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Mothercare UK failed because UK stores ‘not financially viable’ in discount-driven market

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Mothercare UK failed because UK stores ‘not financially viable’ in discount-driven market

Mothercare chief executive Mark Newton-Jones today said that Mothercare UK had gone into administration because its store estate was no longer financially viable in a market driven by discounting.

 

Newton-Jones, speaking as the Mothercare Group reported half-year results, said that the move to do so had protected the retailer’s global business. Plans to start a new Mothercare franchise in the UK are currently under discussion and an announcement is expected “in due course”.

 

Newton-Jones said: “This has been an extraordinarily challenging period in Mothercare’s 58-year history, particularly for our committed, hard-working colleagues who have worked tirelessly to sustain our UK retail operation. It was simply not financially viable to maintain the UK store estate and supporting infrastructure any longer without putting the whole Mothercare Group at risk.

 

"Whilst this was a very difficult decision and one we didn’t take lightly, it completes the transformation of our group into a capital light, cash generative and profitable business and, importantly, protects all of the pensioners of the group.

 

“We are confident in the future of the Mothercare brand. We believe that, without the financial and management burden of running a UK retail operation, we can singularly focus Mothercare on its global international franchise. This opportunity for this business is best demonstrated by the fact that there are 130 million babies born every year across the world, compared to 700,000 in the UK, and the group will now look to drive value for shareholders by harnessing that potential.”

 

The Mothercare UK administration came after the end of the business’ first half. In the 28 weeks to October 12, group revenue came in at £234.1m, down by 13.2% on the previous year. Pre-tax losses came in at £21.2m, up from £18.5m a year earlier.

 

International retail sales of £102.3m were 4% down on the previous year, while international profits of £12.2m were 21.2% down. UK sales of £131.8m were 19.2% down on last time, with online sales of £68.9m down by 13%. UK like-for-like sales were 2% down on the previous year.

 

The UK business’ stores are expected to stop trading in early 2020.

 

Mothercare’s view on why the UK business failed

Mothercare’s UK retail business – although performing well as a multichannel business, ranked Leading in IRUK Top500 research – had not made an annual operating profit in more than 10 years, and efforts to restore it to profitability had failed, said Newton-Jones in today’s Mothercare statement.

 

Work to improve the online business, stores and products, while cutting the number of stores from about 250 to 140 and boosting online sales to about 50% of turnover, had briefly resulted in a return to profit in 2017 before a downturn in customer confidence and spending. Stores were too big, and discounting was rife in the sector - making sales of third-party brands less profitable. While Mothercare UK, said Newton-Jones, provided 70% of UK store space for many leading brands in the baby category, the profit margin on selling those had reduced over time until it was not enough to cover the retailer’s costs. Goods were often available elsewhere, and were sold by other retailers as a loss leader. “Unfortunately,” said Newton-Jones, “the brands were not prepared to provide further contribution to offset the loss of margin or indeed higher levels of exclusivity to combat the discounting in the market.”

 

In 2018, Mothercare moved again to reduce its UK store estate - this time to 80 stores, though a series of CVAs (company voluntary agreements) in order to reduce operating costs.

“On this lower store base and reduced cost, we had hoped the UK business could stabilise; however, as we reduced the store estate, we did not see sufficient trade transfer to the remaining stores or move online,” said Newton-Jones. “As consumers watched their local stores close, we struggled with the misperception that Mothercare in its entirety had gone out of business. Given the cash constraints of the business through 2018, we were unable to launch an effective marketing campaign to address that misperception and promote the Mothercare brand as a going concern in the UK.

 

“Throughout 2018 and into 2019, the UK market remained very challenging and the margin structure, which was already under pressure, showed no sign of improving in the medium term. In simple terms, the occupancy cost and labour costs of UK retail could not be offset by the margin through the till.”

 

Looking to the future

The retailer now believes that Mothercare can only continue in the UK as a franchise, the model on which the brand operates elsewhere in the world. Discussions are ongoing. “We ... recognised that the ideal franchise partner for our brand would be an established UK retailer that could provide adequate floor space and an online presence, and importantly existing footfall of a similar customer profile,” said Newton-Jones.

 

“Finally, from a strategic perspective, we knew that the effort and energy that were being expended on fixing the conundrum of UK retailing would be better served on our global ambitions and building the Mothercare brand and proposition around the world.”

 

Mothercare’s UK business was a Leading retailer in IRUK Top500 research. Now the Mothercare Group operates 965 stores across international markets, where its overall turnover of £102m was 4% down in the first half, while online sales rose by 10%. The biggest growth came from the Middle East (+120%) and India (+38%).

 

Image courtesy of Mothercare

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