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IREU Top500 The Customer Report: 2018

IREU Top500 The Customer Report: 2018

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Despite tech leadership, House of Fraser becomes latest victim of High Street Armageddon

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House of Fraser: closing the doors of 31 stores, but can its e-commerce savvy save it?
House of Fraser: closing the doors of 31 stores, but can its e-commerce savvy save it?

House of Fraser has joined a growing list of once-proud retailers to apply a CVA and close stores as the collapse of the High Street as we know it continues.

 

The Top500 Leading retailer has applied to close 31 stores – with the potential loss of 6000 jobs – across the UK, including its flagship Oxford Street store in London. It is also planning to relocate its Baker Street head office and its office in Granite House in Glasgow.

 

The move comes after the announcement made on May 2, of C.banner’s conditional agreement to acquire a 51% stake in House of Fraser Group Ltd and its pledge to introduce significant new capital.

 

Currently, House of Fraser operates 59 leased stores across the UK and Ireland and its property portfolio is unsustainable in its current form.

 

The company says it has held constructive initial discussions with landlords and other key stakeholders to reduce rents on its remaining properties by up to 70%. Pending approval of the CVAs, it is anticipated that those stores scheduled for closure will remain open until early in 2019.

 

If this process is approved it will affect up to 2,000 House of Fraser staff and a further 4,000 brand and concession partners. Those impacted by the proposed changes have already been informed. The directors are committed to working with all those affected openly and with sensitivity over the months ahead.

 

The consultation on the CVA proposal will take place over the next 17 days and House of Fraser will seek approval from its creditors on June 22 2018. During the period of the proposal, the Company will continue to trade as normal both through its stores and online. Will Wright and Robert Croxen of KPMG LLP have been appointed as Nominees to the CVAs.

 

 

Why is this happening?

House of Fraser’s woes come despite the company being highly-ranked in the IRUK Top500– in varying years ranked Elite and Leading – leading the way in innovation and embracing of technology, not least mobile.

 

While it continued to offer an exemplary service to its customers and has been something of a poster-boy for how stores can integrate the web and the in-store experience, the business has long been dogged by the financial legacy of Baugur and Highland acquisitions, which has constrained the business through poor liquidity, debts and short-term investment windows.

 

It is hoped that the slimmed down company – with liquidity injected by C.Banner – can continue to drive consumers to both its store and online properties and could emerge as a the exemplar of how to use stores and online together. However, nothing is a given: this was the strategy at BHS.com when it closed the doors on its High Street operations. It looked to leverage its brand through an online only pure play, reaping the rewards of lower overheads, but it failed to ignite and that too has now been forced to shut down after a trying couple of years.

 

This will no doubt be just one of many problems on the minds of C.Banner and House of Fraser execs as they ponder the company’s future.

 

Sofie Willmott, Senior Retail Analyst at GlobalData, a data and analytics company, offers her view on the House of Fraser’s current challenges: "Despite announcing plans to reduce its store numbers from 59 down to 28, focusing on fewer stores and its online channel will not be enough to ensure the retailer’s success in the competitive UK retail environment. House of Fraser must significantly improve its product offer and store environment to attract customers back whilst also enhancing its online proposition."

She continues: "In FY 2017/18 results announced yesterday, House of Fraser’s gross transaction value (including sales taken from concessions) fell 5.9% with operating profit down 37.7% leading to operating margin falling from an already low base of 2.4% in 2016/17 to 1.6%. The retailer’s main problem is that it does not have a clear point of difference in a crowded market and in a climate where consumers are cutting back on discretionary items House of Fraser has failed to give shoppers a good enough reason to buy."

 

Of the online and mobile channel she says: "The online channel will be expected to pick up sales that will be missed from store closures so House of Fraser must ensure its website proposition stacks up against the high standards set by online pureplays in order to succeed. Re-platforming its website in April 2017 had a negative impact on online performance and has been a real set back causing the retailer to fall behind other multichannel clothing specialists. House of Fraser plans to implement personalisation and a loyalty scheme in 2019 but as its competitors already have assets like these in place, it really must act quickly to implement tools to drive digital sales. Though House of Fraser will be hoping clothing concessions sales from shuttered stores will be transferred to their online channel, it is likely that these sales will be split given the wide availability of many of their brands. Sales are likely to shift to the brands’ own websites and possibly nearby stores, as well as other online branded destinations such as ASOS or Next and other department stores such as John Lewis and Debenhams."

