House of Fraser Continues to Teeter

House of Fraser, the massive department store that began in 1849, in Glasgow, has been making the business headlines for quite some time. After the collapse of BHS, House of Fraser stands on the brink of being the next massive feature of the British High Street to fold. In this post, we will look at the latest developments as the company battles to stay in existence and survive the hostile environment facing High Street retailers, whilst we will also look at the what these developments many mean for the future of British retailers as we continue to move through the economic cycles.

The news of House of Fraser’s troubles broke earlier in the summer, which came on the back of negative financial results last year which detailed that the company had made a net loss of £37 million, with a £53 million drop in revenue. Those financial troubles led to the need to develop a rescue plan to protect the company from the hostile environment within which they operate, and in June of this year they announced that it would be closing 31 of its 59 stores. As part of that rescue plan, there were two specific elements that needed to be realised, and recently those elements have been played out. Today the company managed to come to a legal arrangement with the landlords of the properties they wish to close, after those landlords had sought to take legal action against the closures as part of the ‘Company Voluntary Arrangement’ (CVA) process that we have discussed before here in Financial Regulation Matters. The terms of the arrangement involve the company being allowed to continue the CVA process without running the risk of further litigation from the landlords, with the landlords stating in response that ‘we are pleased with the outcome and hope that our landmark legal challenge sends a clear message to any other companies considering a CVA, on the importance of transparency and fair treatment for all creditors throughout the CVA process’. It has been suggested that inherent weaknesses within the CVA process are being magnified by the increased usage of them, relatively speaking, and that these issues need to be ‘urgently addressed by the industry and by government’, whilst there is also a number of scholarly investigations on this area taking place at the moment.

The second element of House of Fraser’s rescue plan involves finding an entity to invest in the firm, or better yet take it over. It was suggested yesterday that the removal of the legal hurdle presented by the landlords would advance the rescue of the company, but other news recently has presented the company with much larger hurdles. C.banner, a Chinese firm which also owns the toy store Hamley’s, had been in talks with House of Fraser regarding a takeover and a much-needed injection of £70 million. However, C.banner announced last week that it would not be proceeding with that planned takeover/investment, and this stems from the company’s issuance of a profit warning after its share price plunged. It has been mentioned subsequently that Sports Direct founder, Mike Ashley, may be interested in investing, as too may the Alteri Investors vehicle, but apparently those talks are not at an advanced stage. The question is, however, may there be a longer effect stemming from this current period of turmoil.

It should come as no surprise that economic cycle fluctuations will have a demonstrable effect upon sectors such as the retail sector. We have looked previously at the tremendous effect the economic cycle is having upon the dining sector, and it is obvious that the retail sector would struggle also. As leading names on the High Street struggle (John Lewis reported warnings over its, and Waitrose’s performance recently), one would assume that there would be an almost-natural shift towards the ‘price-aggressive discount retailers’. Yet, the collapse of Poundworld recently perhaps flies in the face of that understanding. There has been plenty of research into the connection between the retail sector and its performance during the changing economic cycles, with it being suggested that economic downturns are prime moments for discount retailers to irreversibly take market share from the more respected retailers. That view seems more than sensible, but the collapse of Poundworld forces us, perhaps, to re-evaluate. What then is the differing factor between that economic research and the reality we see in front of us?

The answer, arguably, is Amazon. The massive online retailer is revolutionising the way in which retail companies operate, and is quickly becoming the focus for targeted research as we begin to seek to understand its scope, its role, and its effect. Amazon made the news recently after reporting a profit of $2 billion for the first time in the second quarter, and also for having paid just £4.6 million in tax within the UK. Predictably, this news has resulted in a number of articles within the business (and wider) media regarding the system of corporate taxation, but for us there is another effect which is worth discussing. Earlier this year a columnist asked ‘is this the end of the UK’s retail boom?’ after referring to slumps in spending over usually busy periods (Christmas, and early year periods). However, perhaps the question should be aimed at the presence of a High Street at all. The British High Street is fundamentally changing, with bank branch closures being performed at an accelerated rate, restaurants struggling to cope with the economic climate, and now constitutive components of the traditional High Street model now disappearing. If House of Fraser were to fall, then the loss of BHS and House of Fraser to the British High Street would be massively noticeable. The existence of Amazon is providing the retailing dynamic with a new stimulus, and the sector is being changed irreversibly. Amazon is forcing society into two particular streams: from a retailer perspective, it is forcing retailers to compete online, but the dominance of Amazon in that field is prevalent. From a customer’s perspective, the need to shop on the High Street is ever-diminishing, with better value and more convenience to be had via online retailers. This revolution started in 1994 but did not gather pace until the Financial Crisis took hold, and that is for a good reason – the economic climate is forcing society into the realm of Amazon, and the deteriorating High Street is the proof of that. What is means for the future of the High Street is uncertain, of course, but it is not outside of the realm of possibility that the concept of a ‘High Street’ will be a thing of the past very soon. What the High Street of the future will look like is another question entirely, because the obvious conclusion to make would be that it would be dominated by discounted stores. But with Poundworld’s demise that may not be the case, whilst it is also possible that an economic upturn (although one is surely not forthcoming anytime soon) could reverse these trends mentioned in this post. Whilst that may apply to consumable items i.e. restaurants, it is difficult to see a way back from the brink for the large department stores, which would mark a sea-change for modern living.

Keywords – Retail, UK, House of Fraser, BHS, Investing, @finregmatters