House of Fraser's woes is about more than e-commerce and real estate

British high street
iStock_Yokaew_AW
Share this content
Tags

The High Street resembles a graveyard in 2018: every single month this year has witnessed store closures, job losses and administration. That’s a total of 35,000 jobs lost or at risk.

Toys R Us, Jamie Oliver’s restaurant chain,  Mothercare, Carpetright, and now, most recently, House of Fraser are just a few of the big-name victims of a seemingly intractable High Street slump.

House of Fraser has resorted to a company voluntary arrangement (CVA). It’s a type of insolvency that allows a business to renegotiate its deals with creditors and landlords, but at a steep cost: store closures and laying off staff.

The iconic department store will be shutting down 31 locations, and 6,000 people will lose their jobs as part of the CVA. House of Fraser’s chief exec Alex Williamson told the Press Association that its CVA proposals were the “last viable” option to save the business.

“It is a highly emotional, highly regrettable situation that none of us either imagined or wanted to see happen, but there is simply no alternative,” Williamson said.

Why is this happening?

The usual suspect in the ‘Who killed the High Street’ murder mystery is e-commerce. Amazon, in particular, hovers imperiously over the retail landscape. But as Diginomica’s Stuart Lauchlan explained, it’s a simplistic explanation to a strategic problem.

Modern retail demands a convenient blend between online and instore, and the Old World opulence of department stores, in particular, have failed to catch up. Department stores are expensive to run and the last few years have seen rents and business rates rise alongside the introduction of the National Living Wage.

House of Fraser is actually an exception - the firm invested in e-commerce at an early stage - but “it failed to address the ‘drag’ of its legacy real estate until too late in the day”.

Business rates, in particular, have hobbled House of Fraser, a retail chain known for its sprawling stores. Recent expert estimates suggested that it had been saddled with a £120m business rates tax bill in England and Wales as a result of last year’s revaluation.

In Wolverhampton alone, House of Fraser’s store location faced an estimated rates bill of around £470,000 next year based on the rateable value of £925,000 for the huge site, according to the property services group Colliers International.

The closure of over half its stores under the CVA will ostensibly help put things on an even keel (that is, if the landlords accept the deal’s terms). But Richard Hyman, an independent retail analyst who has worked in the industry for over three decades, is dubious.

"House of Fraser is essentially saying it can’t make a living on Oxford Street with these closures, that it can’t make a living in the centre of Edinburgh or Birmingham,” Hyman said. “If it can’t get the right bums on seats in those key shopping locations, then I’m not feeling overly confident.

“My big question is ‘Will shutting a large number of stores make them a better retailer?’ The answer is no.”

Is the High Street dead?

House of Fraser’s struggles are a precursor to a bigger retail apocalypse, according to Hyman. And it’s not just down to one factor but a combination of numerous, damaging trends

“There’s rarely one thing and this is no exception,” said Hyman. “There are a number of external things going on: Brexit, the consumer economy hasn’t ever recovered post-debt crisis. It’s looked as though it has recovered, but it has mainly been illusory.

“There’s a lot of structural factors that are driving this. There’s too much capacity: online shopping has reached £60bn of sales in a 15-year period. But it’s not added to spending: that £60bn, had online not been invented, would’ve gone through the shops.”

So it’s a case of massive new costs, but no additional revenue. And the private equity model has really magnified the cracks in the economic models of a lot of businesses, said Hyman. “The old private equity model is okay in a growth market. The consumer economy has always grown. But that’s over.”

There’s less space at the retail table now, but Hyman said there still are success stories. “If you look at the successful retailers: Primark, Asos, Aldi, Lidl, Selfridges, Zara; they all understand exactly who their customer is. It’s built into their business model. It’s not something that’s characteristic of most retailers. They’ve grown fat and flabby by chasing too much peripheral business."

Selfridges, a chain of high end department stores, has recently enjoyed record profits of £180m and a 16% rise in sales. Where Selfridges has excelled, according Dan Higgot of CADA Design, a retail design consultancy, because it realised "that to create a destination required more than just range or quality". "By offering customers theatre and experience through events, themed campaigns, pop-ups and some social campaigning, Selfridges has maintained, and grown in, relevance over the last two decades," Higgot said.

Ultimately, its important to avoid excessively pigeon-holed conclusions, concluded Richard Hyman. "It’s not all about online. It’s more difficult and this is not a market where if you tick a few formulaic boxes, you’re alright. It’s about how you execute as well.”

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

Replies

Please login or register to join the discussion.

avatar
12th Jun 2018 12:09

If technology is not fully to blame now it will be in due course as it inexorably improves.

Thanks (0)
avatar
to Justin Bryant
13th Jun 2018 09:08

Justin - it's not technology to blame but the customer. Many have never liked trekking around shops and now they've been offered an alternative they've grabbed it with both hands. Find a way to make shopping more enjoyable than the internet and the current online option will be dropped like a hot potato. Clearly the "high street" needs to get its thinking cap on before it dies out completely.

Thanks (2)
avatar
to rememberscarborough
13th Jun 2018 09:39

That's like saying it's not guns to blame; it's the gun owners.

Thanks (0)
12th Jun 2018 17:23

High-streets are still priced (through rents and business rates) as prime locations.

