The announcement of House of Fraser’s company voluntary arrangement (CVA) on 7 June showed that one of the grand old dames of the high street is on its knees.
If approved by creditors on 22 June, the department behemoth that once boasted 115 stores will be reduced to only 28 outlets. What went wrong at HoF, and can the retailer turn its fortunes around?
Large legacy store portfolio
The decision to cut 31 stores was higher than many estimates before details of the CVA were released. However, HoF shares a problem with many other department stores – many of its legacy shops are in need of a radical overhaul, while others are no longer in prime retail locations.
The Birmingham store, which is earmarked for closure, is a prime example of HoF’s estate problems, one property adviser told Drapers: “If you take the HoF in Birmingham, it used to be dominant store in the city, but in in recent years Harvey Nichols has opened, they are about to open a whopping great new Primark, and then you have the Bullring and John Lewis near New Street Station. HoF has found itself way down on the list [of stores to visit].”
The sentiment is shared by one former senior staff member at HoF, who said that the decision to cull its Birmingham store, though surprising, was the right one: “Birmingham is a massive store in terms of real estate, but it’s just in the wrong location. It was a millstone around the company’s neck.”
Although the decision to close so many stores took many by surprise, arguably it could be the bold move the firm needs to survive. One retail insider said rival retailers such as Marks & Spencer should follow suit, rather than “twiddling around the edges”.
Lacklustre customer experience
If the CVA is approved, HoF needs to significantly invest in the experience shoppers have when they come through the doors of the stores that survive the cut.
“Retailers need to do more to draw crowds back into their stores. and the world of ‘experiential retail’ has a real opportunity here,” says Natasha Frangos, partner at chartered accountants Haysmacintyre. “Despite the growing dominance of etail, consumers still respond to an inviting physical environment with knowledgeable floor staff who can showcase the products that they are looking for. Adequate training for staff is critical to enable them to create and sell the consumer experience and encourage footfall.”
As one former senior director at HoF says, the business needs to identify who it appeals to and work to get that message across: “My question for HoF would be, in five years’ time, can it deliver on a much more curated product and create reasons for people to say, ’Let’s take the family to HoF’?”
After ploughing millions into a revamp of its online offer, HoF revealed that problems with its relaunch meant it had become “invisible” on Google, leading to a significant drop in revenues. In its half-year results to 29 July 2017, released in September that year, it stated “as a consequence of the disruption to the ecommerce business, online sales were down 9.8% for the period”. The fall was enough for the firm to request funds from its owner, Sanpower Group.
Issues with customer data during the transfer are also believed to have led to a drop in sales.
One former senior manager at HoF said the website problems created a financial hole in the company at precisely the wrong time: “The problems were there to see. If you take the online business, it was supposed to go forward by 15% but instead went back 7%. That’s a big swing already. On top of that, rent increases and rates have had an effect. When people are treading water, it only takes the odd thing to put things out of balance.”
Like many of its high street contemporaries, HoF has found it difficult to wean itself off the discounting drug. House of Fraser’s like-for-like sales and profits fell in the first half of the year, partly as a result of heavy discounting of its legacy in-house womenswear brands. In the 26 weeks to 29 July 2017, like-for-like sales dropped 5.2% compared with 2016.
Business rates woes
The elephant in the room, at least as far as the government is concerned, is the high cost of business rates for bricks-and-mortar retailers compared with their online rivals.
The former senior HoF manager told Drapers: “Two years ago, no-one [in government] listened to the campaign to sort out rates – that is a big, big problem. Department stores cost a lot to run and it doesn’t take much to cause a big difference in the profit and loss.
“Take Oxford Street. There are only two reasons why you would close that store – you weren’t bringing in enough trade, or rents and rates were too high. It might be that rates tipped the balance.”
John Webber, head of business rates at real estate services company Colliers, by the 2021/22 financial year, HoF would have been paying business rates of more than £5m a year on its Oxford Street store: “It’s no wonder HoF had to shut stores, and is trying to reduce its rent bills and even cut its store sizes in some areas. As business rates are tied to rental values, it would be mad not to.”
Lack of investment
Many questions have been raised over the ownership of the business and a lack of investment over the years. One adviser said Sanpower Group had allowed key staff to leave and had been slow to enact the funding drive it said it would when it bought the business in 2014.
Another insider said: “HoF was promised funding, which didn’t materialise. The problem with department store businesses is that they are capital intensive – it’s easy to take money out, but you also have to put money in.
“The new, new owners [Chinese fashion conglomerate C Banner ] are promising another £70m, which is all well and good to say, but show me the money. What happens if they spend £70m building a couple more stores in China?”
CVA to the rescue?
The CVA announced by HoF has been labelled by one agent as the “biggest CVA in history”, but many in the sector believe the retailer had little choice but to take drastic action.
One source close to the situation said: “The CVA is one of the few mechanisms that can keep the business solvent. The HoF headlines could have read ‘11,000 jobs saved by CVA’ instead of ‘6,000 lost’.”
However, businesses that fail to tackle underlying problems after opting to undertake a CVA often fail.
Research by Colliers shows that between 2008 and the end of 2017, 12 retailers undertook a CVA, and, of those, 10 subsequently went into administration. One of the two companies that survived, Mamas and Papas, managed to rescue the business by achieving rent cuts across 95% of its estate and gaining a cash boost of £20m. It also drastically restructured the business in that time.
Of the 10 CVAs that failed, half – including menswear chain Austin Reed – were taken out of administration through pre-pack deals.
If HoF’s CVA is to be a success the business will need to show that it has learned lessons and is implementing them – fast.