Disposal tactics

Last week, Retail Week revealed that Tchibo is offloading nearly half of its UK stores. The decision by the general merchandise retailer-cum-café to publish a list of 33 of its underperforming shops was an unusually bold decision by a retailer trying to get its portfolio into shape.

But with a tough Christmas behind us and an equally rocky year on the cards, the real surprise is not that Tchibo has taken this step, but that there are so few other retailers doing the same. As the costs of running a store continue to outstrip sales growth, will other retailers follow Tchibo’s lead and bite the bullet?

It is a question many may be asking themselves at the moment. A disposal programme creates its own problems but, given the uncertainty on the horizon, it may be a stitch in time for many retailers.

Verdict Research lead analyst Nick Gladding says: “This year will be very challenging for retailers. They will be analysing their stores very carefully and this will increase the pressures on some of the underperforming shops.”

Tchibo’s decision to axe stores will come as a surprise to many. The German retailer made waves in the UK market when it first arrived in 2000 with its unusual combination of a coffee shop and product lines that change on a weekly basis. The business quickly achieved a cult following and the company said it thought the UK could sustain 800 stores.

But times have changed and, having upped its store count to 73, Tchibo is now cutting back on smaller branches. Instead, it will focus on larger standalone stores and its concessions in Sainsbury’s and Somerfield supermarkets.

In the recent past, publishing disposal lists has been the preserve of businesses facing a crisis or receivership. In 2007, a number of high-profile retailers undertook large-scale disposal programmes as a damage limitation measure.

Camera specialist Jessops was forced to sell 81 of its stores in June 2007 in an attempt to stave off disaster in the face of plummeting digital camera prices. The retailer was loaned£67 million on the basis that it would sell many of its high street stores in favour of out-of-town sites. Now the slimmed-down business is on the road to recovery with a smaller portfolio of better-performing stores.

Retail restructuring specialist Hilco bought struggling retailer Stationery Box in late 2006, then last year sold 61 of its 137 stores to Chancerealm, owner of the Ryman and Partners stationery chains.

“Pressures have come to a head recently and there has been a sea change in attitudes to property spending,” says Gladding. “Some retailers are doing this because they have been under pressure and have held on to stores longer than they should have done.”

And it isn’t only retailers that are assessing the size of their portfolios. Earlier this month, respected Credit Suisse analyst Tony Shiret caused a storm when he claimed that the new chief executive of DSGi should close as many as 200 stores – more than a quarter of the company’s entire UK estate.

DSGi was the last major retailer to undertake a large-scale store disposal programme when it marketed for sale many of its high street stores earlier in the decade. But Shiret believes that the growth of online retail means the role of stores will be reduced. “There are always people that want to shop in shops,” says Shiret, “but we think DSGi should manoeuvre down to get ahead of the game.”

The problem is that in a struggling retail market, it isn’t always easy to find tenants for the stores. The retailer collapses of the past two years have created a surplus of units on many high streets and in shopping centres and at the same time a record amount of space is being developed.

However, it is still possible to find takers. After Ponden Mill became one of the first casualties of the gloomy Christmas period, administrator Ernst & Young accepted an offer from value retailer Instore to buy 33 stores. The deal demonstrated the value of putting stores out onto the market, because it showed how successful it can be to allow potential buyers to purchase a chunk of outlets that complement an existing portfolio – particularly when the existing tenant is operating in a similar part of the market as the acquiring retailer.

Savills director of in-town retail John Agnew explains: “It’s a way of seeing if there’s another company willing to take on a package of properties. Lists are useful because there may be retailers in a similar market interested in several stores.”

However, for those not in the distressed position of Ponden Mill, there are drawbacks. Inevitably, the process involves the least profitable stores in a group’s portfolio, which can be very hard to shift. And unless there is a lease break or expiry coming up, the tenant is stuck with the store and has the responsibility for marketing the property and finding a new tenant.

There are also other costs: making staff redundant can be a time-consuming and expensive process. What’s more, the fact that staff know their employer wants to close their store could have a negative impact on morale. And if all else fails and the store is closed, the retailer will have to pay rent and empty rates on the property until its lease expires.

One further issue is that putting properties on the market may be seen as an admission of failure by a retailer and can stigmatise the sites. If a big portfolio is put on the market, the resulting negative comment from the media and the City can hit the business, even if, in terms of profitability, it is the right thing to do. That’s because the purpose of disposal lists has changed in recent times. Whereas 10 years ago their function was to allow retailers to keep their portfolio constantly refreshed, they are increasingly used as a means of staving off disaster.

Whether or not a retailer uses a disposal list depends largely on the scale of the property sale. If it needs to offload a large number of stores in one go, a list will be the most practical and efficient method, but if a smaller package is to be sold then a retailer is likely to behave in a more circumspect way.

The shift in marketing strategies brought about by the internet has also had a huge impact on the way property is bought and sold. Retailers no longer need to spend huge amounts producing glossy marketing campaigns, which might have included brochures and literature such as a disposal list. With the culture for producing printed campaigns naturally ebbing, so too is the tradition of getting all deals out in the open.

Producing a physical marketing package is therefore as much about PR as it is about listing available properties. Cushman & Wakefield partner Martin Acton explains: “If you have a list printed, it may well be out of date by the time it comes out. In some ways it is used as a publicity tool to announce the fact that a retailer has properties available all over the country.”

Whether or not it is even necessary to announce that property is up for grabs is also a point of contention in some cases. If a retailer is struggling, it is often a given that it will consider the sale of some of its sites and that is when canny operators swoop to do so-called off-market deals.

Without announcing the availability of a particular location, a retailer may be in a position to wait for offers to come in and choose the highest. This is a solution for the disposal of individual stores rather than a whole package, but can be commonplace in locations such as Oxford Street, where units come onto the market infrequently.

Last year, Japanese fashion retailer Uniqlo made a bid for the flagship Waterstone’s store on Oxford Street, even though the site had not been included in its recently published disposal list. Despite this, HMV Group, which owns Waterstone’s, accepted Uniqlo’s six-figure bid and released the 45,000 sq ft (4,180 sq m) unit, which had struggled to make money as a bookstore. The space had previously been occupied by Tesco, which also struggled in the location – whether Uniqlo will fare better remains to be seen.

Being open about wanting to sell a large number of underperforming stores has its risks. Reputation can suffer, causing widespread speculation about the soundness of a retailer’s foundation and it can be a costly process. But at a time when costs are under scrutiny, it can be easy for retailers to slip into retaining stores because of vanity, even when they’re making no money. In the present tough trading climate, though, Tchibo’s decision to bite the bullet could be the first of a flood of stores coming onto the market.