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surviving on the high street

5 February 2013

High profile retail failures never seem to be out of the news at the moment. Since Christmas we’ve seen HMV, Jessops and Blockbusters all go into administration, owing creditors significant debt and putting thousands of people’s jobs at risk. Each has its own story to tell but all send a message to the rest of the high street which it ignores at its peril. This month Lawyer Monthly talks to Dominic Offord, Head of Insolvency and Restructuring at Browne Jacobson, about these recent failures and the implications for the long term survival of the high street.

Why have there been so many high profile high street failures in recent months?

Many of the recent failures are older, established businesses that have struggled to adapt to the changes in consumer spending habits – HMV was for example established in 1921 and Jessops in 1935. These businesses are characterised by a large work force and operate out of multiple sites. These sites may no longer be located in the best position and rents may no longer be competitive. The combined work force of these three businesses was approximately 9000 employees operating out of 953 stores.

Jessops had been struggling for some time and had already been restructured via a debt for equity swap with HSBC. However restructuring is only successful when there is a viable underlying business model. The challenge for Jessops was that it faced increasing competition from mobile phones whose picture quality equalled that of many of the non- DSLR cameras. Similarly, Blockbuster and HMV could not compete with online access to electronic media. These sectors are incredibly fast moving and if you are unable to innovate and adapt quickly you can easily be left behind.

Some say that the lack of consumer credit is to blame for the recent increase in failures. Is this something you agree with?

I’m not sure it is necessarily the lack of consumer credit that hasn’t helped. The main drivers are the change in consumer’s habits and their increased desire to try and live within their means. Consumer’s pockets have taken a hammering by the hikes in food and energy prices and the news of high profile business failures have increased job insecurity. This is borne out by figures produced by Office for National Statistics (ONS) that suggest consumers are keeping a tight rein on their spending.

Christmas was disappointing for many retailers. Data from the ONS showed the volume of retail sales dipped by 0.1% between November and December, and by 0.6% to the third and fourth quarters of 2012. The outlook for 2013 has also not been helped by the heavy snowfalls over much of the country which is likely to cause disruption to economic activity and increase the prospect of a triple dip recession.

Consumers are increasingly savvy. The internet and mobile phones mean that retailers have to be price competitive. Consumers have access to price comparison sites and many consumers are prepared to shop around to get best value.

Supermarkets have also had a place in all of this, diversifying in new product ranges beyond traditional food stuffs. The strength of the supermarkets bargaining position with their suppliers and marketing resources mean that it can be a real challenge for those territory the supermarkets decide are fair game.

However the challenges of consumer spending are not bad news for all. Although the economic slowdown has had an impact on the whole of the retail sector some, particularly the budget and discount retailers, have been able to embrace this and where they are perceived to offer value they have benefited.

What has been the impact of online shopping?

Online shopping makes up an increasing share of retail sales, with more than 10% of retail sales now being online, an increase of 1.2 percentage points on December 2011. This equates to more than £68 billion of sales. For HMV and Blockbuster, more and more consumers have access to digital downloads and any anxiety about the security and risks associated with purchasing online are dismissed when the consumers primary focus is now on price.

How are the banks reacting?

The continuing support or otherwise of their banks is probably the most decisive factor in a retail company’s failure. We have all heard about “zombie” companies who are being kept alive by generating just about enough cash to service the interest payments of their debts but not much more. Some estimate that these companies may represent about 1 in 10 of British businesses. Unless companies can adapt to the rapidly changing retail environment then debt will continue to rise and eventually lenders will lose patience as HMV (whose debts exceeded £176 million) will testify.

What is the wider impact on the economy of these failures?

The most obvious casualties are the employees. Whilst some jobs may be saved if a buyer can be found, many former employees will find themselves without a job in a market of rising unemployment. This will have an impact on their family and its spending where the main priority will be to keep a roof over their heads.

Taxpayers also end up picking up the tab to certain employee costs. For example Comet’s collapse left the government with a £23.2 million bill for nearly 6900 ex-employees.

Banks and other lenders also suffer as the bad debt is crystallised on their balance sheet. These losses are also ultimately passed on to their customers by higher interest rates, charges and fees.

Suppliers also suffer not only in terms of continuity of business but also the non-payment of invoices. This can in turn place the supplier in financial difficulty leading to a domino effect of business failures.

Conclusion

Retailers need to learn the lessons of these recent failures. Some retailers are limping along because of the continued support of their banks and other key stakeholders. However they need to take action now if they are going to stand any chance of a long term future. This will involve making some difficult decisions and embracing consumers changing buying habits. Those companies who don’t will find it is often the case of too little too late.

Administration, whilst it is obviously not good news, can be the catalyst through which tough decisions are made. Research by R3, the insolvency trade body, at the end of last year showed that nearly half of jobs were saved in the retail sector. R3 tracked the survival rate of jobs and stores over 18 months including the major retailers such as Blacks, Clinton Cards and Aquascutum. It found that 44% of jobs were preserved during the insolvency process, while 47% of stores survived. The key to that success is obtaining professional insolvency advice as soon as possible.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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