The weather seemed to have an effect on our purchasing and it was well reported that sales of clothing during this period was disappointing with many of us choosing to spend our money on leisure and dining out rather than new winter outfits.
Unfortunately for many businesses in the retail sector they rely on the Christmas sales to bolster the reserves. For some shops on the high street the final quarter makes up around 40% of annual sales. As a result of our modest spending, so far in 2016 we have seen the high street chains Blue Inc and Brantano both being placed into administration.
For those who have managed to weather the disappointing sales period they will shortly be approaching the notorious March rent quarter day. A bad start to the year could find business unable to pay the rent in March and this common occurrence can prove perilous for businesses with unrelenting landlords or where there are underperforming sites.
How can this be prevented? We think that companies will need to look carefully at why they believe they are in this position. Is it simply a blip because of the unseasonal weather or is it a regular occurrence when they return to work each New Year? Is there an element of human error to blame, whether that be on general overheads or perhaps because of purchasing too much stock for the Christmas period leading to large discounted sales at much reduced profit levels.
Experts in the retail sector believe that the future for retailers like these seem to be towards multichannel businesses that can cater for the peaks and troughs being experienced in the UK economy. Examples of this include tie-ins with other retailers, parcel collection services or introducing food retail to non-food stores.
BHS, who were sold last year for £1 by billionaire Philip Green have recently secured a £10m turnaround loan from the company that had attempted to save Blockbuster before its demise in 2013. With the investment taking security on major BHS assets, it is anticipated that the funds will be used to rebrand the troubled chain and to roll out BHS Food, an idea originally piloted by Philip Green in 2014 with positive results.
The usual way for not only the larger, high street chains, to deal with a bad run of months with increasing landlord pressure due to missed rent payments is through a pre pack administration. We have seen this with Theo Paphitis’ La Senza and the Black Leisure sale to JD Sports. A pre-pack administration entails the whole or part of a sale arranged prior to a business entering an insolvency process and sold immediately upon the appointment of administrators. Pre-pack administrations have received some bad press over the recent years, particularly where a company is sold back to the owners, which has resulted recently in the government attempting to place better governance on the procedure.
Many insolvency practitioners still believe that a well thought out pre-pack administration can turn a situation around and provide a positive outcome for the company and creditors involved. I have recently completed a pre-pack of a garden equipment supplier and it was a great result compared to the other options available to the company. The new change in governance appears surround the transparency of the pre appointment discussions and the reporting of this to creditors so that they can have the full picture as to why it was the best deal in the circumstances, an approach that we have always strived to achieve at Portland. In an attempt to prevent calls of wrongdoing, if the pre-pack sale of a business is to a connected party there is now a ‘pre pack pool’ which is essentially a group of individuals that would review the sale before it is completed to ensure it is in the best interests of all concerned.
Unfortunately we might see a few more retail casualties shortly if the weather starts to move into spring climate. Perhaps not from the larger stores but some of the smaller independents that purchased winter stock and now find themselves unable to release the expected profit from it.