S̶n̶o̶w̶ ̶S̶n̶o̶w̶ ̶S̶n̶o̶w̶: Spend, Spend, Spend
COVID-19 Market Update – 10/12/2020
12 minutes to read
Introduction
This is the 26th of a series of weekly notes analysing the state of the UK retail market in the light of the COVID-19 pandemic. This note explores two key themes:
- The latest BRC retail sales figures and prospects for Xmas
- Implications of Arcadia’s and Debenhams’ administrations
Please do not hesitate to contact myself or any of my retail colleagues if you require any further information.
Key Messages
- Total retail sales grow by +0.9% in Nov
- 2nd lockdown impact less severe than 1st
- But Nov figures flattered by weak comp and distortions
- Grocery sales surge by +13.9% to £10.9bn in Nov
- Transfer of trade from hospitality and “non-essential” retail
- Footfall up +63.6% week-on-week after lockdown is lifted
- But footfall is still down -30.3% year-on-year
- Consumers making fewer trips, but spending more per trip
- Retail sales on course to report strong growth in Dec
- Figures need substantial qualification
- Arcadia to be broken up as a result of administration
- Buyers likely for all Arcadia’s womenswear brands
- Debenhams’ fate hinges on Mike Ashley
- Hobson’s choice for many Debenham’s landlords
- If no deal is struck, the business will be liquidated.
1. The latest BRC retail sales figures and prospects for Xmas
Retail sales were considerably stronger than expected in November, although the data itself needs serious qualification on a number of counts (lockdown, sub-sector polarities, comps, Black Friday distortions). In essence, retail sales did not suffer nearly as badly during the 2nd lockdown as they did during the 1st and there is still plenty to play for in the run up to Christmas itself.
In terms of headline numbers, total retail sales grew by +0.9% in November, despite the UK being in lockdown for most of the month and “non-essential” stores remaining closed for all but five days. On the surface, a markedly better performance than during the 1st lockdown, when sales in April and May were down -19.1% and -5.9% respectively.
The caveats below the headlines. The comp base last year was exceptionally (and suspiciously) weak, flattering this year’s numbers. Retail sales in November 2019 were down -0.9%. Black Friday, such as it remains a time-defined “event”, effectively fell outside the November figures last time, but would have been included this time around. As we predicted, it appears that Black Friday was just a period of elongated white noise that didn’t really move the needle of spend either way.
Although positive, the other headline number (that like-for-like sales increased +7.7%) is largely spurious. Like-for-like sales have been adjusted to exclude temporarily closed stores and the metric is designed to highlight underlying growth. But the fact remains, we can’t just artificially gloss over the fact that stores were not able to open. Besides, the comp was again exceptionally weak (-1.3% in November 2019).
The aggregated three month figures paint a more realistic picture of the current state of the retail sector overall. Over the three months to November, in-store sales of non-food items declined -18.6% on a total and -10.8% on a like-for-like basis. Conversely, over the same period food sales increased +6.4% on a like-for-like basis and +7.0% on a total basis.
Food is clearly the driver behind the better-than-expected overall retail sales figure. Separate figures from Kantar show that grocery sales surged by +13.9% to £10.9bn in the four weeks to 29 November, a record monthly high that is projected to be surpassed in December (+£1.5bn to >£10bn). 2nd lockdown clearly played into the major grocers’ hands, with transfer of trade from both hospitality and “non-essential” retail, both subject to enforced closure.
With so many stores closed, online had another month in the sun. Online non-food sales surged by +47.2% in November, not surprisingly significantly above the 3-month average of +40.6% and the 12-month average of +33.2%. Non-food online penetration rate increased from 33.2% in November 2019 to 59.3% this November.
In terms of individual categories, many of the trends of previous months continued. Clothing and footwear remains firmly in the doldrums, but there were also sharp downturns in jewellery & watches and furniture, sectors that rely more heavily on store-based trade. Other home-based categories, particularly electricals, fared much better, no doubt partly on the back of Black Friday (but obviously no reference to the impact on margins and profits in the BRC release).
Footfall data from Springboard inevitably shows a strong bounceback since the 2nd lockdown was lifted. Week-on-week footfall was up by +63.6%, but was still down -30.3% on a year ago. Footfall remains only a loose indicator of actual trading volumes and the two do not necessarily correlate closely. Indeed, we still expect consumers to make fewer shopping trips this Christmas, but average spend to be significantly higher per trip. Beware inevitable media obsession with footfall figures in the coming weeks, which only tell a limited part of the story.
Where do we go from here? The official ONS retail sales figures for November will not be released until 18 December and our expectations on those (strong grocery growth of +6%, high single digit decline in non-food, low single digit/neutral overall growth, flattered by a weak comp) remain broadly unchanged, albeit our projections on food may now be a little undercooked (pardon the pun). The official ONS figures for December/Q4 will not be available until well into January.
