Inconvenient Truth


Failing businesses must face some harsh truths and evolve if they are to survive.

Date September 2013

Featured in the Business Reporter in the Sunday Telegraph

Much has been written about the beleaguered retail sector over the past ten months, with high-profile casualties HMV, Blockbuster and Republic hitting the headlines at the start of 2013 and kicking off a challenging year for retailers.

While the casualties are from different consumer products sectors, there are some consistent themes that can be traced back to the pre-financial crisis era: balance sheet issues with over-leverage featuring significantly, no investment and liquidity to effect change, over-rented estates, increasing online competition, and management ill-equipped to deal with today’s retail challenges.

Add to these issues such as supplier nervousness, poor consumer confidence and lower disposable income, and you have a basket of problems with no easy fix. These are once-in-a-generation issues that require structural changes before we hit calmer waters.

But with these issues come opportunities for retail stakeholders to “right-size” structural and balance-sheet issues to position for success. Landlords, owners, investors, lenders and suppliers have to pick the winners to support, where the basic retail proposition has a continuing reason to exist, and back these businesses to succeed.

The retail sector is no different to any other in that obsolescence is a fact of life. It needs to be dealt with, not swept under the carpet. Eventually the “ostrich” effect typically produces a worse outcome for all. The retail casualty list proves previous light-touch pruning, often championed by CVAs (Company Voluntary Arrangements), has not produced many happy outcomes, and sometimes preferred one creditor class over another when more deserving cases have become apparent. The inconvenient truth is that not all retail businesses deserve to survive. Several chains were established during the boom times on the back of high leverage, low investment and questionable business models, with little modern-day relevance to the consumer.

Insolvent restructuring, using administration, has to be the way to go for deserving cases, to renegotiate affordable rents and replace over-leverage with new liquidity. Practitioners and investors have to weed out deserving cases whose business models have a reason to exist. The test is easy – can the business produce enough four-wall contribution to make a positive profit and return for its investor or owner, while paying current market rents and bills on sensible credit terms? Does it have a credible digital offering to complement its stores? And is the central function fit for purpose or bloated and dysfunctional? If rescues could be done out of court, so much the better, but these situations have too many moving parts and time pressures, making this route fraught with danger and uncertainty.

The message is simple – apply the test then apply the solution. Is the concept obsolete or does it have legs? If it’s the latter, stakeholders need to give it the chance it deserves, because second chances are now in very short supply.