The decline and fall of a British institution

26 March 2018

The High Street scene is changing as more and more big-name retailers put up the shutters.

Retailers under pressure

Woolworths and BHS are no more than a fond memory, and in the last few years other prominent retailers have followed their path into oblivion. But they are not the end of the story of the decline of our High Streets. In the last couple of weeks both the John Lewis – Waitrose Group and Next reported drastic reductions in profits. According to the Centre for Retail Research, since the recession in 2008 there have been 29 failures of large retail chains, involving the closure of 11,601 stores and the loss of nearly half a million jobs. The most recent high profile casualties have been Maplin Electronics and Toys R Us.

These statistics deal only with large businesses. Small ones are also affected. There are 220,000 retail premises in the UK, and one prediction states that by 2030 100,000 of these will have disappeared, by which time 40% of all sales will be online. Online fashion sales now represent 21% of the total and this proportion is expected to rise to 63% over the next 10 years.

John Lewis, who have fought back by increasing their internet sales to 25% of turnover, nevertheless continue to face challenges. In the 52 weeks ended 27 January 2018, sales were up 2% compared to 2017, but profit before tax, exceptional items and employees’ bonuses were down 21.9%. After exceptional items of £111 million and other charges pre-tax profits suffered a drop of 77%. The nature of the exceptional items tells a story: these related to restructuring and redundancy, and branch impairment – reflecting the changing patterns of High Street trade. The Chairman blamed “intensifying margin pressure at Waitrose, the weakness of Sterling and subdued consumer demand”.

New Look, which is closing 60 stores as a preliminary to seeking an arrangement with its creditors, attributed its problems to pressures from online and discount rivals, increased labour costs and lower consumer confidence. Sales fell 6.3% compared to the previous year and the firm made a loss of £123.5 million. The final straw was a credit insurer declining cover to its suppliers.

Maplin Electronics, like New Look, also finally collapsed when credit insurance was withheld from its suppliers. Sales had fallen by 7% over the Christmas period and it was burdened with debt.

Restaurants as well

It would be simplistic to blame online trading for all of the ills of the High Street. Restaurant chains are also faltering. The Café Rouge and Bella Italia Group reported losses of £60 million last year. Jamie’s Italian is closing branches and Prezzo has announced the closure of 94 restaurants as it enters a creditors’ voluntary arrangement. Strada is to close 10 out of its 26 sites. The underlying reasons are a rise in the cost of imported food due to the devaluation of Sterling, the Apprenticeship Levy, the increase in the National Living Wage and Workplace Pensions. Another factor is increased competition from delivery services such as Deliveroo, Just Eat and Uber Eats.

The Private Equity factor

More in-depth analysis reveals another cause of the malaise. One recurring factor is the involvement of private equity investors or venture capitalists. New Look, Prezzo, Strada and Maplins are all owned by private equity companies. A glance at the most recent accounts of Maplin Electronics reveals that the seeds of its failure were sown in 2014 when it was bought for £85m by Rutland Partners LLP. The deal was structured in such a way that most of the purchase price and acquisition costs ended up as a loan on the balance sheet. The annual rate of interest on the loan was 15%. As no repayments or interest charges were actually paid by the company, the interest was added to the loan each year increasing the liabilities on the balance sheet.

The interest charges were shown as a cost on the profit and loss account. So in 2017 the operating profit was £2.4m, from which was deducted interest payable on the Rutland loan notes of more than £12m. The 15% return was far greater than any investor could expect to receive and far more than the company could ever generate from normal trading and growth. The unrealistic debt burden no doubt contributed to the lack of confidence which provoked the credit insurers to withdraw their support. Included among the losers are the venture capitalists themselves who will see nothing of their investment. All rather pointless you might say.

The retail and restaurant businesses which have been so much a feature of our town centres have enough problems to contend with without the imposition of unrealistic venture capital deals that burden them with unmanageable debt.

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