Could shaky foundations and legacy costs see House of Fraser crumble?
PUBLISHED: 08:40 08 June 2018 | UPDATED: 08:40 08 June 2018
In a dramatic twist in the retail sector's downturn House of Fraser announced it was to cut a swathe through its estate - axing more than half its stores.
But the department store will remain in Norwich’s Intu Chapelfield shopping centre, with the outlet one of the 28 to survive the restructure.
The company will shed 31 of its 59 stores across the UK, putting 6,000 jobs at risk, in a bid to ensure the long-term survival of the chain.
Expensive rents have taken their toll on the group which has historically snapped up prime high street locations.
Amid challenging times for retailers, with shoppers facing a combination of rising inflation and slow wage growth as well as the choice of shopping online, these have proved too much for House of Fraser which is facing a battle to survive.
The cuts will take place through the use of a company voluntary arrangement (CVA) – a tool for struggling businesses to offload failing shops and reduce rents.
However, this will require 75% of landlords to approve the deal, in a vote on June 22, with a “no” vote likely to see the business collapse.
House of Fraser stressed that the group will continue to trade “as normal” online and through stores ahead of the CVA vote and throughout the proposal.
Frank Slevin, chairman of House of Fraser, said the company’s cost base was “an existential threat to the business”.
He added: “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.”
House of Fraser is not the only company facing tough times with Marks and Spencer proposing to cut 100 stores while Toys R Us has closed its doors, Maplin is in administration and a host of others have pushed through their own CVAs.
One of House of Fraser’s strengths has proven to be its undoing, according to University of East Anglia senior lecturer in business management Ratula Chakraborty.
She said: “House of Fraser has a very expensive estate of stores in good locations but for which it pays very high rents.
“To remain competitive then the store chain has to lower its operating costs.
“Unless it can secure a reduction in its rents on its remaining stores then the retailer may cease trading.
“For the time being, though, the Norwich store looks safe, which is good news for local shoppers.”
Will Wright, restructuring partner at KPMG and a proposed supervisor of the CVA, said: “The business has been impacted by the mounting pressures facing the UK high street, with the declining profitability of certain stores exacerbated by costly legacy leases which were originally negotiated many years ago.
“With trading conditions unlikely to materially improve in the short term, the future of House of Fraser is at significant risk unless steps to restructure the business both financially and operationally are taken.”
Hamleys owner C.banner is being lined up to buy a 51% stake in House of Fraser and invest £70m into what remains of the business.
But its cash injection is pledged only on the condition the retailer can agree the CVA restructuring.
While such a deal will stave off the collapse of the brand it remains to be seen if the long-term future can be secured with a smaller estate.
Despite the gloom for House of Fraser there is good news for Norwich with the store, at the heart of Chapelfield shopping centre, earmarked to remain open – as long as the CVA is approved.
Paul McCarthy, general manager at Intu Chapelfield said: “The House of Fraser store at Intu Chapelfield has not been identified for closure.
“Our customers can be assured that we will continue to work closely with existing and new retailers to deliver the great mix of stores, leisure and entertainment that they have come to expect from us.”
The House of Fraser stores scheduled to close will do so in 2019 after a period of reduced rent, the company said.
Retail analyst Richard Hyman said the announcement had been “a long time coming”, but reflected the “most difficult retail market anyone has ever seen”.
He said: “House of Fraser has developed lots of private labels but in a half-hearted way. In terms of its concessions, House of Fraser doesn’t have anything that nobody else has got.”
“A bit expensive”
House of Fraser’s arrival in Norwich was hailed as a watershed moment with the store occupying a flagship unit in Intu Chapelfield.
Reporter Anyron Copeman found out how city shoppers felt about the brand today.
Michael Staines, 79, from Swaffham, said: “It’s a prime store in Norwich and I would have thought it was doing quite well. Last time we went in, it was a bit expensive. We do quite a bit online. The worst thing is people go round the stores, have a look to see what things are like, think ‘oh that’s very nice, I’ll have a look online’.”
Keith Whitehead, 75, of Shotesham Road, Poringland, said: “I suppose House of Fraser is a bit dearer than a lot of the big stores. My wife does like going in there. I think that online could be a lot to do with it.”
Cynthia Gosling, 67, of Rippinghall Close in Aylsham, said: “I can’t say I’m surprised because every time I go in there, the one in Norwich, there’s hardly anybody in there.”
Poundworld on the brink of administration
The jobs of workers at budget retailer Poundworld hang in the balance as the company is reported to be close to appointing administrators – a move which could put 5,300 roles in jeopardy.
The firm’s cash reserves are running low and it is considering filing the notice as it would give the business two weeks’ protection from creditors.
Sources have said the notice would give Poundworld, which has stores in Norwich’s Castle Mall, King’s Lynn, and Wisbech, time to put together a deal – which could be undertaken through a controversial pre-pack administration – with private equity firm R Capital, former owner of Little Chef.
Poundworld, which is owned by TPG Captial, had previously rejected offers to sell through a pre-pack but all options are now being considered.
Its losses widened in 2016-17 to £17.1m, from £5.4m of losses the year before.