Travails of the UK retail sector

July 2016  |  FEATURE  |  BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

If you wandered down the High Street in any UK town or city over the last 30 years, you would have seen many of the same retail stores. The same brands, many of which have been in situ for decades, have, until very recently, endured.

However, many of the High Street’s most recognisable names have begun to disappear from view. Economic pressures and the threat of disruptive new online competitors are eroding the High Street.

Yet even as the edifice started to crumble, a number of brands remained ubiquitous, somehow defying the odds and continuing to trade. One such chain was British Home Stores (BHS), a fixture on the British High Street for decades. But in late April, after months of speculation and botched fundraising attempts, the company’s time finally ran out. BHS filed for administration, followed two days later by clothing operator Austin Reed.

End of an era

BHS defied the odds for years, even as other UK High Street brands such as Woolworths and Jessops disappeared. That the company collapsed is, in many respects, the natural conclusion to its near decade long struggle for relevance and profitability. Consumer tastes have changed and BHS, for all of its storied past, failed to change with them. The company reported trading losses for seven years running before the filing, with total losses reaching £415m. Efforts to sell the company or attract new investment were adversely affected by its £571m pension deficit. In 2015, British businessman Sir Philip Green sold the company to Retail Acquisitions for £1, despite purchasing it for £200m in 2000. Retail Acquisitions is a vehicle for a group of 10-11 financiers, lawyers and accountants.

However, it would be wrong to classify BHS’ failing as solely an unwillingness (or inability) to move with the sartorial times; indeed, many of the company’s difficulties can be traced back to the logistics of its stores. BHS, which employed 11,000 people, was a vast empire, but many of its 164 stores across the UK were too big and in poor locations. With sky-high rents and lengthy leases taking their toll, it was only a matter of time before BHS finally collapsed.

Two days after BHS filed for administration, the 116-year-old tailoring brand Austin Reed appointed administrators as the company ran out of money. Austin Reed had attempted to restructure in 2015 when it closed a large swathe of its locations, choosing instead to operate concessions in larger department stores. Such efforts were too little, too late.

Austin Reed’s administration is another blow to the beleaguered UK retail market, threatening another 1184 jobs in the space. Since 2007, more than a quarter of a million jobs have been lost in retail as more than 350 chains have gone into administration. Times have been hard since the onset of the financial crisis, and the sector’s troubles show little sign of abating. Profitability has been hard to come by and last year saw the highest number of profit warnings announced since the crisis first took hold.

Retail pain             

Consumer tastes are changing, not only in terms of the products they are buying, but the ways in which they are shopping. The internet has had a significant impact on the retail space. Consumers are abandoning ‘brick and mortar’ shopping, opting instead for cheaper and more convenient online portals. The relatively slow growth experienced in the UK economy has also contributed to the pain currently being felt in the retail space. Though unemployment is currently at a record low, wage growth across the UK has remained fairly stagnant. As long as spending power continues to languish, the retail sector will struggle to recover. The introduction of the ‘living wage’, though a boon for lower paid employees over the age of 25, who will benefit from a 50p pay rise above the National Minimum Wage, will be detrimental to retailers, many of whom employ people at relatively low wage levels, and will be required to make up the difference.

At the same time, many consumers are spending more of their disposable income on leisure and entertainment, which is also impacting upon the retail space.

Closed

As more companies in the UK issue profit warnings, the outlook for the nation’s retail space could get worse before it gets better. In April, Next – another fixture of the UK High Street – said that it expects to see “weaker underlying demand for clothing and a potentially wider slow-down in consumer spending” throughout the second half of 2016. To that end, April saw British retailers endure the sharpest drop in sales for eight months as shoppers became more cautious in the face of the slowing economy and the EU referendum, curtailing their spending considerably. Cold weather also played a part in discouraging spending.

With uncertainty high, expect to see more firms on the High Street close their shutters for the final time.

© Financier Worldwide

BY

Richard Summerfield