Turnover at shops may stabilise in 2012 but after the Government abandoned an election promise to scrap upwards-only rent review legislation, many shop owners are reassessing their futures
‘THIS SHOP is now closed,’ reads the sign above the door of lingerie retailer La Senza. On Monday, large plastic bags of ruffled knickers, gel-filled bras and baby-doll nightdresses – unsold during a brief closing down sale – lay inside the glass window of the floundering UK chain’s Grafton Street store, just a few units away from where John Corcoran, proprietor of shoe shop Korky’s, has erected a giant canvas sign accusing Fine Gael of being “liars” for abandoning a manifesto pledge on upward-only rent reviews.
Later that evening, it was announced that some 60 La Senza stores would be bought from owners Lion Capital by the Kuwaiti retail group Alshaya, confirming an earlier tweet by La Senza’s former owner, the television dragon Theo Paphitis. It was “good news and bad news”, Paphitis wrote – some 1,100 jobs would be saved, but 1,300 lost, as 84 stores were axed. In the Republic, about 100 La Senza staff found themselves on the wrong side of the line.
Even before the chain entered what’s known as a “pre-pack administration”, three of the four outlets here had been placed on a hastily assembled closure list. The fourth, plus its four Debenhams concessions, joined them this week, as did a total of seven outlets and concessions in the North.
What brought La Senza to this point is a tale that’s by no means unique in the retail sector. There was nothing obviously wrong with the product: it was cheerful, youth-oriented and rainbow-hued. Pitched halfway between Marks Spencer and Ann Summers, much of the stock leaned more towards cutesy than hardcore, its colour palettes changing with the seasons and its price promotions decent.
But the economics underlying its earlier success had become seriously askew. Bought from Paphitis by Lion, a private equity firm, for £100 million (€121 million) in 2006, the chain exuberantly over-expanded. Lion tried to borrow its way out of trouble in 2009, to only temporary avail. Sales wilted as consumer spending by Primark-dwelling twentysomethings retrenched. Its costs didn’t.
And so La Senza, purveyor of items ranging from silky basques to terry cloth dressing gowns, has become the highest profile retail casualty in 2012 to date. But there are more to come, the industry is warning, and it’s likely to be from both struggling, recession-weary Irish firms and retreating, debt-laden British brands that the jobs are shed.
HMV, Mothercare and Argos rank among the UK chains with a substantial presence here that have become no stranger to profit warnings over recent months, while jobs are already being lost from Barratts Priceless, the wobbling footwear chain that announced the closure of 18 stores, including one in the Republic, before Christmas, and has now failed to find a buyer for its concessions business. At some of the retailers that have managed to report positive seasonal trading figures, such as clothing chain Next, it was the contribution of their buoyant online divisions that notably saved their Christmas bacon.
“It’s not a pleasant place to be in the retail sector at the moment,” says Marie Hunt, director of research at property agent CB Richard Ellis. “Many retailers just came into the market at the wrong time. The shop next door could be paying a rent that’s 50 per cent less than theirs, but they have to try and compete with them.”
In a report on the commercial property market published this week, Hunt forecasts that most retailers in Ireland, now in their fourth year of austerity, will see turnover stabilise in 2012. But the realisation that the Government isn’t going to sweep away upward-only rent clauses in retail leases will force some shop owners to reassess their futures.
“Retailers have already done what they can – they’ve cut costs, they’ve cut staff. They see that there’s no immediate prospect of trading their way out of it,” she notes. “I think it’s inevitable that we’re going to see more high-profile announcements.”
Location factors are looming large. CBRE’s report highlights the risk of surging rates of vacancies in “secondary” and provincial retail properties – there’s always been a gap between the financial health of prime and secondary retail locations, Hunt says, but they usually moved in tandem.
“Now we’re beginning to see a bit of a divergence. For Grafton Street, Dundrum and the better schemes, there are still international retailers vying to get into that space, albeit on keener deals. But beyond the prime centres, if the vacancies creep in, it’s much harder to re-let that space.”
It’s a pattern that has obvious social consequences beyond the immediate trauma of direct job losses. When vacancy rates rise, footfall drops, putting the shops that are still trading at risk of failure – a downward spiral of degeneration can set in.
Landlords and scheme owners will try to stop the trend in its tracks by installing pop-up shops – temporary traders willing to take on empty properties under short, cheap leases. But while that might provide a limited income stream for the owner, it’s far from ideal. Pop-up shops don’t tend to overlap with the kind of “super-brands” that retail analysts believe are strong enough to appeal to consumers in an age of e-commerce, mobile commerce and Tesco.
