CoStar Column: Slew of retail and leisure fails have a common denominator

By Stephen Springham - Monday, March 12, 2018 8:00

A number of long-anticipated retail and F&B failures have finally materialised over the last week or so, and there is a common denominator, writes Stephen Springham, Head of Retail Research, Knight Frank

Private equity-owned Toys ‘R Us finally succumbed to administration on the same day as private equity-owned electronics business Maplin. Private equity-owned New Look has subsequently filed for a CVA, in an attempt to cut its rent roll by as much as 60%. On the F&B side, private equity-owned Prezzo has also put forward a CVA that will see 90+ sites close. This follows earlier administrations at private equity-owned burger chain Byrons and private equity-owned Jamie’s Italian.

I think I’ve made my point as to the common denominator between all these failures. It’s a point I’ve made before and the fact that retailers and private equity ownership often make for a toxic mix is a notion I will always stand by. However, despite overwhelming evidence in support of my convictions, other commentators tend to cite alternative reasons. Some of these carry weight, but others are very spurious.

Weak consumer confidence and declining spend are complete red herrings. Despite all expectations to the contrary, the UK consumer is continuing to spend in defiance of all economic logic. Overall retail sales grew by 4.5% in 2017, with some spending categories significantly higher than this – including electricals at 7.0% and clothing at 6.7%. Weak consumer demand is the flimsiest excuses for most retailer failures. The rise of online is another lazy conclusion to reach. Most of the recent retailer failures are established multi-channel operations with an active (if not seamless) online arm. The notion that they have fallen by the wayside because they have been usurped by online pure-plays is as tenuous as it is facile.

Putting ownership to one side, there are more fundamental issues that are undoubtedly a factor in retailer failures. In the case of Maplin, for example, one of the key issues is that gross margins in electricals are notoriously thin. In layman’s terms, it’s very hard to make money in electricals, all the more so in a high-cost environment such as the high street, to which Maplin is still heavily exposed.

The key issue surrounding New Look is perhaps even more fundamental – its product hasn’t been as compelling as many of its competitors for a while now. Fashion retailers are all about product and New Look has clearly played second fiddle on the merchandising side to the likes of Primark and the online pure-plays such as ASOS, Missguided and boohoo. In the case of the pure-plays, the issue is far less that they only operate online, much more that they are excellent retailers who really understand their customers and have a compelling product offer. They are doing the fundamentals of fashion retailing better than New Look, regardless of their channel of operation.

New Look’s store portfolio is not the root of its problems, although like many retailers, it has been guilty of not managing its estate as effectively as it might. It has not been as aggressive as it might have been in weeding out under-performing stores and a number of sites may well be over-rented – this will obviously play out through the CVA process and is a site-by-site issue. Its stores are not necessarily the root of the problem, but it’s an obvious place to make initial cost savings.

But New Look’s property issues are secondary to the more fundamental ones of getting the product right. And, of course, both these issues are subordinate to the small matter of £1.2bn of debt reportedly racked up by past and present private equity owners…

Stephen Springham, Head of Retail Research, Knight Frank

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