Many column inches have been written about the difficult trading environment on the British high street. At Red Flag Alert we have covered the turmoil closely – while the general public is intrigued as to why century-old brands go out of business, we’re interested in the impact it has on the many businesses badly affected by these insolvencies.
Our recent article on the changing face of the UK high street outlined the long list of pressures felt by retailers, like an increase in National Minimum Wage and the explosive rise of online shopping.
Debenhams is the latest household name to report shocking financial news, with losses to September 2018 of £491.5m (versus profits of £59m the year before). Although this loss was driven by write-downs of £512.4m, the reduction of market capitalisation (down four-fifths in 12 months), reduced sales and the general high street malaise all point to a retailer in trouble.
After the recent financial results, a statement by Debenhams outlined their future cost reduction plans:
The response to this is neatly summarised by Julie Palmer, Partner at Begbies Traynor:
“A small amount of shops to shut was expected, but evidently, the new owners have stamped their authority on the beleaguered retailer already and made more drastic cuts than expected. The losses of £500m are large and, in response, it has decided it needs to strip back to the bare bones of the organisation if it is to grow life once again. Only time will tell whether this approach will work, but it appears to be that this is one of the few options it has to survive.”
Palmer goes on to contextualise Debenhams’ problems as being part of a wider trend:
“Our Red Flag Alert data has shown that the number of retailers in distress in the past year has increased from 29,727 companies to 30,123 – an increase of 1%. If this number continues to creep up, we could be seeing more companies taking drastic action to save their brands.”
Debenhams is pre-emptively closing its poorest performing stores and a deeper look into the business gives us reason to believe this is essential.
Debenhams is, of course, affected by the wider malaise in the market. The pressure on the high street has led to big names shutting stores: Marks & Spencer, Mothercare and Sports Direct have all been affected.
Department stores are cash hungry – expensive leases and business rates eat into profitability. Also, creating great retail experiences, like beauty treatments and prosecco bars that can improve footfall, are expensive.
Debenhams are well aware of the need to compete online, but the competition is fierce – many retailers are investing here, and some online businesses like Amazon are already entrenched – competing here will be hard.
Perhaps, most worryingly, footfall and sales in stores is down – in the year to September 2018 there was a like-for-like sales decline of 2.3%.
Sergio Bucher, Debenhams’ Chief Executive, explained that currently profitable stores are being earmarked for closure because Debenhams believe that “rolling forward current trends, we do not believe they will remain profitable in future years and, therefore, we intend to exit these stores over the next 3–5 years.”
Ostensibly this seems sensible, and the City reacted with a small share price spike, albeit from 7p to 9p – given that shares were trading at 46.75p on 27 October 2017 and at 99.3p on 28 October 2013, the jury is still out on Debenhams’ long-term viability.
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