Wilko: a victim of what exactly?
This week’s Retail Note focuses on the collapse of Wilko and why this is not your typical retailer administration and what chances there are for the business to be salvaged.
9 minutes to read
To receive this regular update straight to your inbox every Friday, subscribe here.
Key Messages
- Wilko enters administration this week
- 1st major retailer failure of 2023
- Buyers for the business not found ahead of deadlines
- Still reportedly a number of interested parties
- Debt markets a constraint to potential PE interest
- Price likely to prove pivotal
- Stores remain open for business
- 400+ stores and 12,000 employees at risk
- Causes of Wilko’s demise not obvious
- ‘Cost of living crisis’ carries limited weight
- Heavy value-led competition much more a factor
- Some operational shortcomings esp. product sourcing?
- Any rescue likely to result in a reduced physical footprint.
A retailer bloodbath was predicted coming into this year, but we’ve had to wait until August for our first big casualty. After months (years?) of speculation and feverish but failed behind-the-scenes rescue activity, Wilkos finally entered administration this week, putting 400+ stores and 12,000 staff at risk.
Two questions: how did it come to this and what is the future of the business? Both difficult questions to answer, for very different reasons.
Ticking none of the ‘failure’ boxes
Any retailer failure and the wise-after-the-event analysts are out in force, either trotting out generic fodder about the state of the economy or the consumer squeeze, or worse still, lazily coming out with supposedly company-specific issues that simply do not apply in the case of Wilko. Apparently, Wilko was/is a terrible business and market conditions are brutal. End of.
Of couse, there is so much more to it than that. Wilko was indeed firmly on our radar, registering on Knight Frank’s fabled retailer ‘watch list’ as a Pink (‘major risk: severely under-performing or CVA/administration rumoured). However, the reasons for this are not the obvious ones. Typically, our ‘watch list’ is determined based on the following criteria.
- Previous distress.
- Ownership structure.
- Trading performance.
- Balance sheet.
- Consumer demand.
- Market rumour.
With Wilko, there is only one firm tick in any of the above boxes, the very last one. ‘Market talk’ is often the least tangible of these criteria and there is a trade off behind the notion of ‘no smoke without fire’ and the dangers of Chinese whispers. But Wilko has been subject to market rumour and scrutiny for a few years now.
Faint ticks, I suppose, also in terms of trading performance, the business having reported an operating loss of £37m in the last financial year (to Jan 2022). But it has been profitable (just) for most years prior to that. Not great financial performance, but not a case of the business hemorrhaging cash for years (compare Wilko’s P&L with one of the more-celebrated and championed online pure-play operators).
In contrast, Wilko has no track record of distress and is not a ‘repeat offender’. In terms of ownership, it sits in one of the seemingly safest camps of all, family ownership. Being a PLC brings transparency and certain financial support mechanisms, while private equity (PE) ownership raises all sorts of red flags. Family ownership is usually a good guarantor against distress in that the owners have a massively vested interest in running the business well, tend to be conservative rather than over-exuberant in their strategic direction and have a more intimate knowledge of ‘their baby’.
Expressed another way, Wilkos is not the typical retail casualty which has been through the PE mill, as so many others were that went before it. It has not been acquired by a fly-by-night faceless operator in a highly leveraged deal, asset-stripped, starved of cash and over-expanded. And then sold on to be someone else’s problem. Thankfully.
The consumer demand argument is also questionable. Obviously, high inflation and the ‘cost-of-living’ crisis are very real things, but are also highly nuanced. As we have explored in previous Retail Notes, we have not seen a complete collapse in consumer demand by any means. Retail sales are running ca. +6% YTD and although volumes are down ca. -2%, this is not nearly as disastrous as it could be.
More cash-strapped consumers are undoubtedly trading down to lower cost operators and discounters. Not a discounter per se, but Wilko is definitely a strong player at the value end of the retailing spectrum. Current market conditions should be playing into its hands, rather than working against it.
A weak, tired brand? Not really, Wilko is a long-established business (established in the 1930s) and there is much residual affection for the brand. Nor is it in any way ostentatious that would leave it prone to the vagaries of being in or out of fashion. It still delivers what its customer base prioritise most - reliability and good value.
A victim of online? Nor does that old chestnut apply. Wilko is already a multi-channel business and while online probably only accounts for a small proportion of its revenue, the majority of its vast product range are small ticket items that do not lend themselves to online. Wilko had little to gain by going hell for leather for online growth and was probably as active in the multi-channel space as it needed to be.