“Any international brands of note that have entered the Irish market in recent years – the likes of Zara and HM – haven’t favoured the high street. They’ve mostly gone to the shopping centres and the retail parks. They’re not stupid – it’s a controlled environment, and they recognise that that’s the way people shop now,” says David Fitzsimons, chief executive of Retail Excellence Ireland (REI).
“But it’s eroded the high street. Coffee shops and telcos and bookies and discount stores . . . all of those feed off footfall, they don’t generate footfall.”
This, as Fitzsimons sees it, is one of the problems with the current two-tier retail property market. Where landlords, such as State assets agency Nama, prove intransigent on rent negotiations, retailers undone by legacy leases will end up making way for a newer breed of shop that can take advantage of softer deals. “There’s nothing wrong with fluidity in the market, that’s the way all markets go. But the concern is we’re losing good, progressive retailers, and in some cases they’re being replaced by retailers that don’t offer good customer engagement,” he says.
Not all retail tenants were created equal – a fact stressed from the outset of a recent report on UK town centres by the retail expert and television star Mary Portas. She lamented that the British high street had become an increasingly desolate home to pound shops and charity shops. As affluent consumers either drove to out-of-town centres or loaded up virtual baskets instead, the solution, for Portas, seemed clear: town centres had to become more “experiential”, with an influx of non-retail service companies such as gyms, creches and even bingo halls forming part of “multi-functional social and shopping” streets.
“And she’s right. We shouldn’t restrict the high street to strictly retail,” says Fitzsimons. REI, which is hoping to lure Portas to a retail conference in the spring, is currently putting together its own Portas-style blueprint for good town centre management, which it hopes to take to Minister for the Environment Phil Hogan.
The solutions for the Irish retail sector may be somewhat different from those Portas recommended in the UK, Fitzsimons qualifies, but town centres do need to capitalise on what they often already have an advantage in – offering a much more vibrant social scene and restaurant choice than “formulaic” mall rivals. Greater co-ordination and clarity on parking initiatives, opening hours and sales periods are also crucial. “Town centres need to think more like shopping centres do. They need to think like [centre director] Don Nugent in Dundrum does.”
IN THE MEANTIME, several retailers that were clinging on for the retrospective removal of upward-only rent clauses, are now set to apply to the High Court for examinership – the process where they secure court protection from creditors as they try to restructure their business. Restructuring here means repudiating onerous leases and closing down shops with untenable rents, or using corporate insolvency specialists to negotiate lower rents.
“It is happening, even as we speak,” says Neil Hughes, managing partner of Hughes Blake, the accountants to which REI is referring troubled members. “Since the Government announcement regarding upward-only rents, there’s been a noticeable increase in inquiries. Examinership is really the only way of exiting a lease.”
Hughes argues that examinership is not just for “the big boys” and that it can cost as low as €50,000 – a tempting option if you have a six-digit annual rent. A halving of that rent is typical, and reductions can run as high as 65 per cent as part of the resulting negotiation with landlords, he says - often the cases don’t go as far as a repudiation of the leases. “It’s not an exercise to bring landlords to their knees, it’s an exercise to bring landlords to their senses,” he adds. But the focus should be on “saving as many jobs as possible”.
When retail jobs are lost, it’s not usually pretty. On Tuesday, around 25 La Senza workers began a sit-in at the Liffey Valley store, frustrated by a lack of communication. They had not been paid for either the hours racked up in January or overtime completed during the Christmas period, and there was no word on when they would receive their P45s. This left them in a financial limbo, unable to claim welfare entitlements and facing a long wait for statutory redundancy payments.
The treatment of the workers is “deplorable”, says Michael Meegan, official from trade union Mandate. The Liffey Valley store took in €253,000 and the Irish outlets had total revenues of €6.1 million in December, he says. Staff worked through the sales even though the retailer signalled on the day before Christmas Eve that it intended to enter administration. But as late as January 3rd, a QA document issued to staff stressed that La Senza was not actually in administration – a technically correct statement that glossed over the behind-the-scenes search for a buyer. Faced with little choice, staff continued clocking in until they were ordered to bring the shutters down for good.
The experience of La Senza’s staff – kept in the dark, left out-of-pocket – is dispiritingly common in a pre-pack administration, where companies continue trading until a buyer is already on board to take the cream.
The leaner patches are dispatched as part of the process, with no room for negotiation – the buyer either wants your store or it doesn’t, leaving the administrators to mop up the shreds of the failed management. Worryingly, the La Senza-Alshaya deal looks set to be just one of many instances of a cruel “right-sizing” in the retail sector in 2012. There are, to be blunt, just too many shops.
