Arcadia: What went wrong?

On Wednesday afternoon Arcadia Group was saved from administration by agreeing on the required majority of its company voluntary agreements (CVAs) with landlords. Despite numerous reports of dissent from key landlords including Intu, Sir Philip Green’s retail empire has narrowly avoided the administrators and will still be forced to close around 23 stores as part of its turnaround plan, with rent reductions in 200. How did the toast of the high street get here? Retail Gazette investigates what went wrong for Arcadia, and what could lie ahead.

The Reasons

Where to begin? While the Arcadia of today is intrinsically tied to Sir Philip Green, the company founded by Montague Burton in 1903 has endured many trials in its chequered history to become one of the mainstays of British retail.

As of June 2019, the group now represents Topshop, Topman, Miss Selfridge, Burton, Evans, Dorothy Perkins and Wallis, as well as 18,000 members of staff.

On the surface, the timeline above shows a retail giant determined to survive despite change at every element of its business. But beneath that, it could be argued Arcadia’s current issues date back through the decades. What seems clear now is that Arcadia has had too many stores for more than 30 years, while its key competitors such as Asos and Boohoo have remained entirely online-only, never branching into bricks and mortar.

Especially relevant is Townprint, the major review of stores the group undertook in the early 1990s, when it was still known as Burton.

Launched in 1993 by then-Debenhams’ chief executive John Hoerner, Townprint aimed to ensure that each Burton outlet was located in the right place and properly distanced from each other. The report led to a major reorganisation of the group’s 1,600 stores, calling for the disposal of 380 units, the acquisition of 228 units, and the transfer of 354 units from one Burton Group format to another.

While no-one in the early 1990s could have predicted the boom of e-commerce and fast fashion, many critics of Arcadia’s turnaround have been quick to point out the retailer suffers from over-exposure on the high street. Another round of CVAs may do little more than a quick fix for the business, that it also looked to address thirty years ago with Townprint.

“Arcadia have been guilty of the same crime as a number of the casual dining operators who have entered CVAs, by having too many stores in too close proximity,” said London-based retail law firm specialist Howard Kennedy partner Nicky Stewart.

“The flaws of the financial modelling that was used to justify such numbers are sadly becoming apparent as can be seen by the number of businesses who have had to resort to CVAs. However, it is unlikely that a restructuring via a CVA or administration will overcome what is the fundamental problem.

“Sir Philip Green’s fall from grace clearly hasn’t helped either. His reputation could be affecting the current CVA negotiations as heavy weight landlords may be reluctant to grant the same concessions as they would do to other struggling retailers,” Stewart argued.

Too big to fail? It might be that one crucial issue with Arcadia is it has become too big to change.

While its business has seen many iterations in the past one hundred years, with the rise of e-commerce, brands like Topshop and Miss Selfridge acquired new competition Arcadia’s business model is not set up to compete with easily.

“The rise of fresh, agile competitors has undoubtedly contributed significantly to the group’s demise,” said Joelson property litigation partner Daniel Swimer.

“Arcadia sells relatively little online compared to many of its rivals and it has faced a considerable threat in the last few years from online retailers such as ASOS and Boohoo,” Swimer added.

Setting aside Arcadia’s shortcomings, landlords have come under fire for increasing rents while retailers have been unable to match through sales.

With many retailers facing rising business rates and labour costs, they argue new deals with landlords are necessary for survival on the high street, and that such high leases would never be agreed upon in today’s economic climate.

On top of that, there’s the issue of dwindling market share across all of Arcadia’s brands (bar Outfit) in the past ten years that shows Green has a real fight ahead of him even now that his CVAs have been approved.

In fact, 23 store closures may be just the beginning of the turnaround for Arcadia, as experts believe it may need to cut back further in order to survive in the long-run.

“I doubt the 23 closures will be enough,” said commercial real estate advisors Harper Dennis Hobbs executive director Dan Hildyard.

“After agreeing the CVAs, the next step now is to re-engage the brand with their customer and I suspect the latter will be even more difficult than the former. The reason that I think this will be difficult, is that high street stores are constantly competing with fast-fashion retailers, who can produce low-cost products, as quickly as the consumer needs change,” Hildyard added.

On the other hand, landlords are concerned over the precedent a new series of CVAs sets with a major retail group such as Arcadia. Were another fast fashion giant to fall on hard times, they’d have more CVAs to contend with.

Yet with thousands of jobs at stake, it’s likely Arcadia’s landlords will feel the pressure from the general public, as well as the losses they’ll face with empty stores from failed negotiations.

“At some point, the landlords and shareholders are going to have to accept some kind of a deal. The UK retail environment is still a difficult one and, inevitably, there will be some casualties as the high street reinvents itself,“ said Retail Connections chairman Chris Field.

“Things never are as dire as the business owners like to say, and Sir Philip is no fool; and, ultimately, money comes first – this could well be the catalyst for reinvention, rather than the ultimate road to ruin for Arcadia,” Field added.

Read the original article.

Daniel Swimer

Partner – Property Litigation

+44 (0) 20 7307 2306