Erin Brookes, managing director and head of retail at Alvarez & Marsal, discusses how the restructuring firm behind Cath Kidston’s administration and footwear retailer Office’s sale process is spotting vulnerable retailers in the current retail climate.
This is the most challenging thing that retail has ever had to experience. I cannot think of a time like this in my lifetime – it is truly unprecedented.
The latest ONS figures show just how dire it has been for retail: British retail sales fell by the largest amount on record in March. Everything has shut down from a physical perspective – it is a total shock to the system. Britain is known for being a nation of shopkeepers, and nearly all are closed for business.
Fashion in the eyes of the administrator
Alvarez & Marsal believes fashion is set for most the significant contraction in the market: around 22%. The reason for that is the huge pressure on discretionary purchases. People are focusing on essentials because there is so much concern about personal finances. So fashion falls into the contraction category.
The market will contract by value and by volume. Consumers will be much more price conscious. We were already starting to see more discounting going on, and this is persisting through this crisis. People have stock they have to shift, so I would expect that, as we get closer to June, we are going to see a lot more discounting.
Survival will depend on stakeholders, private equity owners, lenders, whatever their finance mix is
The outlook is also challenging for autumn/winter. Retailers are having to make commitments to suppliers, and it is very difficult to call demand right now, considering the complete uncertainty.
I do, however, think that subject to catastrophic situations with supply, there ultimately will be demand for the autumn 20 season. Consumers will want to buy some clothing, as there will be things that need to be replaced. For example, children continue to grow, so demand for kidswear is strong.
It is hard to believe given the situation we’re in at the moment, but some businesses are doing very well. Boohoo is doing amazingly with its value-led proposition and incredible assortment. There have been concerns about ethical positions of fast fashion and low-priced players, but they will be doing everything they can do to ensure supply is there. Boohoo is really well positioned.
Spotting vulnerable retailers
However, the future for the rest of retail is going to look very different. By autumn we may not have everyone on the same high street. There will be a shake-up of retailers that will already have had issues: retailers that are simply operating in a total cash drain at the moment. Survival will depend on stakeholders, private equity owners, lenders, whatever their funding mix is, as to how long they’ll be supported through that.
The story of these retailers had already started to be told pre-coronavirus. We’ve had some really challenged retailers in that fashion middle market. Karen Millen is no longer on the high street, while LK Bennett is still is going through its administration process. It tends to be those retailers that are dependent on higher-ticket items who are struggling.
There is real pressure on occasionwear, too. This sector was challenged before, and coronavirus is just exacerbating the situation.
What we’ve been saying is that businesses have to focus on the well-being of staff
As a restructuring expert, Alvarez & Marsal is looking at businesses with low ecommerce penetration as being particularly vulnerable. To be set up in this crisis, you have to have an excellent ecommerce platform.
The key things to watch out for are businesses with lower-than-average ecommerce penetration and businesses that rely on some of the sub-sectors in fashion where we won’t see demand for a while – for example, occasionwear, going out, footwear and workwear.
For the retailers that were struggling beforehand, this won’t have helped. Even for businesses that didn’t have issues, pressure on the top line is now completely unprecedented.
How to avoid the inevitable
Clients are coming to us for several big reasons: trying to figure out how to secure some financing – for example, extending facilities with the bank – managing dialogue with stakeholders, focusing on cash, looking at expenditure and asking ‘how do we navigate this’, while also wanting to know what the future looks like.
What we’ve been saying is that businesses have to focus on the well-being of staff and ensuring they are well communicated with. We’ve been helping them focus on cash, running through different scenarios and revenue situations, trying to plan how any reactivation of business as usual would happen, and advising them to take advantage of government support available.
People now shopping online for food and other items won’t go back
At the moment, the advantage of tapping into government support means that there’s a payment holiday going on, including relief on rent and payroll. But the reality is that when things get back to normal, there will be no government support. Businesses will need to right-size and change operations for the revenue they’ll be expecting.
We will look back on this and see it’s created an absolute step change in how retailing works in the UK and in Europe. I think this will lead to two fundamental changes:
- Moving to turnover rent. We cannot continue operating with volatility. We can’t continue expecting a vibrant high street where online shopping means that retail revenues are under pressure and rent is only going up. I think one big change is we will get is a more mutual relationship with landlords. That creates a partnership with tenants and property owners.
- Ecommerce has already been growing, but this is going to push penetration of ecommerce up across all sectors. Consumers will be much more familiar ordering things online that they didn’t before. The delivery proposition will need to get better, and returns need to improve. People now shopping online for food and other items won’t go back.