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Having spent much of the last few months on the road visiting consumer businesses or people with a vested interest in retailers it struck me that there is an odd air of optimism surrounding the sector……but for different reasons.
The retailers themselves whether trading well or not have a dogged determination to trade hard in the ‘golden quarter’ and very few will be sad to see the back of 2010. What a year they’ve had with so many events having a detrimental effect on consumer confidence and trade; from volcanic ash to budgets all under the storm cloud of a recession and credit crisis. At the forefront of everyone’s mind now is Christmas trading and January sales. Projects have been shelved and it’s time to ‘sell, sell, sell’. Fortunately for the retailers, we love Christmas and the countdown has begun – every second advert on the TV is Christmas themed and it won’t be long before we hear Noddy Holder screaming ‘It’s Christmas!’ as the tills ring in the background. Oh joy!
The Private Equity players have begun to look over the trenches and ‘are shopping for retail deals’. There have been 11 private equity-backed deals in 2010 and in the peak of the buyout market in 2007 it was the largest sector for private equity interest. In the context of the uncertainty of this year, one might expect investors to shy away from sectors reliant on consumer spending but many in private equity believe this is the dawning of a new age for retail. Businesses that emerge from the recession relatively unscathed will have survived for good reason and it’s these that will be targeted in 2011.
At the other end of the market, the so-called ‘zombie’ or ‘walking dead’ businesses! I had to laugh when I heard the analogy but it makes perfect sense. It refers to the retailers out there who are so highly leveraged by debt that they are just managing to keep up on the interest payments. While interest rates are low they are surviving but their investors will not sell the debt for anything less than the full amount. The restructuring firms are getting ready as some of these businesses will inevitably fail and there will be deals to be done in buying whole businesses (or divisions) investing in the profitable bit and getting rid of the rest, providing finance / purchasing debt or looking at store closure / stock clearance programmes.
So, over the next few months I’m predicting more investment in retailers, whether it’s from the business itself or from outside parties which will mean budgets for projects and inevitable changes in management. This, finally has got to be good news for all of us in the consumer interim management community…………doesn’t it?
Jonathan Flynn is Head of Retail at Interim Partners.
November 24th, 2010 at 7:26 pm
Jonathan some interesting insight. I have been consulting widely with a number of retailers and vc’s over the past 12 months and common themes have been: Perception of a margin bloodbath over the xmas period with prices cut to the bone, problems for many pan european retailers when the quarterly rents fall due, especially at year end when a number of financing deals expire and the opportunity for consolidation and growth. Couple of key challenges they made to me was that interims maybe too short term for what looks like a long haul back to profitability, task nature of interims when they are looking for creativity and the high visibility of the big consultancy agencies who are now coming into this pool in the search for business. I see big challenges ahead but some great opportunities.
November 25th, 2010 at 1:41 pm
A very concise and pertinent article and one that resonates with my view of the market at the moment. Martin is right to point out the pressures that will inevitably impact the so called ‘zombie’ retailers when quarterly rents fall due but this could also be impacted by Christmas performance and credit terms. With retailers under pressure to perform this quarter (and in anticipation of buoyant sales ahead of the impending VAT rise) many retailers will have invested in significant inventories ahead of projected sales peaks in December. If anticipated sales levels do not materialise and are followed by a particularly lean January then this may cause further pressures on cash flow ahead of settling Christmas invoices at January month end. As a result, I expect to see some of the zombies coming under pressure ahead of any interest rate rises.
November 25th, 2010 at 2:08 pm
An interesting read and I have met with a couple of CEO’s of retailers in the last week.
I think they are all braced for a tough Q1 but I think trading their way through it is the message that I have gleaned – I would expect a lot of promotions and it will still be a very consumer driven market. I think the article is accurate as I think there will be good retail brands that are too leveraged which will see some opportunities – hopefully one’s that we all can take advantage of.
I am also aware that a few of these businesses will require to change their CEO/FD’s as it will clearly require strong change director’s who can hit the ground running.
November 25th, 2010 at 3:01 pm
An ideal time, in fact, to invest in a strong economic recovery programme.
Those first out of the blocks when consumer confidence & borrowing return will surely be in an excellent position to take full advantage over their competitors. Would your investors like a powerful combined customer, product and location expansion programme? Supported by an internal business model with planned step changes? Driven by a united executive team educated by sound market research? Bet those aren’t all in-house!
More a question, in my experience, of who can see beyond the margin-busting present to the economic future. With hindsight, of course, I would have had foresight…
November 25th, 2010 at 5:02 pm
Jonnathan,
A good article and plenty of upside potential for 2011.
Would argue that not all the highly leveraged business are “zombies” or “walking dead”. Am aware of one large, highly leveraged organisation that still has a strong appetite for acquisitions. The point is that their acquisitions need to be self-financing. Overall, this is a very confident sector.
