In the first article in this week’s two-part focus on retail insolvency, Andrew Martin and Andy Bates look at how the sector can evolve to face its financial challenges – and how bricks-and-mortar still has its place in that transformation.
Seemingly not a day passes without a report of yet another retail casualty, with an ever-lengthening list of household names facing financial distress, and in some cases insolvency.
Predictions that the “death of the high street” is nigh have been floated since the financial crisis, and the current landscape is doing little to calm the nerves of many.
However, there may be light at the end of the tunnel. There will always be winners and losers in retail – such is the challenge of adapting to evolving consumer demand – and there are significant lessons the industry should be taking note of now to ensure firms are fit for the future.
The property conundrum
According to statistics from PwC, 2017 saw 14 retail chain store closures per day, and 2018 has been coloured so far with the demise of a number of well-known brands. There are, of course, several factors at play that are placing strain on the industry.
On the one hand, retailers are facing a rising cost burden – not least including employment and, critically, business rates – while on the other they are continuing to respond to the growing pervasiveness of online retail and e-commerce. Connected to this, online fulfilment brings its own cost burden for retailers – chiefly through delivery, returns and inventory. In this climate, some operators (and investors) are reassessing their portfolios to downsize or, more accurately, right-size holdings. This is particularly true of the large supermarkets, which have previously expanded beyond their traditional remit of food sales, and moved towards the hypermarket model of being “all things to all people”. They now are facing up to the challenge wrought by the discounters and the rise of convenience shopping to seek more product-appropriate and customer-centric sites.
This same dynamic is happening in the wider retail market, which is arguably even more exposed to the consumer trend towards convenience shopping.
With customers increasingly making their purchase through digital platforms (of all stripes), the question that emerges is: just what role does bricks-and-mortar need to play in the retail mix? The struggles of the likes of BHS, Toys R Us, Carpetright and New Look have in common the fact that these retailers were operating from expansive property portfolios, with stores of a huge square-footage and very often on long leases – the costs of which added up to a financially untenable situation when coupled with dwindling in-store transactions and limited, or no, online presence. In some cases, a 25-year lease, agreed in a very different retail environment to the one we now find ourselves in, might see an occupier paying double the rent it would pay if it did the deal today.
The CVA as a solution
In this environment it is little wonder that retailers facing financial distress may want to seek to alleviate their costs by attempting to lower their rent liabilities – and the company voluntary arrangement, or CVA, is one possible solution. A CVA is a formal insolvency procedure (in that they require supervision by a licensed insolvency practitioner) and is a means by which a company can seek to rescue itself by agreeing with creditors (75% of whom, by value, must be in favour) to restructure the payment of liabilities. The upside for creditors is that keeping a company in business may prove a better outcome in the long term than the company going into administration.
It is worth noting that, taking a purely statistical view, insolvencies overall continue to be on a downward trend, with CVAs in 2017 at their lowest levels since 2008. Further, the store closures that PwC noted in 2017 (14 per day) were actually the lowest levels of closures since 2010.
However, clearly all is not rosy and the “noise” levels around retail failures is more to do with the scale of the brands in question rather than the volume of failures overall.
Needless to say, there have been vocal opponents to CVAs as their usage has gathered attention (for more on that, turn to “CVAs – Blame the game or the player?” on page 54).
If a CVA is to be pursued, the solution should be determined based on the interests of all relevant stakeholders.
Pre-emptive action
Addressing under-performance is not a simple task, though it is certainly made more difficult as it spreads across a retailer’s store portfolio. Those businesses that ride the bumps more smoothly are those that are not afraid of continual operational restructuring, and who critically assess their business (dispassionately), including its property assets and liabilities, on an ongoing and proactive basis.
Continuous reviewing of underperforming stores and finessing of the business while things are good (or at least not in a distressed situation) requires discipline, but the benefits can be significant.
For some, though (and this is potentially understandable given the debates playing out in the press), it is an over-simplification to say that the problem resides chiefly with property liabilities.
Coupled with the rising importance of online retail – the World Economic Forum estimates that global e-commerce penetration is expected to grow from 10% to 40% over the next decade – the extent to which a physical store is even required for successful retailing is a conversation not unheard of.
However, simply shutting stores is not a panacea. The core issue lies with the underlying business model and the re-imagining of what bricks-and-mortar is actually for within the new retail reality and the customer’s transactional journey.
Physical space still has an important role to play, a fact highlighted when we consider the number of examples there are of online retailers making the move to incorporate some level of bricks and mortar in their offering. Amazon is, of course, a notable trailblazer, but there have been more specialist retailers – like Sofa.com – making the transition, as well as Missguided, bucking the trend for “fast fashion” being the purview of the online operators.
Fundamentally, a significant proportion of transactions still occur in stores, while physical presence and the associated direct interaction with consumers plays a crucial role in brand awareness, customer acquisition and engagement.
It is important to remember, too, that there are examples – perhaps most notably Primark – of retailers performing well without a significant online offering at all.
Shaping up the shop
What will never change is that bad retail will always be bad retail, no matter the circumstances or prevailing trends. Any retailer that fails to evolve and adapt will be left behind and the failures we have seen have been a casualty of that fact. In the case of Toys R Us, for instance, the brand was arguably slow to react to, and integrate its bricks-and-mortar with, the modern world of “experiential” and digital engagement – continuing to put product first instead of people and play.
This factor is increasingly key to retail success, with good retail more and more integrated with leisure and lifestyle – giving rise to the “shoppertainment” phenomenon where customer experience is key to both increasing dwell time in store, and increasing the probability of sales transactions, whether they occur offline or online.
Apple, for instance, has re-imagined the “store” as a customer engagement centre built around the advice, service and, more broadly, customer buy-in to the Apple brand (or, you may argue, “way of life”).
Of course, there isn’t a one-size fits all model for retail. There remains a polarisation in the market between high end/prime and value/convenience. In some ways this is widening, with many of the retail failures we have seen occurring in the mid-tier, where there is a risk of lack of differentiation.
The future is flexible
One factor is key: the new world of retail requires flexibility at its core. In the same way as co-working has shaken up the office market, and co-living is beginning to affect the PRS residential market, landlords will come to think of their spaces and places in terms of curation rather than simply occupation.
At the same time, retailers demand and require the ability to flex their space up and down in line with evolving consumer demands, and the ability to incorporate new complementary services and experiences within their space. This will require a rethink of the landlord/tenant relationship, as the traditional long lease and anchor tenant models are put under strain, and innovative solutions that recognise the new role of bricks-and-mortar in what is an ever more connected and multi-channel retail landscape.
Main image: Dinendra Haria/Rex/Shutterstock
Andrew Martin is a partner in real estate and Andy Bates is a partner in business support and restructuring at Addleshaw Goddard
