Drapers examines the future of footwear chain Footasylum, after its proposed merger with retail giant JD Sports was thwarted by the Competition and Markets Authority
An understandably furious Peter Cowgill has blasted the competition watchdog’s decision to block the proposed multimillion-pound merger between his business and sportswear rival Footasylum. The executive chairman of JD Sports labelled the watchdog’s final ruling – that the deal would leave shoppers worse off – as “absurd, alarming, erroneous, extraordinary and outdated.”
The CMA argues that, as close competitors, the deal between Footasylum and JD Sports would result in consumers having fewer discounts or receiving lower-quality customer service. It reasons that both companies are among a handful of retailers selling sports-inspired casual footwear and fashion to young, trend-conscious consumers. Removing a direct competitor from the market, the CMA argues, would negatively impact shoppers. As a result, JD Sports must now sell Footasylum.
JD Sports has refused to take the decision lying down and is “carefully considering” whether to challenge the move at the Competition Tribunal Appeal. But if it is forced to jettison Footasylum, the future of the footwear chain will be thrown into serious doubt.
The CMA’s decision is not unexpected. It provisionally ruled against the £90m takeover in early February following the second phase of an in-depth investigation into the acquisition. What is surprising, and what no-one could have predicted, is how drastically the UK retail market has changed as a result of the Covid-19 pandemic since the CMA made that provisional decision. The UK high street is now closed. There is very little sign that retailers will be able to get back to business any time soon.
The CMA said that it has taken the impact of the pandemic into account – the “ongoing uncertainty” means JD Sports will be given sufficient time to sell Footasylum to an approved buyer. However, as Pippa Stephens, retail analyst at GlobalData warns, Footasylum will struggle to survive without JD Sports’ backing. The retailer has floundered amid tough trading conditions and high levels of discounting over recent years – two factors only exaggerated by the lockdown.
“Footasylum will no longer be able to piggyback upon JD Sports’ success in the market, with the latter having reported impressive UK growth in recent years, making headway on key competitors like Sports Direct,” Stephens argues. “The UK clothing and footwear market is now set to decline by 30.1% in 2020. Footwear is expected to be the worst hit of the two sectors. Footasylum may not prove to be strong enough to stand on its own two feet in the future, given the impact of Covid-19.”
Her concerns echo Cowgill’s, who argues that smaller retailers such as Footasylum will be disproportionately hit by the accelerated shift online, even after lockdown is lifted. Footasylum is an insignificant online player, the retail boss warned, and relies on concentrated footfall to stores.
“It is extraordinary for the CMA to now require the divestment of Footasylum, in full knowledge of the impact that Covid-19 has had on its operations and, indeed, the retail industry as a whole,” Cowgill said. “We must face the fact that there is significant probability that a prospective purchaser could look to substantially reduce Footasylum’s operations, resulting in a considerable loss of jobs, particularly in the north-west of England, which is entirely at odds with the government’s strategy.”
Even finding that prospective purchaser is not going to be easy in the current retail market, as the failed sale and resulting collapse of Oasis and Warehouse Group last month proved. Although there was reported interest from bidders including Sainsbury’s, Boohoo Group and a consortium of retailers, a sale of the high street chain as a going concern proved impossible. The group will now close its website and stores after failing to find a buyer. A wave of distressed retailers – including TM Lewin and another footwear chain, Office – have also already put themselves up for sale.
Industry insiders have previously told Drapers that although many retail businesses will follow suit, finding a buyer in the current market will not be easy. Who wants to take on a retail business when consumers have no reason to purchase new clothes? It is extremely unlikely that all the fashion businesses looking for a buyer will find one, making more collapses inevitable.
There could also be long-ranging consequences for the future of retail mergers as a result of the CMA’s decision. Retailers wanting to acquire new businesses could be dissuaded if they fear the watchdog will intervene, resulting in large costs and the pressure to find a new buyer, in what will be the toughest market fashion chains have ever faced.