It’s hard to remember when so much happened in UK retail in just a single week. Over the past seven days there have been several significant announcements, including the 12,000 jobs at risk as JD Sports pulled out of possible Debenhams takeover talks and the administrators then announcing last Monday evening that stores would close once stock had been sold through.

This was followed less than 12 hour later by the news that there were another 13,000 jobs at risk as Sir Philip Green’s Arcadia Group (including such well-known retail brands as Topshop, Topman, Burtons, Evans, Miss Selfridge, Dorothy Perkins, Outfit and Wallis) fell into administration.

Because of these two huge retail stories some other significant retail news last week was almost overlooked. There were a further 1500 retail jobs at risk as Bonmarche fell into administration again. Ann Summers planned a CVA to cut rent on 25 of its stores and Primark, one of UK retail’s real success stories over the past few years, took a huge estimated sales £430m hit from the Governments second wave lockdown closures across England during November.

 Meanwhile, in the grocery sector most major players were tripping over themselves to announce they would pay back the ‘business rates holiday’ the Governments provided to all retailers back at the start of the crisis.  

This was the result of Tesco’s decision last Wednesday morning to repay some £585m of COVID-19 business rate relief, which then caused a rapid ‘domino effect’ across UK Grocery, which at the current time has resulted in almost £2bn of business rates relief being handed back, presumably initially to HMRC and then onto HM Treasury, although the precise mechanics of how this will actually work have yet been confirmed.

There have since then been sensible calls from the retail sector to use this to provide support to the thousands of small and non-essential retailers that have been so hard hit by these lockdown closures. Others have also called for it to be diverted to the wet pubs and other hospitality venues that have also be so damaged by lockdowns and the various tier restrictions. The Government haven’t made any statement yet but there is of course concern that this unexpected ‘windfall’ from the grocery sector to Government will have already been allocated or spent.

 Grocers, as ‘essential retailers’ were allowed to remain open during both national ‘lockdowns’ and so have seen soaring food sales as more people eat at home, with eating out in restaurants and cafes not possible for much of the past nine months, as well as millions of people working from home.

There have been thousands of words written about some of the background to these recent retail problems and failures and many of the challenges (online shopping, too many stores etc.) have been discussed at length before. However, there was one interesting, and common, theme behind the demise of both Debenhams and the Arcadia Group which I thought was interesting. Mentioned indirectly by both the Times and the Telegraph coverage last week it was particularly highlighted by Tom Brathwaite in an opinion piece in last Friday’s Financial Times.

I thought this was worth revisiting but in summary both these retail groups have struggled for years due to the consequences of financial engineering in the early 2000’s and at a time when leverage was in fashion.

 Back in 2003, private equity backers won a long battle to buy Debenhams. They raised £1.1bn of debt to pay for Debenhams and then quickly shifted it onto the balance sheet. They then then refinanced those loans with bonds and paid themselves a huge £130m dividend after only a few months Then, in 2005, they then engineered a series of sale and leaseback deals. They sold off 23 of Debenhams’ store freeholds – including those in such prime locations such as Oxford Street, Manchester, Cardiff and Chester – for £495m. Debenhams then leased them back for very long leases of 30 years (and 35 years in the case of the Oxford Street and Manchester stores). 

In just three years, Debenhams private equity investors owners – CVC Capital Partners, TPG Capital and Merrill Lynch Private Equity, tripled their £600m investment. This period of private equity ownership enriched its backers with £1.2 billion in dividends, but it also starved the department store chain of investment required to survive longer term, loaded it with debt and trapped Debenhams with very long rent agreements.

Debenhams was then re-listed on the stock market in 2006 but the high fixed costs with which it was burdened made it impossible to invest in its hundreds of stores and so really compete with the new online competition it was now facing.

 Philip Green (as he then was) bought Arcadia in 2002 mostly with borrowed money, took the company private, cut costs and refinanced the business. He subsequently bought BHS (and audaciously also tried to buy Marks & Spencer in 2004) In 2005, he then paid his wife (the ultimate owner of Arcadia and who was domiciled in tax-free Monaco) a £1.2 billion dividend in 2005, three years after buying Arcadia for £850 million.

However his business reputation was significantly tarnished when in 2015, he sold British Home Stores for just £1 to Dominic Chappell, who was a serial bankrupt without any retail experience (and who was jailed last month for six years for tax evasion) BHS fell into administration in 2016, with the loss of 11,000 jobs and a £571m pension deficit, leading to an outcry that eventually forced Green (following legal action from the Pensions Regulator and an MPs’ inquiry) to pay £353m to support the pension scheme.

So it might be argued that the demise of both Debenhams and Arcadia, which finally came to a head this week, actually began in the early part of this century and by similar greedy and irresponsible (although not illegal) actions by their owners at that time.

However the difference is that the private equity owners who many believe effectively signed Debenhams death warrant have long left the stage, whereas Philip Green has remained in the full glare of publicity as the face of Arcadia and has never really been out of the news.

He has therefore come under much more scrutiny by the ‘court of public opinion’ including politicians and the press. This is very unlikely to decrease over the coming months as the administration of Arcadia, and the reported pension fund deficit comes under the spotlight in a way which was never going to happen in the case of Debenhams.

 

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Clarence Choe