As we head into the festive season, retailers will be hoping for a positive end to another tough year. With Mothercare and Mamas & Papas both filing for administration this month, many retailers will be stocking up ahead of Black Friday and the pre-Christmas sales, while worrying what the new year may bring.
Recent times have been challenging for retail, with a number of high-profile insolvencies filling the business pages. Tough trading conditions have also seen a wave of CVAs over the past couple of years, as distressed retail businesses look to turn their fortunes around.
As we move towards 2020, further retail insolvencies are likely, including retailers who have only recently been through a CVA process. This begs the question: are CVAs still working for retailers?
A mixed record for CVAs in retail
Enabling distressed companies to compromise creditor liabilities, the first raft of retail CVAs – around a decade ago – typically focussed on property liabilities and involved concerted work to reduce rent rolls or close underperforming stores.
Rather than being used as a standalone solution, these measures typically worked alongside a capital structure reorganization and a range of other restructuring methods. This approach meant that some of the early CVAs really worked – transforming the fortunes of Café Rouge, Bella Italia, Fitness First and Travelodge, among others.
However, it is becoming clear that some of the more recent CVAs have simply enabled distressed retailers to “kick the can down the road”, creating a short-term solution without addressing the underlying issues. Furthermore, the more recent raft of CVAs have really only solved one part of the problem facing today’s retailer – the store estate. And where they have rationalized the store estate there is increasing evidence to suggest that they have not cut deep enough.
The questions retailers are not answering are why they are failing and why their product is not selling, along with a lack of understanding about what they should do to turn their fortunes around.
This failure to properly address the root cause of the issue means that many retailers are limping along, leaving them vulnerable to future failure in an already very challenging market.
Do CVAs still have a role to play today?
Despite the evident limitations with these newer, more commoditized procedures, CVAs still have a role to play in helping retailers in trouble. However, to be effective, they need to be combined with a range of wider financial and operational improvements. The ingredients for a successful CVA, when broken down, are relatively simple:
- Capital structure – restructuring an over-leveraged capital structure and avoiding being saddled with large amounts of debt, which can’t be serviced, must be carried out alongside a property reorganization, to ensure the retailer is in a strong position to recover.
- Understanding the impact of store closures – consideration should be given to the possible side effects of store closures and rent roll reductions. For example, how will online sales be influenced by the loss of click-and-collect locations, and will any of the lost sales be transferred to other stores?
- Be wary of quick wins – to be effective, and to recover and survive, it is important to ask a number of tough questions: ‘Are we operating efficiently on all levels and generating the right EBITDA margins?’; ‘Is our business focused on what the customer wants?’; ‘Are we creating an omnichannel shopping experience that means people will return, even if we have fewer stores?’ Fail to answer these strategic conundrums, and a CVA alone will not offer a long-term route to recovery.
There is still merit in CVAs, but they are not a panacea. With many retailers relying on strong performance during what will certainly be a challenging festive season for many, we can expect to see further insolvencies in the new year.
CVAs may be a route to recovery for some, but long-term success will only be achieved by those retailers that recognize their limitations, and pair the process with rigorous and far-reaching operational and financial restructuring.