November 25th, 2010 at 5:09 pm
In my view, consumers will still make high-value purchases, but will require greater reassurance to do so. However they will continue to be cautious of funding significant purchases through increasing personal debt.
The current expectation is that both interest rates and inflation will stay low for the medium term, continuing the perverse situation of putting consumers who remain in employment in a relatively better economic position. The main issues will continue to be giving them confidence and reassurance to continue to spend.
Consumers are still massively price sensitive. Given every retailer is offering some form of promotion, consumers know they can access value and will continue to compare and contrast prices to do so.
But they also want entertainment and escapism. Brands that help them achieve great value and enjoyment are most likely to succeed.
There is still opportunity on the high street and those retailers that are brave enough to exploit this opportunity as a pre-cursor for strategic growth will be the winners in the longer term
How best to achieve this? That is where the interim executive can add value by challenging the status quo….
November 26th, 2010 at 12:15 am
I agree some interesting insights. Of course the potential effect of pulling in the sales by slashing prices is a need to cut costs in the new year with resulting overhead reductions and general redundancies. It will certainly be worth keeping a close eye on the employment issues in the first quarter of the year as I would expect to see some significant movement in staffing to ensure the continued survival of businesses; this many actually mean an upturn in interim and consultancy work as employers chose to bring in expert help rather than add to the overhead by recruiting directly; interesting times.
November 26th, 2010 at 7:27 am
A really interesting article.
It’ll be interesting to see what impact the VAT rise has in January. Will retailers delay or absorb the increase? Or, As is more likely, put the ’squeeze’ on suppliers.
November 26th, 2010 at 9:51 am
Thinking optimistically, we should not forget the customer angle in all this. The much maligned Lord Young was quite right when he said that many people had never had it so good. There are great swathes of consumers out there on good, secure salaries or index linked final salary pensions, with their lowest ever mortgages; so, for many, disposal incomes are higher than 2 to 3 years ago. The retailers need to be cute about how they recognise and tap into this. Maybe they have to address their marketing and positioning with more creativity. Investor due diligence ought to focus especially closely at these factors.
November 26th, 2010 at 10:05 am
A good article Jonathan, however I seem to remember exactly the same arguments being made this time last year. VAT was about to revert to 17.5%, the ‘Zombies’ would be in trouble as interest rates would increase,etc. Yet, surprisingly few retailers have gone to the wall in 2010. There’s been a few ‘pre-packs’ but not the expected loss of High Street names expected.
The predicted start of the interest rates increase keeps getting pushed back and the general consensus seems to be that it will not happen until at least 2012 (or even 2014 I’ve read). The VAT increases will be accepted by the consumer next year as they did this year, the banks will still be reluctant to ‘pull the plug’ on these Zombies, whether for moral reasons or unwillingness to crystallise a bad debt and we may have several more years of many retailers ‘limping along’.
Don’t be surprised if 2011 is a repeat of 2010.
November 26th, 2010 at 10:54 am
I am inclined to agree with Tony Heywood. I have an overwhelming sense of Deja Vu!
Although I do think that now the Governments spending (or not spending) plans have been revealed, more clarity regarding levels of disposable income will stimulate purchasing behaviour.
November 26th, 2010 at 3:25 pm
Thought provoking. There are always pressures on retailers and imminent VAT rises, public sector job losses and eventual increases in interest rates will provide the latest challenges. However, not all consumer groups are subject to worries about job loss and falling real incomes. Republic and Supergroup provide two examples of retailers who have benefitted from a less-pressured key target market together with a discernable “USP” and a strong overall offer. Retailers such as these will continue to prosper regardless
I would question whether the Banks have a tremendous appetite to put many of the “walking dead” out of their misery if they can possibly avoid it. In my experience, Banks will attempt to restructure debt rather than take precipitative action which could have political consequences (especially those Banks partly or largely owned by the taxpayer!)
November 26th, 2010 at 4:28 pm
I think that Jonathan has called it pretty much as it is
If I were to add my observations, there are quite a number of retailers doing well out there. The ONS reported for October “non-food stores increased by 2.5 per cent. Within predominantly non-food stores there were rises across all sectors, apart from household goods stores which decreased by 4.7 per cent, driven by hardware stores. The largest rise was non-specialised stores at 5.6 per cent. Non-store retailing increased by 12.0 per cent. ”
Now, I must add that many leaders in retail are pretty averse to government statistics.
The figure for non-store retailing must also be considered. I am getting much more requests to consider projects in retail, long may it continue.
November 26th, 2010 at 5:13 pm
I think as far as the consumer economy goes, one thing unites the ‘never had it so goods’, the pensioners and savers and the less fortunate: they will all be worse off next year. Tax hikes and inflation will ensure that, unless they have received bankers bonuses or big payrises, they will have less money than they had last year and what they do have will go around less far. These are economic realities and we retailers addicted to our LFL’s may find it harder to generate exciting numbers. So for me it is not about when interest rates go up, things get tougher here and now.
