House of Fraser's woes is about more than ecommerce and real estate

  1. Francois Badenhorst

    Francois Badenhorst Business Editor, UKBF & AWEB Staff Member

    91 18
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    The High Street resembles a graveyard in 2018: every single month this year has witnessed store closures, job losses and administration. That’s a total of 35,000 jobs lost or at risk.

    Toys R Us, Jamie Oliver’s restaurant chain,  Mothercare, Carpetright, and now, most recently, House of Fraser are just a few of the big-name victims of a seemingly intractable High Street slump.

    House of Fraser has resorted to a company voluntary arrangement (CVA). It’s a type of insolvency that allows a business to renegotiate its deals with creditors and landlords, but at a steep cost: store closures and laying off staff.

    The iconic department store will be shutting down 31 locations, and 6,000 people will lose their jobs as part of the CVA. House of Fraser’s chief exec Alex Williamson told the Press Association that its CVA proposals were the “last viable” option to save the business.

    “It is a highly emotional, highly regrettable situation that none of us either imagined or wanted to see happen, but there is simply no alternative,” Williamson said.

    Why is this happening?

    The usual suspect in the ‘Who killed the High Street’ murder mystery is e-commerce. Amazon, in particular, hovers imperiously over the retail landscape. But as Diginomica’s Stuart Lauchlan explained, it’s a simplistic explanation to a strategic problem.

    Modern retail demands a convenient blend between online and instore, and the Old World opulence of department stores, in particular, have failed to catch up. Department stores are expensive to run and the last few years have seen rents and business rates rise alongside the introduction of the National Living Wage.

    House of Fraser is actually an exception - the firm invested in e-commerce at an early stage - but “it failed to address the ‘drag’ of its legacy real estate until too late in the day”.

    Business rates, in particular, have hobbled House of Fraser, a retail chain known for its sprawling stores. Recent expert estimates suggested that it had been saddled with a £120m business rates tax bill in England and Wales as a result of last year’s revaluation.

    In Wolverhampton alone, House of Fraser’s store location faced an estimated rates bill of around £470,000 next year based on the rateable value of £925,000 for the huge site, according to the property services group Colliers International.

    The closure of over half its stores under the CVA will ostensibly help put things on an even keel (that is, if the landlords accept the deal’s terms). But Richard Hyman, an independent retail analyst who has worked in the industry for over three decades, is dubious.

    "House of Fraser is essentially saying it can’t make a living on Oxford Street with these closures, that it can’t make a living in the centre of Edinburgh or Birmingham,” Hyman said. “If it can’t get the right bums on seats in those key shopping locations, then I’m not feeling overly confident.

    “My big question is ‘Will shutting a large number of stores make them a better retailer?’ The answer is no.”

    Is the High Street dead?

    House of Fraser’s struggles are a precursor to a bigger retail apocalypse, according to Hyman. And it’s not just down to one factor but a combination of numerous, damaging trends

    “There’s rarely one thing and this is no exception,” said Hyman. “There are a number of external things going on: Brexit, the consumer economy hasn’t ever recovered post-debt crisis. It’s looked as though it has recovered, but it has mainly been illusory.

    “There’s a lot of structural factors that are driving this. There’s too much capacity: online shopping has reached £60bn of sales in a 15-year period. But it’s not added to spending: that £60bn, had online not been invented, would’ve gone through the shops.”

    So it’s a case of massive new costs, but no additional revenue. And the private equity model has really magnified the cracks in the economic models of a lot of businesses, said Hyman. “The old private equity model is okay in a growth market. The consumer economy has always grown. But that’s over.”

    There’s less space at the retail table now, but Hyman said there still are success stories. “If you look at the successful retailers: Primark, Asos, Aldi, Lidl, Selfridges, Zara; they all understand exactly who their customer is. It’s built into their business model. It’s not something that’s characteristic of most retailers. They’ve grown fat and flabby by chasing too much peripheral business."

