Why are high street retailers suffering?

Another day, another high street retailer goes insolvent. It feels a bit like that at the moment, with Jessops, HMV and today Blockbusters all entering administration in the past week and Comet going the same way at the end of 2012.

We spoke to Mike Jervis, partner at PWC, about the current state of the UK High Street.

Why are high street retailers finding it so hard at the moment?

There are a number of reasons the high street is struggling, these include:

  • consumers have less disposable income, fear for their employment, spend less—there is real evidence that volume growth has stopped (they also want the convenience of on-line)
  • retailers in many cases have too many stores, too much fixed cost—the costs of running stores has grown at a higher rate than the top line (rents, rates, wages)
  • struggling retailers not devloping a viable online offering
  • technological or socio-economic changes marginalising certain categories—eg music online, greeting cards etc

In recent months, it seems to be specialist retailers (ie Comet, Jessops and HMV) entering administration. Why are they finding it hard compared to more ‘general’ retailers, such as the super-markets?

Supermarkets have enormous turnover driving buying economies allowing them to pass on low prices to consumers. They can afford to offer low prices just to drive footfall—eg some of the areas supermarkets have affected are games (impacting the retailer Game), cards (Clintons), DVDs (HMV) etc. Because they have been, and continue to be so profitable, they invest in their businesses—eg loyalty cards—to protect themselves even more.

Are these retailers just bad businesses, or are there other factors at play?

Many did not adapt to the new norm—fewer stores, online offering—quickly enough. Some expanded too much—either expanding overseas or taking on too many stores. There are always lessons to learn from insolvency cases but it is hard to say bad management is any more culpable in this sector than others.

We have seen that Comet accepted some vouchers but Jessops and HMV won’t—should the government be taking any action to protect consumers?

Credit card payments provide some protection. On Game, we ‘sold’ the liability on vouchers as part of the sale so the purchaser had to honour them as part of the goodwill. There could be legislation to ringfence money for vouchers but that would increase funding levels and costs. There could be an industry fund for this but it would have to be funded and it would be expensive to administer.

What next for retail insolvencies in the UK?

There should not be as many national chains going bust as in 2012, but there will be a lot of mid-market casualties. The fundamentals of a cash strapped consumer will continue for some time.

Are the current legislation and procedure fit-for-purpose?

There are very few successful CVAs despite a lot having been set up. A number of these went into administration—eg Blacks, JJB. It is hard to find a successful one. I suggest, before a CVA is allowed, the supervisor satisfies themselves the business is viable and capable of returning to profitability over the term of the CVA. Supervisors should not simply be able to abrogate responsibility for that vital aspect.

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