As for highly leveraged businesses,David makes a good point about banks not wanting to further damage their battered reputations by tipping businesses over. Generally they are being much more tolerant than they would have been in the past. Problems come around for those that will have to refinance a big chunk next year, and there will be quite a few for whom the clock is ticking. Because of demands on increasing capital ratios liquidity is still tight and, unless you are AAA banks will not be keen and if you want new money……
There will of course be winners and here’s to them.
November 26th, 2010 at 5:22 pm
I read you article and thought it was very insightful.
I think the current Christmas trading period will be an interesting and potentially tough time for the retailers- I suspect that consumers will be more cautious this year and I wonder whether like for like performance in terms of profit margins will be lower than last year and whether there will be a drive to increase volume though early discounting / promotional offers. I heard a report on the radio talking about lower average spend at a consumer level compared to 2009 - my thoughts are the various discussions and media coverage of the Comprehensive Spending Review are leading consumers to be more risk averse and this will inevitable have an impact on short-term consumer spending.
I agree with the other readers who have replied to your blog, that businesses will be looking increasingly at opportunities to drive operational performance and growth next year - the current year has seen lots of discussions about potential collaborations, acquisitions,consolidations, projects etc but business have generally held off on the investment required. I think business will start to embark on some of these initiatives next year and I agree that good strategic and change managers will be in demand to support / drive growth and efficiencies in organisations.
November 26th, 2010 at 5:28 pm
Thank you all for your comments so far.
I think we’re all agreed that retail business are trading with all guns blazing but it’s going to be tough out there - whether it’s pressure on their margins or having some point of promotional difference but a real in-store experience supported by excellent customer service and value will be now more important than ever. I read earlier about the growing trend of people leaving their Christmas shopping later than ever to try and capitalise on any early sales which will cause a few sweaty palm moments but with the VAT increase just round the corner consumers will be keen to purchase any big-ticket items this side of the new year.
There are recurring themes of VAT, interest rates and rents. Add to this a weaker household spending budget (for example cuts in child benefit) which means more bad news for the sector. Next year a repeat of 2010 was predicted by Tony and Ian and a ‘Big Four’ consultancy has recently stated ‘there will not be any meaningful sales growth in the retail industry next year and the possibility of falling sales values is a real risk’.
I’m very interested to hear your views on the ‘walking dead’ retailers and what should be done about them. I agree with David that banks won’t be keen to put them ‘out of their misery’ which unfortunately was not the case a couple of years ago when the banks prematurely pulled the plug on Music Zone and the Celebrations Group.
Martin touched on an interesting topic early in the discussion about the big consultancies coming into this pool in search of business. It’s an argument for a later date but I’ve picked up that retailers (including a very ‘broken’ one I met recently) think nothing of engaging a large consultancy because of the ‘confidence’ the name brings when realistically industry specialist interims could deliver the projects at a lot less expense. Seems perverse when they’re all focussed on cost reduction. I’ve lit the fuse, now I’m going to run!
Enjoy the weekend.
November 26th, 2010 at 6:32 pm
Enjoyed reading the blog and agree with many of the comments made.
Just picking up on Jonathan’s final comment above - as a business that also works across the public and third sectors as well.
Here we regularly see a preference / ‘habit’ for using the large consultancies being exhibited, for exactly the same reasons as quoted.
It will, however be fascinating to see if this continues at the same levels post -CSR, when the need for specialist interims who bring commercial expertise and change management skills has been recognised as essential,(and as I understand it),already budgeted for. Watch this space!
One final point, many public sector bodies are already well into consultation with their staff, and we should therefore expect to see the early, but no doubt well publicised, casualties of the CSR beginning to hit the labour market early in 2011. Regrettably, one can only predict that this will become a feature of the forthcoming years. This will undoutedly only further damage overall consumer confidence, and how retailers respond to this mood will be vital.
Lessons as always to be learnt in history - I’m thinking about the success of the Northern European food discounters during the early nineties. As David says above…..there will always be winners!
November 28th, 2010 at 12:36 pm
Jonathan,
First a little rant if I may…Large consultancy houses have survived the last 2 years in part by adding junior ‘consultants’ to their offering free of charge to be seen to add value to their service provided…debatable as to whether this is value add but nevertheless it has proved to be a tactic that has worked very well for some (insider info).
Back to the thread…’Walking dead’ retailers have in many instances been living on cash flow generated by increased borrowing and the banks will start to get tough again once they feel that the dust has finally settled and the new government can be blamed for any business disasters around the corner.