The real reasons
The red herrings are easier to identify than the real reasons. There is not one clear reason for Wilko’s demise – rather, a combination of small things colluding to create something much bigger.
If I were to point the finger at one single factor, it would be the level of competition at the value end of the market. In particular, B&M’s and Home Bargains’ pace of growth has been nothing short of phenomenal over the years. B&M is a £4.5bn+ turnover business with over 1,000 stores: Home Bargains £3.4bn+ with nearly 600 stores. Nor are they Wilko’s only competitors – there is also considerable product and market overlap with Poundland, The Range, Dunelm, Aldi and Lidl, to name but five more. And the competitor set shouldn’t really exclude the Big Four grocers (Tesco, Sainsbury’s, Asda, Morrison’s) either.
The value end of the retail market is an extremely crowded place. Consumers have a multitude of choices. Consumer spend may well be holding up generally and much of it is gravitating towards the value end of the market. But at the end of the day, there is only so much to go around a very broad and diverse retailer base. Wilko is just one of those operators.
It has also been suggested that family ownership structure was as much a hindrance as it was a perceived strength. Was the business managed too conservatively and therefore not as fleet-of-foot as it should have been? Possibly, but very hard to gauge from the outside as an independent observer. There were no obvious strategic clangers. If anything, I suppose most of question marks centre on the business’ product sourcing and supply chain arrangements. Again, there is limited visible evidence to support this notion but this is ‘one of the words on the street’.
Those clever analysts have pointed out the fact that the business was increasingly succumbing to ‘empty shelf syndrome’. This is, in fact, a recent thing, a direct result of it having credit insurance withdrawn. This makes it impossibly hard for any struggling operator to trade its way out of difficulty. Recent ‘empty shelf syndrome’ is an effect, rather than a cause.
Does Wilko have too many stores? It hasn’t been subject to PE-fuelled aggressive over-expansion, nor has it undertaken any major acquisitions over the years. Expansion has always been measured and executed on an organic basis. Is 400 stores too many? Impossible to put a figure on what a ‘perfect’ store count would be without full recourse to the full P&Ls of the entire store portfolio. Inevitably, there will be huge variations in the performance of individual stores and limited rhyme and reason for this (e.g. no regional trends, stores in uncelebrated towns top performers, those in supposedly great locations trading badly etc etc). Invariably, not all stores will be profitable, so there will be a tail, so yes, Wilko probably does have slightly too many stores.
Are Wilko’s stores too big? Most aren’t, some are. Although it will vary by location, some stores are evidently too big for what they are trying to achieve. Possibly 30k sq ft, when probably 20k sq ft would suffice. So, yes, some of Wilko’s stores are slightly over-spaced.
Are Wilko’s stores over-rented? Again, hard to say without all the detail. But Wilko has always taken a relatively conservative approach to expansion and does not have a reputation for committing to silly rents. That said, retail rental tones generally have rebased considerably in recent years, such that passing rent at many of Wilko’s stores will be higher (ca. 10-25%?) than ERV. So, yes, some of Wilko’s store are slightly over-rented.
Slightly over-expanded, slightly over-spaced, slightly over-rented. But three slightlys that probably add up to quite a lot in the grand scheme of things.
The future
As already mentioned, there has been huge behind-the-scenes rescue activity in recent weeks that we are not necessarily privy to. But clearly an initial buyer has not been found ahead of the business going into administration. The timing is not good for potential private equity buyers, rising interest rates continuing to put a straitjacket on debt markets. Macro-economic conditions may have only partially contributed to Wilko’s demise, but in this respect, they are definitely hindering any rescue attempts.
At time of writing, the business is being run by PwC as administrators and the stores are still open and operational. The sense is that many negotiations are ongoing and hopefully a buyer will come forward. We can but speculate, but we would anticipate interest from both trade and private buyers. Presumably, price is pivotal and maybe some suitors are just playing a waiting game. Amidst so much uncertainty, it is impossible to speculate as to how many stores may ultimately close.
As the examples of Woolworths, Debenhams and Arcadia show, no retail business is too big to fail. Sadly, experience has also taught us that sometimes even good retail businesses fail, if not managed well or if they fall under the wrong ownership. Unglamourous as it is, Wilko is fundamentally a good business that remains relevant and has a definite place on the high street. Hopefully this will be enough to secure its future. All fingers crossed.