The High Street continues to change apace with well-known brands struggling to survive in the midst of the Covid-19 outbreak. Administrators have announced that Warehouse and Oasis, part of the Hilco group, are to permanently close with the loss of more than 1,800 jobs after they had failed to secure a rescue deal for the fashion chains.
Warehouse and Oasis have been familiar brands on our High Streets since 1976 and 1991 respectively. In the year up to 2 March 2019, the fashion chains actually saw an EBITDA increase by 20% with total sales up by 6.5% and online sales increasing by 17%. However, sales from concessions within House of Fraser were impacted when the department store went into administration and further pressure was put on the brands when the government announced restrictions on non-essential businesses on 24 March 2020.
Whilst lockdown was seemingly not the only factor in the failure of these brands, it was likely to have been the straw that broke the camel’s back and forced the closure. The circumstances that Warehouse and Oasis have found themselves in are by no means unique. High Street giant H&M reported a 46% plummet in sales for March 2020. In the UK, the government lockdown has forced non-essential shops to close and put simply; consumers don’t spend as much money on clothes when they have nowhere to go!
Whilst clothing sales decline, one area which has remained buoyant is fitness and health. The whole country seems to have taken up running or cycling, however, Halfords has recently announced that it will be closing all of its Cycle Republic stores, putting 226 jobs at risk. This is indicative of the extremely tough trading conditions at the moment for traditional bricks and mortar outlets. Halfords’ decision to close Cycle Republic stores was driven by their intention to focus on its online cycling business, Tredz.
It was clear to any customer of Warehouse and Oasis that they hadn’t harnessed the potential of online sales in the same way that other brands have successfully done. While Next stores remain closed, it recently restarted its online business having made sweeping changes to its supply chain so that it can comply with government guidelines and deliver products to customers. Retailers who have a sole online presence have seen a surge in sales during lockdown; Asos has reported a sales increase of 26%.
Brands which focus on traditional High Street shops, with all of their associated overheads such as rent and staff have been struggling and will continue to struggle. Consumers want more; a strong online presence and, if they are going to venture into a store, they want an experience which makes it worth their while, think Apple and Nike Town or personalised services which John Lewis offers at flagship stores.
It is clear that bricks and mortar retailing is suffering, and with the three drivers of this pain being rent, rates and staff costs, what more can be done to slow the decline? From a landscaping perspective, this decline makes a real difference to the State’s coffers: online retailers make a lesser (meaning nil) contribution to local authorities’ rates’ budgets, and anyone watching the news headlines over the last three financial years will already have understood that online retailers’ contribution to the Exchequer generally is questionable. With profit mitigation strategies such as brand charges, and trading in our communities supposedly happening in Luxembourg or Ireland, the taxation of global online brands may now snap into focus.
In the short term, bricks and mortar retailers need the ability to mothball their businesses. The closure of Warehouse and Oasis follows news that Debenhams, Laura Ashley and Cath Kidston have also called in Administrators in the past couple of months. If brands don’t adapt (and quickly) there will surely be more to follow. This is a present risk, and also one that will continue when lockdown eases; whilst employee furlough, rates, tax and VAT reliefs help in lockdown, the postponed debt bubble will arrive at precisely the time that reduced turnover would make a business in any other circumstances plainly uneconomic. It is clear that there will need to be some sort of taper relief for business re-opening under social distancing rules. How else will a 200 cover restaurant survive with 50 covers across socially distanced tables?
For companies emerging from lockdown, it may be that the “right-sized” business needs a fresh start, and we anticipate a wave of restructurings through classical administrations and company voluntary arrangements. If Cycle Surgery is to close, what of the other High Street leisure retailers? Hiking, climbing and running retailers might well follow.
In view of the prescribed three statutory purposes, an administration is not a stand-still device. The administrators of Oasis and Warehouse have recognised this, and the profession’s recent nudge towards “light touch” administration would not have helped. A CVA presents its own procedural challenges, and so perhaps there is no better time for the introduction of the rumoured debtor in possession process to be contained in the government’s forthcoming Corporate Insolvency and Governance Bill?
Please contact Claire Sansome, Simeon Gilchrist or any member of Edwin Coe’s Business Protection Team to discuss any of the issues discussed in this update.