Cash flow as ever is king and any interim worth his / her salt should have the objective of increasing this at the heart of their proposition in 2011. Developing net working capital will help retailers to relieve themselves of crippling debts and re-invest in service levels and customer relationship management…if you think customers have been more promiscuous recently just watch what happens going forward. Debatable I know but I actually think that service levels and risk averse purchase products (warranties, payment protection, part exchange schemes etc) will come back to the fore and the retailer that finds the USP soonest will steal market share as expendable income will still be limited for many if not most consumers.
With regards to service levels, when was the last time any of us experienced excellent salesmanship or service? In all too many of my shopping experiences the first impression is poor and the lasting one is mediocre at best. Helping retailers to get back to their prime is the second step towards regaining success, the first step is to get retailers to remember what a good job looks like in the first place! Reactive ’shoot from the hip’ retailing has taken over strategic planning and tactical thinking, necessary in many cases but a semblance of order is needed now. A thought leads to a feeling which generates an action and negative thinking has caused many to make poor judgement calls in the last 24 months…retailers need to get back to positive thinking again.
A positive thought that changes fortunes for the better is one that leads to asking for professional help from us. Many of the ‘walking dead’ just need leading to the cure, and there is one!
Not sure if I’ve added value here or not but just a few thoughts anyway.
November 29th, 2010 at 9:17 am
Do you think we are focussing on the bad rather than the opportunity? A very large section of householders have had fixed rate mortgages, these have now finished their term, and they have reverted to base rate + rates, which in over 85% means a reduction in monthly payments, others were already on standard base rate mortgages.
These householders have higher levels of disposable income, as have some of the early “baby boomers” who retired with high pensions benefits. Retailers should be looking to recognise these groups, and offer high levels of service, rather than weekly or daily special offers and promotions. People are prepared to pay for quality and leading service, that sets the business apart from other retailers.
November 30th, 2010 at 10:40 am
Jonathan, your last point resonates with the ancient cry, “no one got fired for buying from IBM” - that seems a very long time ago. Does the business still exist? Only joking. I guess that we need to remember that many potential clients in ‘permanent’ employment are themselves feeling vulnerable and not in the mood to be brave (or sensible). Bringing in one of the big consultancies is ‘the easy option’. A compelling sales case for interim managemeent can overcome that though and expose the big consultancies’ weaknesses.
Banks are being attacked for bonuses and for ‘not lending’. The average recovery from businesses where the rug is pulled is 30p in the £, I have been told. Not an attractive prospect. I’d be surprised if bank lenders move from their current position for so long as they can continue to survive whilst propping-up ‘the walking dead’. It’s about timing, I suspect. The time will come.
December 1st, 2010 at 11:20 am
David your thoughts about service level are very valuable so I think you’ve added value here. Clearly 2011 is going to be a tough year with consumers in general being wary of large purchases and also reigning back on credit as they are constantly being told by the media that it’s not a good idea!
However I agree with David that one of the major issues is the decline in service levels in the last year or two. It appears that all the bad economic news has meant that people worried about their jobs have stopped trying and bosses have been too worried about financial survival to focus on customer service.
Whilst I have received some good service I can recall some service I’ve received where I left convinced I had actually just met one of the “walking dead”.
Whilst consumers will remain price sensitive with the amount of choice available in the high street and online the level of service will be a major contributor to success or failure.
December 1st, 2010 at 5:21 pm
Coming at the clothing industry with more of a supply prospective than a retail one, I found your article very interesting.
What I have noticed is that production orders by brands and retailers are becoming smaller and more frequent.
Buyers are very nervous to commit to large programs. Maybe they are worried about the sales of these items in the stores. Or maybe they are fearful for their own job security. The media has not given buyers a clear or accurate guide to future retail sales direction in the last two years.
This little and often approach is not only having an impact on the prices that buyers need to pay, but also impacts on the factories that they can use, as the larger plants will not accept smaller orders.
The styles being bought are more high fashion, in an attempt to keep the consumer constantly lured into the shops every few weeks rather than a few times per season. Styles that designers create, that in the past would not have been bought as they did not have the potential to be rolled-out across a retail chain, are now being considered.
Designers, merchandisers and buyers can be far more creative. However this is more labour intensive and planning is a far longer process.
However many of these styles are more complex to make and as a result more costly.
If the retailers can push the retail prices up to take account for the extra cost of making and merchandising then fantastic, the high street will become a more interesting place. My fear is that the consumer will not pay much more and with cotton prices doubling in the last 4 months and labour rates going sky-high in China, I am not optimistic about margins for retailers.
My other fear is that retailers are employing more buyers that do not understand production. People are being employed for their fashion flair and their sense of what will sell only. They do not have all the skills needed to do their jobs.
I recently gave a buyer price quotes to produce some clothing ranges. Based on their non-product related specification, there was a cost spread of 40%. To be clear, this was the same product made using exactly the same components in the same factory costing up to 40% more due to sampling, ordering, packaging, shipping and financing methods.