Figures compiled by Deloitte show a 28% increase in the number of retailers filing for administration in 2017 when compared to 2016. This is hardly surprising considering the squeeze on household incomes resulting from inflation outpacing wages. And just days into the New Year, Debenhams, Moss Bros and Mothercare have all issued profit warnings, whilst House of Fraser is reported to be struggling, following a slump in Christmas sales.
While the end of year figures are, for most retailers, still being compiled and reviewed, a trend is emerging: online sales are up, instore sales are down. Next, for example, has posted a 13.6% increase in online sales compared to a 1.6% decrease across its 550 stores. Throw into the mix a combination of rising rents in many areas, together with forthcoming increases in the national minimum wage for young workers from 1 April this year, and for many retailers you have the ingredients for a perfect storm.
So how should retailers seek to weather this storm?
Rebecca Walker, senior associate in the restructuring & insolvency department at Stevens & Bolton, comments: “Retailers have for a while now been seeking to incentivise customers by developing slick omni-channel experiences and offering in-store customers a complimentary glass of champagne, live music or dance performance. However, for as long as consumers are feeling the pinch, retail will be a tough market. It is now important that retailers look to right-size their real estate portfolio.”
Marks and Spencer is currently undergoing an operational turnaround, involving the closure of 30 UK stores as well as converting 45 of its stores to food only outlets. Likewise, Debenhams is considering further store closures after its disappointing Christmas trading results and House of Fraser has reportedly written to landlords asking for its rents to be cut.
Seeking rent reductions or store closures is not always straightforward and will come down to the terms of the leases. If a retailer finds itself tied in to long-term leases across numerous unprofitable outlets, what are its options? Informal bilateral agreements with each landlord (which is what House of Fraser is seeking to achieve) are certainly possible, but a time consuming process, and one which will not produce uniform results, as some landlords will agree while others will not. For this reason, Company Voluntary Arrangements (CVAs) in the retail sector have, for several years now, been all the rage.
A CVA is a statutory arrangement between a company and its creditors. If passed by the requisite majority of unsecured creditors, it has the ability to bind all unsecured creditors (including landlords). We have recently seen Toys R Us successfully propose a CVA to reduce the number of large out-of-town stores in its portfolio. CVAs proposed by other retailers (such as the likes of Blacks in 2009 and JJB in 2011) have sought to restructure the retailers’ rental obligations by including terms that rent should be paid monthly in arrears rather than quarterly in advance, that the quantum of rent should be linked to turnover or that rent should be reduced.
The plight of all retailers will, of course, not come down solely to real estate. Indeed, for those who are struggling under the weight of significant debt on their balance sheet (which we understand to be the case with the likes of Debenhams), attention is likely to focus on how to restructure those debts and/or a retailer’s wider capital structure. What is, however, clear is that 2018 is likely to be another tough year for the High Street.
Tim Carter