UK retailer distress: very little to see here
This week’s Retail Note focuses on retail occupier distress and fall-out in the year to date – such as there has been any at all.
7 minutes to read
Key Messages
- Very limited retail occupier fall-out YTD
- Market far more benign than predicted
- Official stats overstate level of actual distress
- 27 ‘failures’, 511 stores and 5,807 jobs ‘affected’
- Many of these aren’t retailers per se
- Most are small, local operators
- Paperchase the only multiple of any scale to fail
- M&Co failed at end of 2022: stores now closed
- Prezzo to close one third of its estate
- All three had previous track record of CVA/administration
- Failure down to historic ownership, as much as market conditions
- Limited occupier failure expected for the rest of the year.
The die was seemingly cast before Christmas. The UK was in the grip of an all-encompassing cost-of-living crisis that could only escalate during 2023 as looming recession became a reality. The retail sector would, of course, be at the eye of every storm, caught between the rock of massive belt-tightening on the part of consumers and the hard place of spiraling operating costs. Massive retail occupier upheaval and fall-out seemed a foregone conclusion.
The reality to date has been oh-so different. Retail sales held up far better than expected over Christmas and rather than prove a ‘last hurrah’ (the only conclusion that most economists could reach), consumer demand has proved even more robust in Q1 (y-o-y values +5.6%, q-o-q values +1.8%, q-o-q volumes +0.7%). Recession has so far been averted and while the hikes in operating costs have indeed materialised, they have largely been absorbed and managed by retailers with almost stoic defiance.
Above all, the anticipated distress amongst retailers has thankfully been minimal. A number of key operators have taken an inevitable hit to profits, but there have generally been more upgrades to profit guidance than profit warnings. Retailers knew what was coming and have prepared and communicated accordingly.
And more importantly, there has been no occupier bloodbath.
Limited fall-out in Q1
On the surface, the numbers tell a slightly different story. According to the Centre of Retail Research (who track retailer distress under the no-nonsense, if slightly unpoetic, banner of “Who’s Gone Bust in Retail?”). According to their analysis, 27 retail business have ‘failed’ in the year to date, with 511 stores and 5,807 employees ‘affected’. On top of 49 failures in 2022, with 2,318 stores and 34,907 employees ‘affected’.
These figures massively over-state the level of actual fall-out. As the Centre of Retail Research acknowledges, these figures relate to operators that have undertaken any administration process and they do not mean that the business has not survived / ceased trading. Stores and employees may be ‘affected’, but that probably doesn’t mean they have been closed or made redundant in the latter case.
An analysis of the 27 ‘failed’ businesses is also an exercise in 1. Operators that aren’t technically retailers e.g. manufacturers / distributors / wholesalers / suppliers (Milltag, Velovixen, Snowdrop Independent Living, Moore Large & Co, Connect Distribution Services etc.) 2. Local retailers that few people (with respect) have actually heard of (Batemans Opticians, Middletons, Snug, Farmison & Co, Banks Musicroom, Maker&Son Ops etc.)
Stripping out the ‘non-retailers’ and very small operators, the actual scale of fall-out has been very limited.
Perspective on those that have ‘failed’
The only ‘household’ name retailer of any scale to go into administration in Q1 was Paperchase. To this, we could probably add M&Co, which technically went into administration in December, but the effects are washing through this year. Although not an administration, the recent decision of Prezzo to close around one third of its estate is probably the other most ‘newsworthy’ example of distress on the high street.
All three of these examples of apparent occupier distress need substantial qualification. In essence, they are less a barometer of general economic malaise and much more of operational shortcomings particular to that operator.
I covered Paperchase’s administration in a previous Retail Note (from 3 February 2023). The stationery retailer collapsed into administration, before being bought up by Tesco for an undisclosed fee. But Tesco only acquired the name and intellectual property of the business, which meant the closure of its 100+ high street stores. In essence, Paperchase’s demise came largely as a result of its checkered history of private equity ownership, rather than a direct result of tough market conditions.
Certain parallels here with M&Co, another “repeat offender” in the failure stakes. The business went into administration for the second time in December 2022, having previously restructured through a pre-pack administration in 2020, which saw the closure of 47 stores. AK Retail Holdings (owner of plus size operator Yours) bought the brand and intellectual property of the business, but not its stores. An axe hangs over the remaining 170-store portfolio, although Peacocks is reportedly looking at taking on around 20 of the sites.
A victim of economic circumstance or a weaker player in a highly competitive market? The evidence points more to the latter than the former. For all the talk of a consumer squeeze, clothing sales remain relatively buoyant and fashion is one of the few retail sub-sectors that is still reporting value and volume growth.
You could even argue that economic conditions should actually be playing into M&Co’s hands, with consumers trading down to value operators. But Primark and the major grocers are likely to have been the main beneficiaries of any flight to value (easy to forget that F&F, Tu and George are all £1bn+ brands these days). The plain fact is that M&Co struggled to compete in this crowded arena.
Further downsizing at Prezzo grabbed a lot of media headlines last week, mainly on account of it fitting the doomsday narrative as much as anything else, the exception that proved the rule. The business is closing 46 loss-making sites, around one third of its existing estate.
Huge emphasis in the media placed on the fact that its utility bills have more than doubled in the past year, coupled with sharp rises in costs for dough balls, pizza sauce, mozzarella and spaghetti. The so-called talking head experts also majored heavily on the cost-of-living crisis and the fact this was dramatically curtailing consumers’ propensity to eat out. And arrarently, according to some, we’ve fallen out of love with Italian food. Really?
Nothing to do with the pass-the-parcel private equity ownership the business has had to endure and the legacy of over-expansion in the past? Another “repeat offender”, Prezzo first fell under private equity ownership (TPG) in 2015. In 2018, it launched a CVA which saw 94 of its ca. 300 restaurants close. It entered administration in late 2020 and was subsequently bought by another PE house, Cain International.
Heavily geared PE acquisition, over-expansion, multiple changes in PE ownership, cost-cutting, retrenchment, failure (but hopefully not). Stop me if you’ve heard this one before…
Why so resilient?
Should we be surprised that there hasn’t been more occupier fall-out in the year to date? Clearly not, for those of you that have read KF’s ‘Retail Property Market Outlook’ for 2023 that we released before Christmas, in which we boldly predicted muted retail distress despite mounting economic pressures.
In simple terms, the retail sector is entering this recession (if it is even a recession at all) in a far better state than it did those that went before. The GFC came in the wake of a supposed prolonged retail boom in the 1990s and 2000s, the market was bloated and complacent and totally ill-prepared for what was to come. Totally different this time around – the retail sector has undergone considerable structural change over the last five years and is someway down the road to ‘right-sizing’ and re-basing. Any vestiges of complacency have been swept away and replaced by a new sense of pragmatism. This recession has also been a long time coming (18 months), so is less a shock to the system than the GFC. Forewarned is forearmed.
But make no mistake – the retail market is a very tough place to be at the moment. Even if consumer demand is holding up and inflation isn’t necessarily the destroyer the media purport it to be, cost inflation is still a very issue for retail and F&B/leisure operators alike. This is evident in most retailers’ reporting, recent updates from Tesco and Sainsbury’s underlining the pressures that even the biggest and best operators are facing. Headline profitability has been hit, but has not collapsed completely. But thanks only to massive behind the scenes operational and managerial efforts.
Retail defences are being sorely tested, but they are largely holding up. It is inevitable that there will be more occupier fall-out as the year progresses, but this is likely to be fairly minor on the richer scale.
All quiet on the western front. Boring is the new good in retail. And long may it continue.