By Francesca James
The imminent collapse of the High Street is over hyped despite the doom and gloom currently overshadowing it, according to retail expert Phil Duffy at corporate restructurers, MCR.
“There are few sectors where the effects of the global economic crisis have been more starkly visible than the UK’s retail sector. With the collapse into administration this week of Jane Norman, Habitat and Homeform, the owner of brands such as Moben, Kitchens Direct and Dolphin it is hard to see how the sector could weather the storm, let alone recover.
The most recent official figures showed that UK retail sales fell 1.4% in May, which combined with a business rate increase of over 4%, as well as the structural changes taking place in consumers’ shopping habits, there has been a near intolerable strain on retailers as we have seen this last week.
Shoppers are simply staying at home, ordering more items from the Internet and the effect on high street cash flow is now being felt. What is drawing this to a head is the quarterly rent period, with many retailers simply unable to pay the rent for the past quarter,” added Phil.
Earlier this year figures came to light that the proportion of shops sitting empty in the UK had risen from 12 per cent to 14.5 per cent (as a national average), in just a year. This figure varied by region, with the North West, Yorkshire and Midlands posting figures as high as 21 per cent. The rise in empty high street outlets has been attributed to not only the challenging economic climate, but also a dramatic shift in consumer shopping habits.
“What is needed now more than ever is for retailers to reorganise their businesses and look for effective and appropriate funding solutions andnegotiate with their creditors as opposed to the last resort of going down the restructuring route.
But let us also be clear landlords, who have had years of upward rent reviews, must now rethink their returns which in turn will have a direct impact on their own Loan To Values (LTV).
The issue of LTVs does not just sit with the landlords, it is also an issue that the private equity sector has to consider. During the good times private equity investors built up substantial debts buying retailers. Now is the time to rethink their own expectations on what they can recover from those investments and again this has a direct impact on their own LTV,” continued Phil.
Private equity firms completed $1.2bn-worth of deals in the first quarter of this year alone, according to Dealogic, the data provider. This meant it was the second largest sector by value. However, the figures were heavily skewed by one marquee transaction: the $1bn acquisition of Phones 4u by BC Partners. Excluding this deal, the retail sector would have not even featured in the top 10 of most active sectors for the buyout industry. This is a factor of lower LTV’s as opposed to a lower number of deals.
Phil continued: “Retail has traditionally been a popular destination for private equity firms. The sector has featured in the top five most active sectors for buyout firms in every year since 2005 — except in 2009, when it came eighth.
Over the past few years a lot of deals were done in retail at relatively high valuations and value is an issue. Secondly if you look at the macro environment consumers have far less cash in their pockets, which makes an investment more difficult to justify. That is why now is the time for troubled retailers to focus on reorganising debt as opposed to going down the restructuring route and that means Loan To Value needs to be addressed.”
“Successful retailers have understood what is happening in the market and continued with their investment plans. They have been able to adapt to changes in consumer spending habits and have managed to change and innovate accordingly. The tough climate has forced the retail sector to evolve and evolution leads to more pragmatic, adaptable and stronger organisms. The retail sector will come again, but in what guise and in what landscape, we will have to wait and see,” he concluded.
