Shopping centre and high-street landlords have been asked to lower rents on unprofitable stores as struggling retailers seek ways to keep their businesses afloat and cut costs. But property owners have grown increasingly resistant, prompting some chains to consider an alternative approach.
Last month Philip Green was forced to tweak a plan to close or secure significantly lower rents on stores leased by his Arcadia business. He pledged to invest £100m into the company, which owns Topshop and Miss Selfridge, after landlords refused to back a more aggressive restructure with deep rent cuts.
The landlords revolted after feeling pushed into a corner by chains saying they would collapse if they could not secure company voluntary arrangements, a form of insolvency that permits store closures and rent forgiveness deals.
Between 2016 and 2019, the number of retailers that agreed CVAs doubled, according to PwC. Chains using the process included children’s wear retailer Mothercare and department store group Debenhams.
But now some retailers that had been expected to push hard for CVAs are planning to let leases lapse, then renegotiate them at lower rates.
Many are inspired by fashion chain Next, which remains in good health but nonetheless is pushing hard for lower rents. On shops where leases have come up for renewal, chief executive Lord Simon Wolfson said in March that Next has managed to renegotiate rents down by 29 per cent, on average.
This week Superdry, a once-booming British fashion chain known for its Japanese-themed hoodies and jackets, reported an £85m full-year loss. This came after the retailer, whose co-founder Julian Dunkerton has returned to the helm following a flurry of profit warnings and a boardroom spat, wrote down the value of underperforming stores by £130m.
Mr Dunkerton, who is supremely confident that he can restore Superdry to growth after same-store sales fell 10 per cent in the year to April compared with the previous year, has pledged there will be “no CVA”. He said on Wednesday that he would wait for leases to expire instead. He added that 70 per cent of the group’s rental agreements were up for renewal within four years, while 40 per cent would be renegotiated within two years.
The Superdry co-founder and interim chief executive, who took the post in February after shareholders narrowly voted him back in, said that once leases expire, the business would be in “a fantastic negotiating position” with its landlords. If rent reductions were not achieved, he said, Superdry would “shut the stores”.
Mr Dunkerton cited Lord Wolfson and Next as his inspiration for this strategy. But investors do not appear to mirror his confidence, with the share price falling 16 per cent since his return.
Another retailer expressing concern that its rents are too high is car accessories and bicycle seller Halfords, which reported that pre-tax profits fell by a quarter to £51m in the year to March, compared with the year before. Its market value has slumped from a peak of £1.1bn in August 2015 to £428m now as annual revenues have slipped.
Halfords is also not pursuing a CVA, instead opting to unnerve its landlords about potential store closures at the point leases expire. The group’s chief financial officer Loraine Woodhouse told City analysts in May that, over the next four years, Halfords has 175 break clauses or rent reviews coming up. “So we have got a lot of opportunity to go back and renegotiate rents,” she said.
The group has already achieved “double-digit savings” on new leases compared with those that had entered break clause or review territory, Ms Woodhouse said.
While many retailers blame landlords for their struggles with costs, not all of them view shops as their key cost or profit centres. One small retailer that takes a contrasting view is Ted Baker, a premium-priced fashion chain that last month issued its second warning in four months on profits after it heavily discounted clothes to shift stock.
A Ted Baker spokesman said there were no plans for a CVA because the group’s 48 wholly owned or licensed UK stores, which are all in prime locations, are there to showcase the brand, whose profit margins have shrunk and whose stock price has shed two-thirds of its value over the past year. Essentially, the outlets are bricks-and-mortar advertising hoardings designed to tempt wealthy customers to buy its products on their smartphones.
Retail used to run on so-called operational gearing — making profits march higher by increasing the sales that each fixed-cost-base shop can achieve. For many retailers that model has shifted into reverse. And for all its challenges, Ted Baker has at least hit on what is likely to be the future of the shop.