Following company voluntary arrangements from New Look and Select, and rumours that Mothercare will be next, Drapers asks whether there will be a ripple effect on the high street.
In tough times for high street fashion, retailers are turning to company voluntary arrangements (CVAs) to break leases on unprofitable stores and seek reduced rents on others. Once an absolute last-resort mechanism, CVAs are increasingly being used in 2018 to help weather the tough retail climate. Now, some fear high-profile cases such as New Look and Select may lead to a domino effect on the high street as retailers seek to address an unfair playing field.
As one property source says: “I feel sympathy for retailers who are in good shape. If you’re next door to someone whose rent is half what it was the day before, it’s just not fair. That said, a lot of landlords are feeling a lot of pain. We have certainly not seen the end of these CVAs, and I don’t know whether they’ll be a tipping point for some landlords.”
Another property source agrees: “It is a very unfair system. The impact for landlords is not great, but it’s also not good for the reputation of the retail industry itself. [CVAs] are creating a very negative impression about bricks-and-mortar retailers, and this undermines the whole sector.”
One property investor tells Drapers he is aware of landlords that vote no to every CVA put in front of them, regardless of the consequences, arguing they are not “right or equitable”.
However, a CVA may be the lesser of two evils in a market where a tenant that hands back the keys could leave an empty store that is hard to re-let.
Jonathan De Mello, head of retail consultancy at property agency Harper Dennis Hobbs, says CVAs are needed for retailers to address long leases: “Retailers have been closing stores on lease expiry for some time. [However], getting out of a lease isn’t really possible without some sort of vehicle to do so, such as a CVA.”
One commercial property expert told Drapers that the growing use of CVAs is an inevitable consequence of the state of the market: “The market is as challenging as it’s ever been and nothing surprises me. I never expected New Look to be in that position, irrespective of the debt. It was a hell of a good business. A lot of CVAs that have gone through in the past were pretty average businesses, but New Look was very profitable.”
Another property source adds: “Trade is horrendous. Lots of people can’t go on like that. If retailers are looking to resolve issues, they should be thinking about it now, rather than waiting until it’s too late. On the current run rate, how long will you survive before someone puts in more money? Unpalatable as they are, CVAs have got to be seen as a better option than the alternative.”
Although CVAs are a way for retailers to get out of contractual liabilities, they do not address the root of the problem, such as debt, poor product or bad management decisions, one property director argues. And, as more than 50% of CVAs end up with the applicant entering administration, he questions if they are “just a plaster over a gaping wound”.
One retail property expert tells Drapers: “The wider issue is that we’ve allowed venture capital firms to buy debt and that’s what they are interested in – not running a retailer.”
Joshua Bamfield, a director at consultancy Centre for Retail Research, say the next two years may be “the worst for retailers since the recession”, adding that “survivors will have to deal with competition from sur product dumped on the market by administrators, as well as the quality of high streets and shopping centres being adversely affected by empty shops.”
In the short-to-medium term, Bamfield predicts retailers will continue to pressurise landlords to ease the terms of leases and cut occupancy costs.
However, he adds: “Survival in the longer term requires a focused strategic vision about how to meet the needs of the 2020 consumer in an aggressive and multichannel world.”
The Drapers Verdict
More retailers are likely to examine CVAs as a way to cut costs. Once the preserve of those verging on collapse, they are now seen as a method of renegotiation for retailers still in the black. While landlords need to take a more realistic view of rents (and the government of business rates), retailers must be wary of disguising structural problems with a CVA. It may reduce overheads, but it will not solve issues with product, culture or management.
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