Anyone reading the news headlines in the past week could be forgiven for thinking we were back in the dark days of 2008 when retailers were falling like dominoes.
This week BHS has plunged into administration, putting 11,000 jobs at risk, while Austin Reed appointed Alix Partners as administrator on Tuesday. These are both retailers with a fine and long-established British pedigree, which in the case of Austin Reed goes back to a shop on Fenchurch Street, EC3, which first opened its doors in 1900.
Both companies are now at the mercy of an administration process where potential buyers, including vulture funds, will pick over the meaty bits of the carcasses of once highly profitable and relevant retailers.
There is no doubt that buyers and structured transactions of some sort will be completed in both cases as there is still some value left, particularly in Austin Reed. However, the real question to ask is what is really at the heart of this recent distress in the retail sector.
Administrations aside, as one retail market expert said to me: “If both Next and Primark are struggling then you know there is a real problem on the high street”.
It is a valid point. The two stalwarts of the high street, which for years have reported only rising sales and profits, have both found the going tough of late. Simon Wolfson, chief executive of Next, has even gone as far as to warn of a slowdown “which could lead to a recession” in the clothing sector.
And overall, if you take a look at the FTSE All-share General Retailers’ Index, it has had a horrible year so far, falling by 8% compared with a broadly flat FTSE All-share performance. This is because of the dire trading of some of the listed retailers within the 58-stock strong sector.
For example, shares in Poundland and Mothercare have fallen by more than 40% in the past 12 months after weak trading updates. Poundland’s decline is a result of its difficulties in digesting the acquisition of 99p Stores. By the time Poundland finally got it hands on 99p Stores it was running on empty. Mothercare’s once-storming international division is dragging down the benefits of the turnaround in the performance of its UK store portfolio.
Russ Mould, an investment director at AJ Bell, which looks at wider trends facing the retail industry on both sides of the Atlantic, says there has been some positive retail outperformance within the index. The share price of London-listed electronics retailer Darty has more than doubled in the past year as a result of a bidding war between FNAC of France and the aggressive South African group Steinhoff. JD Sports and Boohoo.com have soared too.
Share prices are notoriously fickle, but the wider point to note here is that there is increasing investor caution about the retail industry, particularly the fashion retailers. A lower oil price and modest wage growth are leading to rising consumer confidence but spending seems to be going on big-ticket items – cars, home improvement and holidays – and smaller treats such as dining, leisure and entertainment. Footwear and apparel has suddenly become the poor relation.
Retailers need to be aware of that, if they are not already. With less spending to go around it is becoming increasingly hard to get to the top of the retailing food chain and stay there. Success means coming up with an omni-channel strategy, figuring out how best to affordably run a store while remaining price sensitive and managing the cost base, which is even higher now as a result of the Living Wage and business rates.
If retailers can’t crack that conundrum, then they face an uncertain future or collapse, as in the case of BHS. While the story will for weeks be dogged with the furore over Sir Philip Green, Dominic Chappell and the investigation by the pension regulator, the ultimate cause of its collapse is that people do not want to shop there any more.
A failure to invest in its stores or improve its range and adapt to changing shopper habits means that BHS has been in its death throes for years.
Owners of retailers facing similar challenges should be warned. Maximising profits and dividend payments today while failing to invest in a business could ultimately spell disaster.
Deirdre Hipwell is retail and M&A correspondent at The Times
