Retail: the inconvenient truth
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 beginning of 2013 and kicking off a challenging year for retailers.
Whilst the casualties are from different sectors within the consumer products spectrum, 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 individual disposable income, and you have a basket of problems with no easy fix. These are once-in-a-generation issues that require structural changes to be made before we hit calmer waters.
All doom and gloom you might imagine, 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, with a program of transformational change.
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 that previous light-touch pruning, often championed by CVA’s (Company Voluntary Arrangements), has not produced many happy outcomes, and sometimes preferred one creditor class over another, causing its own issues when more deserving cases have become apparent.
The inconvenient truth is that not all retail businesses deserve to survive. Many do not have a reason to exist among their peers. 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 the deserving cases whose business model has 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 the business 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 realistically these situations have too many moving parts and time pressures, making this route fraught with danger and uncertainty. When this happens value is destroyed.
The message is simple – apply the test and 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.
Fraser Pearce – Senior Managing Director, Investments, Gordon Brothers Europe
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