Can high-street retailers use CVAs to re-think their property goals in the eCommerce world?

Last month’s announcement that Sir Philip Green’s Arcadia Group is looking at a major restructure to reduce the number of its stores hardly came as a surprise. The owner of high-street fashion brands, including Topshop, Dorothy Perkins and Miss Selfridge, has been strategically readjusting its property portfolio over the past two years.

It is understood that the Arcadia Group will be engaging in formal discussions with landlords, including Intu and British Land, over leases. This may ultimately lead to a company voluntary arrangement (CVA) that might enable it to close a number of its stores or otherwise continue to run them at reduced rents.

How CVAs work

A CVA is an agreement between a company and its creditors to repay debts over an extended period. It enables a business to settle debts, often by paying only a proportion of the amount owed or coming to some other form of arrangement with its creditors. Interest and other charges are frozen and creditor action is stayed when the CVA comes into force.

Landlords have complained that retailers are using CVAs to avoid their obligations and to maintain profitability. House of Fraser’s landlords settled a legal challenge last year over the department store retailer’s plans to close 31 of its 59 stores as part of its CVA. We can therefore expect Arcadia to face a battle to persuade landlords to agree to vote any proposed CVA through.

It has been reported that Arcadia may be considering offering landlords an interest of up to 20% in the group. This offer would permit landlords to share a windfall in Arcadia if it were to be sold following any insolvency process, or a lump sum to equate to the amount they would receive if the group went into administration. Arcadia has instructed Deloitte to draw up the CVA proposals to enable the group to achieve rent reductions and exit multiple stores across the UK. The 20% proposal is likely to be one of many being considered as an alternative, or possibly in addition to that.

A perfect storm for the high street

Arcadia is just the latest of a string of big retailers – including Mothercare, House of Fraser, Paperchase and, earlier this month, Debenhams – to resort to an insolvency process as the traditional retail store model is no longer fit for purpose in the world of eCommerce.

It is, after all, a perfect storm: on one side competition from price-sensitive online-only retailers, which are free to respond to the latest trends driven by Instagram and other social media; on the other, increases in rent and business rates mean physical units are driving up costs.

Reducing the size of a large retailer’s property footprint to save costs alone is only of short-term benefit. Large retailers need to consider how to best maintain a portfolio of stores that will maximise profit and ensure they are well placed in their chosen markets.

A window for change

Many retailers already have a significant eCommerce presence. Brands including Topshop have used innovations such as AI applications to help personalise the customer experience. Selling entirely via the internet, where they will be competing with already well-established online-only start-ups, is unlikely to work. Successfully high street retailers must blend their online and offline presence so they are better placed than their web-only competitors.

Big brands maintain a clear benefit from having a high street presence and physical stores offer something that online shopping cannot – an experience. Retailers also need to use the latest technology to improve that experience. This includes incorporating an optimised payment journey through self-checkouts and advanced digital payment technologies. Analysing data to boost personalisation and using targeted marketing strategies through all channels, including digital, to get people into their stores in the first place will also be key.

Many high street retailers have over-expanded, leaving them burdened with debt and underperforming units. Failing to anticipate the explosion of online retail has left them ill-placed to adapt to it. CVAs, if they can be agreed with creditors, can provide retail chains with breathing space and a window to reduce and recalibrate their portfolios to give them a fighting chance. If they fail to grasp that opportunity and to keep up with the ever-changing retail market, the big beasts of traditional retail risk extinction.

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Daniel Swimer

Partner – Property Litigation

+44 (0) 20 7307 2306

daniel.s@joelsonlaw.com