Retail in the midst of a painful revolution
This was the view of Garry Wilson, managing partner at turnaround specialist Endless, who recalls the collapse of Woolworths resulted in £2 billion of revenues being spread around the rest of the high street including Endless investment The Works.
Speaking at the Real Deals UK Mid-market 2012 Conference in London Wilson told delegates there would be other such failures as retailers fail to make the next quarter’s rental call, “This is hopefully the forest fire that was needed to let other retailers prosper.”
But despite this rationalisation he still questioned the appeal of retail to private equity investors. Going into administration means unprofitable stores can be dumped and leases re-negotiated, but Wilson cited the need for investors to give these troubled retailers big injections of working capital.
“Suppliers will be nervous of granting credit to a ‘newco’. We experienced this when we bought TJ Hughes [after it collapsed]. Asian suppliers now want paying up-front so some retailers will need huge investments in them and I can’t see who’ll invest?” he asked.
This is not the only problem, according to Paul Cartwright, managing partner at Rutland Partners, who suggests there are also structural issues facing the industry: “Do people actually want to go into stores. What’s the mix – out-of-town, online, high street? You need to be confident about some things [when investing], but with retail at the moment it is difficult putting pegs in the ground.”
For Andy Bond, chairman of Wiggle and former chief executive of Asda, this situation is exacerbated by the prospect of “four to five years of stagnant growth”, which when combined with the rise of the online channel will, he says force a fundamental re-think of how many stores retailers need.
He cites research from Javelin Group that suggests a clothing retailer previously needed 300 stores for a national presence whereas today 150 will suffice. “The property market has not yet caught up with the fact that there will be no stores growth in retail,” says Bond.
Peter Kemp-Welch, partner at Piper Private Equity, agrees the internet is having a “profound effect” on physical stores and that the recent announcement by Tesco that large stores were not going to be its key focus in the future was a “line in the sand that will wash through the whole of the property market”.
The need for fewer stores is a manifestation of the tough environment driving out the “marginal”, according to Roger Pedder, chairman of Bargain Booze and former chairman of Clarks, who believes the ultimate result could be wide-reaching.
“In a depressed economy it’s the marginal that fail – whether that is stores, retailers or sectors. The high street in many provincial towns is marginal compared with retail parks or the internet,” he argues.
Bond does not believe it is the internet that will necessarily be the death of high street stores and he refutes the argument that online-only merchants like Wiggle will benefit from high street bike retailers such as Evans effectively acting as show rooms for their online rivals.
“I’m not totally pro-internet because the statistics bear out that a huge percentage of in-store purchases have been researched online first. Eighty five per cent of purchases in-store will start online. It’s now a multi-media world. I’d say Evans is benefitting from Wiggle,” he suggests.
Where he thinks online does benefit is from the impressive range it can offer: “The killer for online bikes sites is that while independent stores have 3,000 SKUs Wiggle has 40,000 and 95% are in-stock and we offer next day delivery. Why get cold and wet going to the high street bike shops.”
Although Bobby Hashemi, partner at Risk Capital Partners - that has investments in Giraffe and Patisserie Valerie, says the leisure and hospitality sector has not been affected as much by the internet as the retail industry, he suggests 50% of people look online before visiting a restaurant – often for money-off vouchers. “It is having an effect on marketing as the voucher market is online and this is driving a lot of restaurant marketing,” he says.
But whatever the segment – leisure or retail – there is unanimous agreement that accessing debt is very tough at the moment for most businesses. But there are always exceptions for strong, differentiated operators.
Into this camp sits Wiggle, according to Bond, who says “we did not find it difficult to get debt”. However, he points out that it is an internet-only player that derives 50% of its sales and profits from overseas so it is a much more attractive proposition to banks and investors. “To a bank it fits into a very different bucket than a high street retailer,” he says.
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