Sunday Retail News Roundup
Birds Eye war with supermarkets, Green fights for BHS millions, Sainsbury's pension black hole, Morrisons cut staff benefits, Sports Direct hopes pay more UK tax, Marks & Spencer profits plunge, M&S store closures, Debenhams creeping predators, Primark owner to boost profits, How Scandi style took over the high street.
Birds Eye has joined the battle with Britain’s supermarkets by threatening to raise the price of products such as fish fingers, chicken nuggets and peas by as much as 12%. The frozen food brand is blaming the crash in the pound for a series of price increases it plans to push through next month. On some product lines, Birds Eye is threatening to shrink pack sizes instead cutting the number of fish fingers in a pack, for example, from 12 to 10 or from 20 to 18. Supermarket bosses are said to be accusing the company, owned in part by billionaire hedge fund tycoon Noam Gottesman, of profiteering” from Britain’s vote to leave the European Union. Wayne Hudson, managing director of Birds Eye UK and Ireland, said: “Many of our raw materials are priced in dollars, and the fall in the value of the pound since the EU referendum has meant that our costs in sterling have risen. Our first priority is always to the people who buy our brands, and we are working to try to absorb these costs as much as possible.” Birds Eye is owned by Nomad Foods, a private equity-style firm listed in New York. It was set up by Martin Franklin, a serial dealmaker, and Gottesman, one of the co-founders of the hedge fund GLG. Nomad, which also owns the continental European operations of Crispy Pancakes maker Findus, had sales of €2.1bn (£1.8bn) last year and underlying earnings of €345.2m, giving it a profit margin of 16.8%. In contrast, Tesco’s operating profit margin was 1.2%.
Sir Philip Green is locked in a tug-of-war with administrators to BHS over a £35m charge held by his Arcadia Group empire over the collapsed department store. FRP Advisory, one of two firms picking through the ruins of BHS, is understood to be investigating whether that £35m can be distributed to all creditors of the company, including its retirement scheme, which is being bailed out by the Pension Protection Fund (PPF). Green is understood to be arguing that it should be returned to him alone. A source close to the tycoon said he planned to use it as part of any settlement with the Pensions Regulator. The wrangle over Arcadia’s £35m charge illustrates how Green has sought to recoup as much as possible from BHS. He wrote off £200m of loans when he sold the department store for £1 in March last year, but kept in place £40m, which had been reduced to £35m by the time BHS went under. FRP, which was appointed by the PPF, is understood to be arguing that Green’s right to the £35m has been forfeited as he is a “connected party” to BHS and the charge was in place for less than two years. That would allow the administrator to share the proceeds among all creditors, the PPF being the biggest. Green is understood to be arguing that he is not a connected party, meaning that the charge stands. His spokesman said Duff & Phelps, the other BHS administrator, had confirmed the charge’s validity.
Mail on Sunday.
Sainsbury's pension deficit is understood to have ballooned to £1billion this year as weak markets have undermined retirement schemes at major blue-chip firms. The soaring deficit, set to be revealed in this week’s half-year results, will further highlight the damage the low value of Government bonds is wreaking on pension funds, particularly in the retail sector, which has hundreds of thousands of pension fund members. Sainsbury’s has been hit by the reduction in yields on Government bonds, also known as gilts. In addition it has taken on the liabilities of the scheme run by retail chain Argos, which it took over in April. The issue of pension funds has been thrown into the spotlight this year after the collapse of BHS. It emerged last month that Tesco’s deficit had soared from £3.2billion earlier this year to £5.9billion.
MPs have accused Morrisons of axing staff benefits to fund the £40million cost of preparing for the new minimum wage. The supermarket has watered down longstanding pay arrangements, abolishing paid breaks and the Sunday rate. The 15-minute breaks earned staff £1.73 a time, while they used to be paid time-and-a-half for working on Sundays, according to evidence presented to Parliament. Morrisons announced a year ago it would raise basic pay from £6.93 to £8.20 an hour in March this year. The firm pointed out this was well above the statutory rate of £7.20, introduced in April, which is set to rise to £9 an hour in April 2020. The rise brought wages in line with those of German discount rival Lidl, which was the first supermarket to raise pay last year. The supermarket, which employs 125,000 staff, is the latest to be drawn into a growing row over cuts to benefits as firms seek ways to fund the cost of the pay rise. Firms already embroiled in the wages spat with MPs include Marks & Spencer, B&Q, supermarket supply giant 2 Sisters and Ginsters pasty maker Samworth Brothers.