This is no longer the case, and until on a macro level rents and business rate fall dramatically then retailers will fall over one by one. The market place for rents is very "sticky" with long leases being the norm.

Been watching this happen at a local level for some time in small towns as the CBD is contracting and flats replacing town centre shops and offices, but it seems to be hitting the larger towns now too.

I am not in the least bit surprised personally, I rarely go "to the shops" myself.

Thanks (2)
avatar
14th Jun 2018 10:27

For a serio-comic vision of how the UK might look in the future, see Adam Robert's novel The R-Town Murders: a "locked room" murder mystery in which a victim is found in the boot of a new car at a car factory run entirely by robots and AI computers. The whole factory is under 100% multi-camera surveillance, so how did the body get there, is the question initially faced by our heroine detective, though events spiral from there.

The novel is set in R-town!, or the city of Reading, renamed by the town council in a futile attempt at rebranding to persuade people to visit it. Most production, transportation, farming and services in this future world have been fully automated via AI-enabled robots; 70% of humans rarely leave their houses, preferring to be plugged most of the time into the "Shine", a vastly powerful and immersive descendent of the internet; the streets are largely empty of people and traffic, except for unconscious people being shuffled around like zombies in exo-skeleton suits, designed to force them to exercise and stop their muscles from atrophying, but without obliging them to leave the virtual realities and economies of the Shine.

In such a world, where VR is vastly more attractive than anything the real world has to offer, retail shops and businesses in city centres have almost completely died out, and been replaced by server farms and distribution warehouses; "going to the shops" is a long-dead concept, just like "going to the gym", "commuting" and "going on holiday".

Thanks (3)
14th Jun 2018 10:58

I agree with Ireallyshouldknow. The questions being asked are why are retailers not surviving in this environment, but shouldn't they be framed another way? - why are landlords and councils continuing to charge exorbitant rents/rates when the whole retail landscape has changed.

Contrary to popular belief, I believe people actually like shops. Visit a town like Whitstable here in Kent and it is thriving. Why? Because it has a host of small, independent, quirky shops. But shops like these operate on lower margins and need lower rents and rates.

If we want high streets worth visiting in the future, that means the landlords and councils are the ones who are going to have to move out of the 20th century and into the 21st by realising that they cannot charge prime rates for locations that become only economically viable for Estate Agents.

Thanks (1)
avatar
14th Jun 2018 11:23

"The usual suspect in the ‘Who killed the High Street’ murder mystery is e-commerce. Amazon, in particular, hovers imperiously over the retail landscape. But as Diginomica’s Stuart Lauchlan explained, it’s a simplistic explanation to a strategic problem."

"There’s too much capacity: online shopping has reached £60bn of sales in a 15-year period. But it’s not added to spending: that £60bn, had online not been invented, would’ve gone through the shops.”

Well see the elephant in the room, compared to that £60bn of displaced sales a bit f theatre and few pop ups is well, a drop, or something, in the ocean certainly there are issues such as business rates but that would be bearable with higher sales.

The lost sales when customers "buy something in Luxembourg" from a company that contributes little or nothing to the cost of the country's infrastructure that it depends on and distributes from out of town distribution centres built on farmland (food self-sufficiency at around 60% down from 79% in 1984, [***]-hits-fan?) where the UK then subsidies it through in work benefits IS the problem.

Having said that the HoF has been a basket case for years.

Regards

A Formerdepartmentstoremanager

Thanks (0)
avatar
14th Jun 2018 11:23

"The usual suspect in the ‘Who killed the High Street’ murder mystery is e-commerce. Amazon, in particular, hovers imperiously over the retail landscape. But as Diginomica’s Stuart Lauchlan explained, it’s a simplistic explanation to a strategic problem."

"There’s too much capacity: online shopping has reached £60bn of sales in a 15-year period. But it’s not added to spending: that £60bn, had online not been invented, would’ve gone through the shops.”

Well see the elephant in the room, compared to that £60bn of displaced sales a bit f theatre and few pop ups is well, a drop, or something, in the ocean certainly there are issues such as business rates but that would be bearable with higher sales.

The lost sales when customers "buy something in Luxembourg" from a company that contributes little or nothing to the cost of the country's infrastructure that it depends on and distributes from out of town distribution centres built on farmland (food self-sufficiency at around 60% down from 79% in 1984, [***]-hits-fan?) where the UK then subsidies it through in work benefits IS the problem.

Having said that the HoF has been a basket case for years.

Regards

A Formerdepartmentstoremanager

Thanks (0)
avatar
By Bix
16th Jun 2018 14:14

It is certainly the case that is a complex picture. I can't help but feel that the challenges faced by the high street are symptomatic of the cultural and societal changes that we are facing. Certainly, in the UK we are becoming inherently more selfish (me, mine and I dominate our thinking) and value the communities we live in less.

Choice would be another thing valued less. Certainly compared to low price and ease because our leisure time is precious and we can't afford to waste it on anything as mundane as going to the shops! We are even happy to turn a blind eye to questionable ethical standards if "me and mine" is satisfied.

Who gives a stuff about a few shops or for that matter the harm people and the environment face around the world. I'm all right jack.

I am of course being deliberately provocative but I am certainly of the view that unless the human race changes direction, the least of our concerns will be the high-street.

Thanks (0)