    Selfridges, a chain of high end department stores, has recently enjoyed record profits of £180m and a 16% rise in sales. Where Selfridges has excelled, according Dan Higgot of CADA Design, a retail design consultancy, because it realised "that to create a destination required more than just range or quality". "By offering customers theatre and experience through events, themed campaigns, pop-ups and some social campaigning, Selfridges has maintained, and grown in, relevance over the last two decades," Higgot said.

    Ultimately, its important to avoid excessively pigeon-holed conclusions, concluded Richard Hyman. "It’s not all about online. It’s more difficult and this is not a market where if you tick a few formulaic boxes, you’re alright. It’s about how you execute as well.”

  2. Highland Spring

    Highland Spring UKBF Regular Full Member

    137 10
    For me this is like a commercial form of natural selection back in the 1970's there was no online competition and having the commanding position on the high street was the main way to succeed. So there was little competition in the environment. Now to survive retailers have to grow their online sales faster than their peers, otherwise they are edged out. Combine that with living wage, business rates and so on and we see the above.
    Last edited: Jun 15, 2018
    Posted: Jun 15, 2018 By: Highland Spring Member since: Jan 20, 2018
  3. The Byre

    The Byre UKBF Ace Free Member

    9,246 3,654
    Absolute nonsense!

    I have grown tiered of retailers yammering about on-line sales taking their trade away - conveniently forgetting that Aldi and Lidl do not have ANY on-line retail and it is those two that are succeeding most.

    The so-called High Street chains and single retailers have totally ignored some of the most basic rules of business - such things as keeping overheads down, building up equity and maintaining a loyal, well-trained and well-paid staff. What we have both in the UK and US is a collection of bloated and old-fashioned dinosaurs, wallowing in swamps of debt and out-dated structures.

    Hyman put it succinctly when he wrote “If you look at the successful retailers: Primark, Asos, Aldi, Lidl, Selfridges, Zara; they all understand exactly who their customer is. It’s built into their business model. It’s not something that’s characteristic of most retailers. They’ve grown fat and flabby by chasing too much peripheral business."

    Aldi and Lidl are now 'invading' the US and the same thing will happen as is happening here and already happened a long time ago right across Europe. In Germany, that process is called 'Aldifizierung des Marketes' (The Aldifying of the market) and even today, many major retailers refuse to believe that Aldi, Lidl and many other similar companies (mostly dealing with specialised fields such as musical instruments, car sales, electrical equipment, tools, you name it) are pulling the sweeties out of the mouths of their competition.

    The bulk of family food spending happens with just a handful of core items, butter, eggs, cheese, vegetables, meat and fish. If you sell olive oil, you only need to sell two or at most three types - boiled, virgin, extra virgin. You do not need 24 types, all coming from the same giant Spanish factory and taking up valuable shelf space. If you sell discretionary products, such as tools and toys, you sell tools at the beginning of Spring and Summer, when the DIY market wakes up and you sell toys at Christmas.

    Half the toy market happens in the one single month leading up to Christmas - selling toys during the rest of the year just does not make economic sense! Use that self space for something else that does sell at other times of the year - right now, bedding, lighting and other home improvement items.

    The key is to drill down to the core of where your turnover and profits come from. The same rigour applies to costs - what the hell are we spending vast sums on? Rates? Rents? Wages? Debt?

    Do we own the shops or are we providing a collection of landlords with a comfortable living? Are we paying as little as possible for product and are we getting as much rebate as possible for early payment? Are we growing organically from profits, or are we leveraging growth to the benefit of the banks, but not to ourselves? Is product moving through our supply chain as fast as possible, or is it languishing in our distro centres, getting old and costing us money?

    Most importantly - are we a private company, beholden to nobody, or are we at the beck-and-call of shareholders who expect regular dividends?

    And at the core of all these questions is just one question - Who really owns the business?

    Look at it this way - who owns your house? Who owns your car? Who owns your business and the equipment and product?