Sports Direct, the retailer run by controversial billionaire Mike Ashley, has been given the green light to pursue a legal case that his firm hopes would see it paying substantially more tax in the UK. The case relates to the overseas sale of goods from its website on which it charges and pays millions of pounds in VAT. EU rules require Sports Direct and other firms to pay VAT in dozens of member states, based on where shoppers are when making purchases. But Sports Direct believes it has developed a structure that would allow it to simplify the complex tax requirements and instead switch to paying more VAT in the UK. It has set up a delivery firm, Etail Services Limited, which offers delivery at the shopper’s request and which it hopes means Sports Direct’s responsibility for paying the tax is confined to the UK.
Marks & Spencer is set to announce this week that profits are down by a fifth. Profits at the group are expected to have dropped by about 20 per cent to £218million, according to broker Investec. Clothing and home sales, measured at stores open for at least a year, are expected to have declined by as much as 5 per cent. The company is also set to say food sales on the same basis were flat. M&S will announce the closure of about 30 of its 940 UK stores and there will be heavy pruning of its portfolio of international outlets in countries such as France and China.
Marks & Spencer is set to close some stores. Britain’s favourite retailer is this week expected to shut a slew of shops, many overseas, including flagship Paris outlet, but also a couple of dozen in the UK. This is good news because it is a tentative sign that the group is grappling with the real strategic challenges that it, and the whole retail sector, are facing. For years the strategy of shop groups was simple: open more stores because that will increase sales and so profits will rise. It made being a retail boss remarkably straightforward. That simple formula ceased working quite a long time ago and many of our biggest groups have yet to realise, so signs that M&S is adapting are to be welcomed. The retail landscape has changed. Online shopping is continuing to rise, but much of its growth is not new sales, it is people choosing to buy online rather than visit a store. Shops, however, cost money: they have to pay rates and rents and, if owned outright, they tie up capital that might be better invested elsewhere. If they are not adding sales they are a liability.
Now is a pretty tough time to be a UK retailer, no matter who you are. Even John Lewis, Next and Primark, probably the industry’s stand-out names over the past two decades, are showing signs of real strain. BHS has bitten the dust, M&S is looking to scale back overseas, and the bonds of Matalan, New Look and House of Fraser have all tumbled in recent weeks as the outlook for the high street deteriorates. As ever, where the majority see only pain and misery, a minority spy opportunity, a chance to profit from the uncertainty. Usually it is hedge funds, and it’s just a question of who they go after. This year they have placed big bets against supermarket giants Tesco and Sainsbury’s. Now House of Fraser is under assault after a pack of hedge funds snapped up its bonds on the cheap. It’s easy to see why the venerable chain has been targeted. It has racked up five years of losses.
Primark owner Associated British Foods is expected to deliver a small rise in annual profits this week despite the discount fashion chain’s growth at older UK stores running out of steam. ABF is expected to post a 2pc increase in pre-tax profits to £1.05bn, compared with £1.03bn a year earlier. City analysts predict the group, which also owns food brands Ryvita and Twinings tea as well as a sugar business, will lift revenues from £12.8bn to £13.1bn. In September the company blamed unseasonable weather for the company suffering its first fall in like-for-like sales in the UK for 16 years. ABF also warned that Primark would suffer lower profits next year because the slump in sterling had made importing clothing from overseas more expensive. The impact of Brexit on the retail sector will be in sharp focus this week with a slew of results from Superdry-owner Supergroup, Sainsbury’s, Burberry, Halfords and Marks & Spencer.
During the first half of this decade, if you looked hard enough, any man with an interest in style was dressed like a Scandinavian. Fast-forward to this winter, and it seems that we are all Scandinavians now. When Topman launches a “Malmö collection”, it’s the same cosy aesthetic that helped make The Killing’s Sofie Gråbøl a star that has clearly achieved total hegemony on the British high street. From chains like River Island to more upmarket retailers like Matches and Mr Porter, to a display at Harvey Nichols based on the lifestyle of the modern Nordic male, “Scandi” is everywhere. Clothes of sturdy simplicity are summoning up the spirit of “hygge”, the Danish candidate for word of the year which translates as warm conviviality in a cold climate.
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