[co-author: Peter Manley]
In this article on the changing landscape of UK fashion retail, we consider the challenges and changes faced by the industry and comment on the opportunities available for existing players and potential new entrants to the market.
The UK fashion industry is estimated to contribute over £21 billion annually to the UK economy. Of this figure, an estimated £2.5 billion comprises retail spending. With over 800,000 people employed in the industry, fashion retail is a significant and vibrant part of UK Plc.
However, in recent years UK fashion retail has been peppered with tales of financial “failure” and in many cases “rescue”: retail has struggled to adapt first to the global recession and then to the new realities as the UK emerged from recession in 2009. It may be surprising to note that even in the current post-recession period, the UK market continues to see significant levels of financial distress and business failure. Established businesses across the fashion retail spectrum are being affected, with businesses operating in both the value segment (e.g. Peacocks and Internaçionale) and high-end segment (e.g. Nicole Farhi and Aquascutum) finding themselves vulnerable to financial distress.
The retail sector continues to face a number of significant challenges. Many retailers (whether in fashion, entertainment or hospitality) are having to manage the costs of rents across their premises portfolio while addressing profitability challenges on marginal stores. Pressure from online competition, employee costs, continuing development of quality ranges and the impact of seasonal weather on consumer demand have all contributed to the insolvency of a range of prominent fashion retail names.
In broad terms, “insolvent” means that the business is unable to pay its debts and liabilities as they fall due. Very often, the insolvency of a business in the UK will involve the appointment of an accountant by the company or its creditors to act as the administrator of the company which owns the business. Once an administrator is appointed, the company is in administration and this (in general) prevents any creditors from taking action against the company.
Insolvency is perceived by many to be the end of a business. But while the initial impact on customers, suppliers and employees of a business undergoing a corporate insolvency process can be difficult, there are significant opportunities for competitors and/or new entrants to the market to acquire strategic assets and business when a fashion retailer undergoes an administration or other insolvency/restructuring process. The insolvency of a business in this sector and the appointment of administrators does not necessarily mean loss of brand value. The insolvency regime in the UK aims to facilitate business recovery and provide an opportunity for financially distressed businesses to trade profitably in the future. A large proportion of those brands/businesses have emerged from administration under new ownership as leaner, more dynamic and more competitive businesses with a prospect of trading profitably for years into the future, typically with a smaller store portfolio, reduced employee costs and a strengthened management team to drive the business forward.
A successful acquisition in these circumstances requires a purchaser to move quickly, so early notice of an opportunity is key. The absence of any warranty or representations from the administrator on issues of title to the business/assets being sold will mean the purchaser will have to price risk into any offer.
When making an acquisition, consideration must also be given to the future structure of the business and to the ownership of the assets. Appropriately structuring a business can be crucially important in managing risk of insolvency within a corporate group operating under different brand names in different sectors and jurisdictions. The use of distinct legal entities to hold particular assets or businesses can isolate unprofitable elements of a group or business in the event of trading difficulties in a particular market or sector. This is a very valuable tool and can allow a purchaser to avoid the “bear traps” which affected the insolvent company. For example, holding trading operations, property assets and intellectual assets in separate legal entities may mitigate the risk to assets of the group in the event of trading difficulties in a particular area.
In the fashion retail sector where brand value is difficult and costly to establish, increasingly the insolvency of an established business in the market is seen as a strategic opportunity to acquire valuable intellectual property assets and skills without having to pay the premium that would apply to a solvent asset or share purchase. The “failure” of a business in this sector is increasingly viewed as an “opportunity.”