The Retail Note | Homebase: Private Equity provided a house, not a home
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Key Messages
- Acquired by CDS (owner of The Range) through pre-pack deal
- CDS takes on ca. 70 stores, brand name and intellectual property
- Retained stores will gradually be re-branded as The Range
- Homebase brand relegated to online-only status
- Administrator seeking interest on the 50 other sites
- All stores likely to be re-absorbed by other players
- Homebase’s demise comes as little surprise
- Business has been subject to an endless merry-go-round of ownerships
- Hilco bought the business for £1 in 2018
- Unlikely to spark contagion of wider occupier fall-out
- Retail distress actually fairly muted
- 2024 is shaping up to be the 4th quietest year for physical retail distress
- KF Retailer Watchlist identifies 58 operators ‘At Risk’
- 31 multi-channel operators, 27 online pure-plays.
A once-good business left to drift, a subsequent merry-go-round of ownerships pushing it over the edge. Obviously more to it than that, but that is essentially the reason behind Homebase’s ultimate demise.
That it has come to this is no surprise. Homebase has long been on Knight Frank’s Retailer Watchlist, ticking many of the boxes that raise the dreaded red flags. As we have so often seen in the past, few of these shortcomings are operational, most relate to financial jiggery-pokery and ownership structures, past and present.
Rather than presage an occupier collapse across the retail market, distress has otherwise been fairly muted this year generally – and our analysis suggests there is good reason to expect a similar status quo going forward.
The facts
Homebase’s private equity owner Hilco has been touting the business for sale for several months. Although there was interest for many of the sites, no one came forward to buy the business outright. Administration was therefore largely a foregone conclusion, the only question was as to what form that would take.
CDS Superstores, the owner of The Range and Wilko, has subsequently acquired the business through a pre-pack deal, taking on the brand name, intellectual property and up to 70 of its store base. The acquired stores will continue to trade as Homebase over the coming months until they are transferred to CDS, when they will be rebranded as The Range. Homebase will be relegated to the status of an online-only brand.
The deal is expected to save ca. 1,600 jobs at Homebase, though just as many could be lost. Teneo, which has been appointed joint administrator for the retailer, is canvassing interest for the ca. 50 remaining Homebase stores surplus to CDS’ requirements.
The conjecture
CDS’ acquisition is essentially a carve up of the store portfolio – The Range wanted a large number of the sites and acquiring the “whole” business was the easiest way of achieving what it wanted. Essentially an acceleration of what we were seeing anyway, but with The Range having a broader need than other interested parties.
Homebase recently sold 11 stores to Sainsbury’s and exchanged on a further three. The likes of B&M and Home Bargains would obviously be interested in certain sites, but The Range has a much smaller store portfolio, so was interested in many more.
The remaining 50 or so stores will continue to trade as normal whilst Taneo continues “active discussions with interested parties.” And there is good reason to suggest that virtually all will be reabsorbed in some shape or form. Vacancy levels in the retail warehousing market are generally low and occupier demand is fairly robust from a whole host of players (retailers, leisure operators, gyms etc etc). As the demise of Carpetright has proved, certain sites will be snapped up, others may be reabsorbed more gradually. But few are going to sit vacant for an extended period.
While the Homebase brand will not be totally consigned to history, its profile will be diminished to online-only, where it will join the likes of other failed retail stalwarts such as Debenhams and Woolworths. The fact that the latter still exists as an online brand that few are aware of speaks volumes.
CDS has relaunched Wilkos, its other acquisition out of administration, as a high street business, but only with a handful of sites vs 400+ at time of demise. Potentially, it could ultimately do the same with Homebase, though this seems unlikely in the short to medium term. Homebase and The Range are almost exclusively retail warehousing businesses, while Wilkos was/is more geared towards town centres. Wilkos fills a gap for CDS in a way that Homebase does not.
How did it come to this?
Why do retailers fail? A very pertinent question that we posed in writing our 2024 Retail Watchlist Report – and duly explored answered in depth. In essence, the reasons cited by management and the press seldom get to the root of the issue.
And this is most definitely the case with Homebase. CEO Damian McGloughlin stated: “It has been an incredibly challenging three years for the home and garden improvement market. A decline in consumer confidence and spending following the pandemic has been exacerbated by the impact of persistent high inflation, global supply chain issues and unseasonable weather. Against this backdrop, we have taken many and wide-ranging actions to improve trading performance including restructuring the business and seeking fresh investment. These efforts have not been successful and today we have made the difficult decision to appoint administrators.”
