and that could make it a big threat for supermarkets.” You could almost feel sorry for the Big four. Their sales are likely to be hit in the same way they have made traditional Market Halls suffer over the last 10 years.

There are a lot of very worried Supermarket suppliers

According to a Sainsburys’ statement both Asda and Sainsbury will continue to trade as separate brands with Argos concessions being put into Asda stores. Not surprisingly, Sainsburys’ shares leapt 20% at the announcement whilst Tesco and Morrisons fell by 3%. Sainsburys announced the new, combined network of 2,800 stores will enjoy operating cost savings of £500m p.a. so employee trades unions are understandably nervous – the merger affects 330,000 jobs. And there are a lot of very worried Supermarket suppliers. The Federation of Small Businesses is pressing for assurances the £500m savings won’t simply be achieved by pressurising suppliers into lower prices ‘a la Tesco’.

The CMA will be looking at whether replacing the Big four with the Big three will be good or bad for Shoppers and Suppliers

The merger is expected to be completed in about 18 months after first obtaining approval from HMG regulator, the Competition and Markets Authority. The CMA will be looking at whether replacing the Big four with the Big three will be good or bad for Shoppers and Suppliers. Sainsburys/Asda are likely to suggest the rise of the ‘LADS’ plus online competition like Amazon still guarantees variety of choice and low prices for shoppers. The CMA will also have to assess whether the 2,800 stores need to be reduced in number. It can impose takeover conditions to ensure Shoppers get a choice of retail outlets in their area. The ‘proximity test’ could bar the merger from operating two or more stores within a mile or a five-minute drive of each other. Some estimates suggest at least 80 Asda stores are located within a mile of a Sainsbury outlet so may have to be closed. This would be bad news for institutional Landlords as well as employees.

‘We’re in the money…’

Mike Coupe has good reason to look pleased. The merger could be a brilliant move, knocking Tesco sideways at a single stroke (and increasing the value of his share options by about £600k). Unfortunately Mike then dropped a clanger. Whilst waiting to be interviewed by ITV someone switched on the microphone and he was broadcast happily singing to himself ‘We’re in the money…’ – the hit song from the musical ‘42nd Street’.