It’s time for a retail clean-up

When sales of scratchcards soar we know that consumer confidence has reached a particularly low ebb - or so the logic goes.

A more telling indicator is the recent decline in fortunes of star performers John Lewis and Primark, which points to a long, tough ride for UK retail.

We believe the sector is at the start of a period of far-reaching restructuring, which will see the withdrawal of a further 10% to 15% of non-food capacity over the next three to five years.

Such a deep and protracted space cull sounds drastic, particularly if LDC’s assertion that average vacancy rates across UK high streets have already reached 14.5%. But the sustained weak macro-economic climate, coupled with ongoing changes in how consumers shop, demands a ‘once in a generation’ clean-up, followed by an uncompromising focus on turnaround and repositioning for growth.

The shape and pace of restructuring will vary by sector. ‘Structurally challenged’ sectors such as entertainment where online specialists have altered the rules of engagement will continue to see the most intense and immediate shake-out - look no further than HMV’s travails.

Yet much of the restructuring across the wider sector will be the realignment of store portfolios by relatively healthy retailers. Carpetright’s intended closure of seven Irish stores and a broader plan to downsize 10% of its portfolio provide a perfect example.

Distressed retail situations will constitute most restructurings over the next few years.

In terms of company-led processes, the days of the CVA are seemingly numbered. Retailers such as JJB coming back for a second bite of the cherry, increasing pushback from landlords and backlash by other retailers all represent nails in the CVA coffin. Expect more pre-pack administrations accompanied by a more holistic approach to restructuring the subsequent newco - restructuring based on retail proposition and strategy, rather than the band-aid that many CVAs have turned out to be.

We’re also likely to see more bank-led insolvencies. The expected rise in interest rates could put more pressure on retailers’ ability to service their debts, but on the other side, rising bank profits will increasingly prompt lenders to crystallise bad debt write-downs.

However, out of the ashes of an administration, good companies can emerge. Take one of our recent deals, British Bookshops and Stationers. Having acquired the debt of the struggling 51-store chain, initiated a formal insolvency process and taken full operational control, we were able to implement actions that drove a like-for-like sales uplift of more than 50%. These actions created a solid platform for evaluating longer-term options - 22 stores were sold to WHSmith, saving more than 200 jobs.

There’s no denying that the next few years will be a white knuckle ride. Some will not make it (including a few major players), but talk of UK retail’s death knell are way overstated.

The banal maxim about strong brands with a differentiated retail offer and service proposition ultimately thriving is true, but so is the converse, which no amount of financial reengineering will solve.

Gavin George European managing director, GA Europe