It has been a pretty dismal year for the UK retail sector. Toys R Us, Poundworld and Maplin disappeared from the high street completely and the likes of New Look and House of Fraser – among others – resorted to company voluntary agreements (CVAs) to ensure their survival.
It is a trend that shows no sign of abating. In October, the month that historically kicks off the sector’s golden quarter when retailers earn the bulk of their annual profits, UK retail sales only increased by 0.1% on a like-for-like basis compared with October 2017.
Analysts think it’s only a matter of time before the sector sees further casualties. So which retailers are more likely to feel the pinch and what can landlords do to protect themselves from the fallout?
The retailer that is the greatest cause of concern for many landlords is Debenhams, which, as Andrew Phipps, managing director of Intelligent Horizon and former CBRE UK and EMEA head of retail research, puts it, “lurches from one crisis to another”.
In October, it posted an annual loss of more than £500m for the year to 1 September, due largely to exceptional write-downs. To arrest its decline, the group set out a plan to shrink its 165-store portfolio by a third over the next three to five years. However, many retail experts are sceptical about whether this will be enough to save the business.
“Fifty stores only scratches the surface of its problems,” says Phipps. “There are lots of other stores that just don’t make any money.”
The department store operator’s woes are not just linked to poor-performing stores. Earlier this year, the retailer reportedly faced a severe cash crunch after insurer Euler Hermes reduced cover for the chain’s suppliers, while credit insurance firms Atradius and Coface were understood to be refusing to cover new shipments.
Without insurance protection, suppliers typically demand money up front on goods or stop trading with retailers altogether. This trend is not exclusive to Debenhams; New Look, Arcadia and Oasis have also had their credit cut or reduced in recent months.
Find out more - Retail trends: the high street paradox
“The withdrawal of credit insurance to suppliers of a particular retailer is worrying and tends to be an early warning sign of business failure,” says Jonathan De Mello, retail director of Harper Dennis Hobbs. “Credit insurers have a generally negative view of the retail sector – particularly fashion retailers – and this may be behind the withdrawal of insurance to certain retailers recently.”
This creates major cashflow issues for already struggling retailers and, De Mello adds, “can unfortunately be a tipping point for some retailers, particularly if it happens before the key Christmas period, where significant sums of cash are typically injected into most retailers”.
These cashflow pressures led Debenhams to call in KPMG in September to assess its options, including the potential sale of Scandinavian chain Magasin du Nord, which it is hoping could raise up to £200m.
However, the consensus among a number of retail sources is that this won’t be enough and that the group is heading for a CVA.
“Can they really close 50 stores in five years?” says one source. “It’s going to be hard. Some of their leases will expire but probably only about 10%, so they’ll probably have to do something a little more drastic to exit those stores, such as a CVA or pre-pack.”
Another retail expert questions whether Debenhams is eligible for a CVA, as a business is required to be making a loss before it enters into such an agreement – if you ignore the exceptional write-downs that were included in its recent trading update, the retailer actually made a profit of around £33m for the year to 1 September.
Retail sources are quick to point out that even if Debenhams could agree a CVA with its landlords, the hard work would not be over. As one senior-level source puts it: “A CVA does one thing and one thing only: it relieves certain burdens connected to your real estate portfolio.
“It gives you a six- to 12-month window to change the way your business operates and to fix some of the more operational and customer-centric issues the business faces. It doesn’t make your product any better or your supply chain any more efficient and it doesn’t change your management team.”
Just ask any of the flood of retailers and food and beverage (F&B) operators that have completed a CVA in the past year. Despite Toys R Us successfully launching a CVA, it failed to save the chain. Other operators have also struggled to turn the corner having completed a CVA.
Some retail sources believe that House of Fraser, which pushed through a CVA in August, isn’t long for this world. Property Week understands that some landlords are already eyeing up new long-term replacement tenants to occupy the company’s stores.
“The [Mike Ashley] deal was a giant stock deal, with licences to trade some stores in the short term,” explains one senior-level source. “No property liabilities were taken and there doesn’t seem to be any interest in trading [the stores] longer than 12 months.”
In addition to seeking new retail tenants, it is rumoured that House of Fraser landlords are also exploring part-retail solutions for stores, including partial residential and hotel conversions – a move that may be made easier by proposals announced in the Budget to make it simpler to change a retail building’s use.
Paul Martin, head of retail at KPMG, says changing use classes “will be absolutely necessary if we want to address the potential ghost-town scenario. If there is 20% to 30% too much space on the high street and a lack of tenants wanting to take this space, you can either leave it empty or think about repurposing it. We have a shortage of housing in this country, so it seems to be a bit of a no-brainer.”
Martin adds that the big question is “whether the chancellor’s announcement means this [change of use] process will be encouraged – will it be simplified and how quickly will that filter down to local government, where actual planning permission happens?”
Another source warns that landlords could face further pressure as retailers begin to take a much tougher stance on their property portfolios across the board, including an “aggressive” stance around lease expiries, renewals and rents.
“Corporate failure aside, retailers are becoming very tough on negotiating portfolio changes. This is all based on there being more stock in the market, with landlords under a lot of pressure, so there’s an impression that good retailers can push really hard on their portfolios,” says the source.
High rents have been a particular problem for the F&B sector, where a number of rapidly expanding restaurant brands signed up to competitive leases when the market was booming.
“A lot of the brands were pressed by [their] private equity houses to open a number of sites over the past few years and have perhaps had to sign up to high rents and occupational costs, which makes their chances of making any money marginal,” says Camilla Topham, restaurant expert and director at consultancy Distrkt.
This is an especially pertinent point for the branded or chain restaurant groups, says Topham, as consumer spending on eating out continues to slow down – data published by MCA in July showed the eating-out sector is growing at its slowest rate for five years.
She adds that millennials are also playing a role in this market shift as they are better travelled and want a more authentic dining experience, so are increasingly turning away from “cookie-cutter” experiences.
Julie Palmer, regional managing partner at Insolvency firm Begbies Traynor, adds: “The problem with [casual dining] brands is that they’re expensive to promote and position, the fit-out costs are huge and if you’re only getting loyalty for six to 12 months off your customer base then that’s a very risky play.”
These pressures will start to bite particularly early in the new year when rents are due, according to James Shorthouse, Colliers International’s head of alternative markets.
Many F&B sources express concern about the future of operators such as Byron and the over-saturated pizza and pasta market.
However, they could be offered some respite if Shorthouse is right in his belief that it is only a matter of time before landlords start to reduce rents.
“With hindsight, some rents that were agreed were unsustainable and now that’s coming home to roost,” he says. “From a landlord’s perspective, the issue is that if you do re-let at a lower rent then you change the tone of the market, so they will try to preserve the level of rent they have now seen or would like to see.”
He says landlords may try and achieve this with incentives such as rent-free periods or contributions to fit-out, but generally the trend “has to be that rents will be coming down”.
For many businesses in the retail sector, the sooner this happens the better. Until then, however, the primary objective for a lot of retailers and F&B operators is making it through the upcoming festive period intact. Even for those that do survive into 2019, it may not be a happy new year given the ongoing battle for Britain’s high streets.