While not untrue, these stock explanations do not shed light on the real reasons. Consumer demand has indeed been volatile – DIY was one of the few sectors that actually experienced a surge during COVID (2020: +14.9%) which carried through to the following year (2021: +14.6%), before softening over the next two years (2022: -11.3%, 2023: -1.2%). But sales have not been bad 2024YTD, averaging +1.8% per month.
Homebase did not fail solely because of weak trading – it failed because corporate activity over the years undermined its financial position and left it struggling to compete. And this is by no means a recent thing, the die was cast a long time ago.
It is difficult to pinpoint exactly when the rot set in, though there are some fairly obvious negative turning points. It is easy to overlook now, but Homebase was actually a pioneering business when it first launched in the early 1980s. In essence, it “softened” the DIY market by incorporating homewares and textiles etc, offering a more rounded proposition and setting out its stall of a home-based one-stop-shop. Something we take for granted now and something the likes of IKEA, Dunelm, B&M and yes, even The Range, do now, better and on a bigger scale.
The ownership merry-go-round started in the early 2000s. In December 2000, co-founder Sainsbury's sold out of Homebase in a two-part deal worth £969m. The chain of 283 stores went to venture capitalist Schroder Ventures while Kingfisher took on 28 development sites. Just two years later, it was sold again, this time to GUS for £900m, where it became part of Argos Retail Group. In October 2006, GUS split to form Experian and ARG. ARG was renamed Home Retail Group, within which Homebase operated until February 2016.
While it was subject to a constant round of pass-the-parcel, the operational side of the business was criminally neglected. An overdue review of the business was implemented in 2014, which saw around a quarter of the store estate close.
The sublime turned to the ridiculous in 2016, when Australian retailer Wesfarmers, owners of Australia's leading hardware store Bunnings, acquired Homebase for £340m. What followed has gone down in history as one of the worst examples of retailer internationalisation, every golden rule broken or just willfully ignored (e.g. understanding the local market, tailoring the offer accordingly, pet project stores rather than investment across the whole chain etc etc).
Homebase therefore became a sitting duck for private equity and Hilco duly acquired the business for £1 in August 2018. Dubbed ‘turnaround specialists’ (have they ever actually turned anything around?) Hilco are more renowned for their ability to improve efficiency and cut costs than they are for their altruism and long-termism. Subsequently, Hilco announced that it would close 42 of the chain's stores and cut 1,500 jobs through a CVA.
The writing has firmly been on the wall for a while, perhaps the only surprise is that Hilco owned if for as long as they did. But then again, this wasn’t through want of trying to sell it. But who would buy it as a going concern? Clearly, there were no trade buyers, nor was there likely to be any further PE interest – there couldn’t be much meat on the bones after Hilco had owned it for so long.
A once-once good business that overexpanded in the “good times” and was then left to drift through a series of pillar-to-post ownership changes. That hasn’t had the investment it needs for years. The real reason for Homebase’s sad demise.
The start of a fresh wave of fall out?
There is a tendency to assume that retail failure has a contagious effect – when one operator goes pop, others follow in their wake and the retail sector is little more than a house of cards. This is a curious myth, as distress is usually particular to one operator, rather than interwoven across the retail sector as a whole.
On this basis, there absolutely no reason to assume that the fate of Homebase will trigger further retail occupier fall-out. That is not to say that there won’t be other retailers failing in the coming months, but if this does materialize, it will be purely incidental to what has happened at Homebase.
As we explore in our 2024 Retail Watchlist Report, operator distress has been fairly limited this year, with the occupier landscape proving incredibly resilient despite ongoing economic uncertainty.
In fact, 2024 is shaping up to be the fourth quietest year for physical retail distress, with only 886 stores affected so far – a notable drop from the annual average of 2,462 affected stores between 2019 and 2023.
While there is always a tendency to focus on those at risk, the outputs of Knight Frank’s Watchlist exercise are not wholly negative by any means. Well over half of the Top 300 Retailer we classify (165, 55%) are rated Green. Coupled with the online pure-play Yellows, a total of 198 (66%) of the Top 300 retailers present ‘no immediate apparent risk of failure’. Our Watchlist currently identifies 58 operators ‘at risk’ (19.3%). Of these, 31 (10%) are multi-channel/store-based (Pink) and 27 (9%) are online-only (Brown). Many of the former fall into the ‘previous distress’ camp, while the latter tend to tick the ‘poor trading performance’ or ‘flaky balance sheet’ boxes (usually both).
Homebase’s graduation from Pink (‘Major Risk’) to Red (‘In Administration’) is a sad endorsement of our methodology. But lessons can surely be learned from its backstory, particularly around the need to maintain focus and investment - and the perils of multiple ownership changes.