    So where are the deeds to the house - at your lawyer, or with the mortgage company? Did you pay cash for the car, or is the paperwork with the bank or a leasing company? Is the company building rented or mortgaged - or do you actually really own the damn thing? Is all the equipment and product paid for? Do you have shareholders who expect to be paid for their investment?

    So we are back to that one question - Who really owns the business?

    And it ain't just groceries - The owner of Music Store in Cologne even had a giant Aldi sign behind his desk to make the point of where he is going. He now owns large parts of the UK music instrument retail industry, most notably 'Digital Village' - second only to Thomann in Bavaria. Yes, the UK's largest musical instrument retailer is based in Bavaria and (again) is owned outright by one person.

    The same probably applies to your local newspaper, private radio station and a dozen other enterprises that are falling steadily into the hands of the 'Aldifiers'.

    The UK business world has been obsessed with growth at all costs - growth that exists only with borrowed money, be that share issues, bonds, mortgages, late payments, use of employment agencies, renting shops, leasing anything and everything! In other words, bleeding fixed costs out through a thousand different wounds.

    We call that 'borrow everything' business model Other People's Money!

    OPM is great if you want to astound the neighbours and amaze your family and friends, as you open yet another branch on yet another High Street or retail park, but come the cold winds of Winter . . .

    So as you cut the ribbon on the next Sommerfields, or Safeways and herald the opening of a new Fresh Xpress or Fine Fare, or just bask in the glory that was Netto and New Day Furnishings, Music Zone and Maplins - remember to always ask "Who really owns this company?"
    Posted: Jun 16, 2018 By: The Byre Member since: Aug 13, 2013
  4. Noah

    Noah UKBF Ace Free Member

    1,243 313
    Seems a good analysis overall - not a retail expert myself - but those key factors mentioned in the article are still killers :

    . Austerity taking money out of the real economy (i.e. people's pockets)

    . Punitive business rate increases (which are not wholly dissociated from above)

    While there are successful businesses, there are far more failures, and with the economic pressures as they are, there is very little leeway for getting it wrong. Self-evidently, if you get it just right, every time, you should succeed, but it seems to me a healthy business environment needs to have room for not-quite-right otherwise innovation and variety are stifled.
    Posted: Jun 19, 2018 By: Noah Member since: Sep 1, 2009
    Kat Haylock likes this.
  5. Lee Oakley

    Lee Oakley UKBF Contributor Free Member

    88 22
    I guess there are so many variables but changing consumer shopping habits and business rates do seem to crop up again and again in discussions on the demise of the high street and whilst consumers will decide where and how they spend their money, business rates is something that can, and should be reviewed.

    One thing that strikes me of being so counterproductive for city councils is to offer tax breaks and planning incentives to the likes of Amazon for out of town fulfilment centres, which only puts more pressure on the retailers who are paying far higher city centre business rates which makes the playing field less even.

    If rate paying businesses generate revenue for city councils why are they supporting a business that will pay them less in business rates but then takes sales away from hundreds of other businesses (collectively paying higher city centre rates) and in turn making the high street less accessible (excessive parking fees for example) which reduces the foot traffic.

    In addition to the lost high street retail sales, all the other local businesses such as leisure, food and entertainment suffer and there has been countless arguments that such lack of awareness and poor council planning collectively displaces more retail jobs than are ever created in the fulfilment centres.

    Far from advocating an Amazon backlash I just dont think anyone would disagree that Amazon doesnt need any help so why offer such tax breaks and incentives at the expense of the high street?
    Last edited: Jun 28, 2018
    Posted: Jun 28, 2018 By: Lee Oakley Member since: May 21, 2018
  6. TODonnell

    TODonnell UKBF Ace Full Member

    1,405 214
    - Rents;
    - Rates;
    - Taxes;
    - Online shops which are affected by none of the above.

    Simple maths, simple attrition.

    What's fascinating is that a largish town I know in Ireland prefers to have a ghost town in the centre rather than modify the first two.
    Posted: Jul 24, 2018 By: TODonnell Member since: Sep 23, 2011