 

 

Business rates and the uneven playing field

But it isn’t just technology that is causing the problem, the costs of running a High Street business are also becoming crippling and, many believe, unfair. Business rates for real-world businesses are becoming cripplimngly high, believe many retailers – something backed up by research from real estate agency and consultants Colliers International.

 

According to John Webber, Head of Business Rates at Colliers, “Like many other retailers, House of Fraser experienced the negative impact of the 2017 Rating Revaluation, which we believe substantially added to its costs.”
Analysing House of Fraser’s 60 stores in England and Wales, Colliers estimate that House of Fraser faced a business rates bill in 2017/18 of around £38m and this would have been rising to £40.3 m in 2018/9. Moreover, some individual stores saw big rises following the 2017 Business Rates Revaluation. The H of F store in Oxford Street, for example saw a RV (rateable value) increase of over 57%, from £5.73 million to £9.01 million following the revaluation and the Milton Keynes store was not far behind with a RV increase of nearly 52% to £1.38 million. Unsurprisingly these are two of the 31 stores being closed.
In terms of actual rates paid this means that the Oxford Street Store alone saw a rates bill of £4.3 million in 2017/8 compared to £2.96 million 2016/7, a rise of nearly 46%. And this figure was on its way up further, given the Government’s 5 years transition scheme. By 2021/22 House of Fraser, Oxford Street would have been paying business rates of over £5 million a year. A massive bill for one store alone.
“It’s no wonder House of Fraser had to shut stores and is trying to reduce its rent bills and even cut its store sizes in some areas, “says Webber. “As business rates are tied to rental values, it would be mad not to.”
Even those stores, in other parts of the country that should have seen a decrease in their rate bills following the Revaluation, were not helping the corporate rates burden much. The policy of phasing in reductions, whereby it takes five years of transition until businesses in England are allowed to pay their business rate bills at the new revalued levels, has meant that many retailers, such as House of Fraser have been paying much more than they should be.
Taking a particular store such as H of F Altrincham Cheshire, Webber points out that the rates bill of around £216,000 in 2016/2017 should have been reduced to around £103,000 following the revaluation, a decrease of around 52 %. But because of phasing, reductions were only a very small percentage this year and next. Colliers has calculated the business therefore would overpay in excess of £450,000 in business rates on that store alone, than it should have done had the revaluation occurred in 2015 and any reduction in liability implemented immediately. “Keeping such stores open for 5 years until they hit their fair rateable value is just not feasible” says Webber, “particularly if trading is down. It comes as little surprise that Altrincham headed the closure list.”
House of Fraser is obviously not alone in its business rates plight. Webber adds: “House of Fraser, Debenhams, Toys R Us, Laura Ashley - the list of retailers with uncomfortably high business rate bills is never ending. As such businesses struggle against the competition from the online retailers and cope with uncertainty over Brexit, wavering consumer confidence and the rise in the NLW for staff, it is no wonder the cracks in the system are growing”
He continues: “Retail pain has not stopped and is on the increase. Business rates are not the only factor- but they are an important factor. Something must be actively done to help the physical retailers. We are going to see a significant change on the high street landscape as these great names falter. Marginally successful towns could go into terminal decline.” While Ministers fiddle with Brexit issues the high street continues to burn. The Government needs to show more support and really must to do it now.”

 

 

A word from the board

Commenting on the CVA proposals, Frank Slevin, Chairman of House of Fraser said: “The retail industry is undergoing fundamental change and House of Fraser urgently needs to adapt to this fast-changing landscape in order to give it a future and allow it to thrive. Our legacy store estate has created an unsustainable cost base, which without restructuring, presents an existential threat to the business. So whilst closing stores is a very difficult decision, especially given the length of relationship House of Fraser has with all its locations, there should be no doubt that it is absolutely necessary if we are to continue to trade and be competitive.”

 

He continues: “We have had constructive dialogue with a number of key stakeholders to date, and we will continue this engagement over the next 17 days. Ultimately, it will be for individual creditors to decide how they will vote on the CVAs. We believe the proposal has sought to find a solution that is fair for all parties, enabling us to secure vital new capital from C.banner.”

 

Alex Williamson, CEO of House of Fraser adds: “Today’s announcement is one of the most important in this company’s 169-year history. We, as a management team, have a responsibility to take necessary steps to ensure House of Fraser’s survival, which is why we are making these proposals. I would like to offer my heartfelt thanks to all my colleagues at House of Fraser for working tirelessly throughout this difficult period. We are fully committed to supporting those personally affected by the proposals.”

 

 

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