If nothing else, the BRC figures for November show that consumer demand is still there, temporarily frustrated by store closures during 2nd lockdown. All is still to play for and December is likely to see a positive outturn. However, strong figures for December and Q4 do not necessarily accurately or fully reflect life on the high street. For one thing, they will be inflated by very weak comparable figures last year. Nor will they take into account the damage done and trade lost earlier in the year.
My advice for navigating the inevitable media barrage on Retail in the coming weeks. Take footfall data with a heavy pinch of salt – it’s a one-dimensional metric. Don’t be seduced by very strong headline retail sales figures – the UK consumer is continuing to spend, but the actual numbers need serious qualification. And don’t read too much into retailers’ post-Xmas trading statements – they are unaudited, seldom take into account product returns and are just one (of many) versions of the truth.
2. Implications of Arcadia’s and Debenhams’ administrations
Inextricably linked for so long – indeed, sister companies as part of The Burton Group between 1985 and 1998 – there is no irony in the fact that Arcadia and Debenhams have both entered administration at broadly the same time. What, if anything, survives from either business hangs very much in the balance, particularly in the case of Debenhams.
Very few commentators have explored the root causes of their respective demises. Inevitably, much of the focus has been on Sir Philip Green and perceived failings on his part, most notably his apparent reluctance to invest in online. A very lazy summation on the part of the media and one that actually has very limited bearing.
Where to start? The obvious place of recent events of the past year. There is no denying the havoc that COVID-19 has wrecked on the UK fashion sector this year. Clothing sales slumped by as much as -70% in April and are still firmly in negative territory going into Christmas. For the year as a whole, we are probably looking at a shortfall in spend of 30%-40%.
Of course this is going to make the clothing sector an incredibly tough place to be. But did COVID-19 kill Arcadia and Debenhams on its own? Of course not, both had major pre-existing conditions and had already launched CVAs long before the pandemic actually struck. COVID-19 was not the architect of their respective downfalls, merely a force that tipped them over the edge.
One of the structural failings of the high street is an over-supplied fashion sector, with too many operators and too many stores. With soft consumer demand even before COVID-19, there was simply not enough growth to go round. With demand falling off a cliff during 2020, only the strongest brands can survive – therein lies the generic reason for the failure of both Arcadia and Debenhams.
Arcadia’s various brands have drifted for a long time through lack of appropriate investment. The preeminence of TopShop for a number of years deflected attention away from the other stablemates, who, to varying degrees, were all under-performing. Latterly, even the supposed jewel in the Arcadia crown has seen performance deteriorate, although a lack of transparency has often made this difficult to measure.
ASOS and Boohoo might be flying high, but shortcomings in online strategy isn’t the key reason behind Arcadia’s demise. It might not be an online trailblazer, but it is a multi-channel operator with a fully-functioning online platform. The issue is far more fundamental and deep-seated – its brand and product are not what they need to be.
In contrast, ASOS’ and Boohoo’s brands and product are currently hitting the mark. But then so too are Primark’s, which doesn’t even operate online. Brand and product will always trump channel strategy and this is where Arcadia, including TopShop, are being found wanting. If the product were right and the branding strong, consumers would respond positively regardless of channel. As we always say, consumers shop brands, not channels.
There are many parallels with Debenhams, but also considerable differences. Debenhams is a more established multi-channel operator, with a decent (but not flawless) online proposition. Other commentators may disagree, but there was residual value in the brand, despite years of seemingly always being on sale and over-enthusiastic embrace of Black Friday. Only over the last couple of years has the brand really started to tarnish, accelerating on the back of the original CVA and subsequent “light touch” administration.
The alarming thing about Debenhams is the pace of its decline. In the space of two years, it has gone from being a solid, if unspectacular, brand familiar to most, to a business facing a very real existential crisis (step forward Mike Ashley…)
The root cause of Debenhams’ travails was actually its time under private equity ownership as long ago as the early 2000s. A consortium under the banner of Baroness Retail Limited (CVC Capital Partners, Texas Pacific Group, Merrill Lynch Global Private Equity) acquired the company in November 2003, before re-listing it on the London Stock Exchange in 2006.
The weakness of Debenhams’ balance sheet stems from this period. General asset-stripping underpinned by a sale-and-leaseback strategy, coupled with by an overly-aggressive new store opening programme (on rents that have proved unsustainable) planted a number of ticking time-bombs that have only fully detonated in recent years. Somebody else’s problem, not those that instigated them in the first place.
Like Arcadia, Debenhams has also been starved of requisite investment over the years. In part, this was due to the financial straitjacket that PE ownership placed it under. Embrace of e-commerce also diverted capital from the bread and butter of the business – the stores themselves. Many stores across the estate had become very tired and again, this will ultimately weigh heavily on the brand. Strange how the negative effects of online on physical stores are usually perceived to be lost trade rather than starved investment, but this is very much the case with Debenhams.
What does the future hold for both Arcadia and Debenhams? The latter is an a much more precarious position and may face full liquidation if Mike Ashley walks away. Clearly, there is much frantic negotiation currently going on behind the scenes on all counts.
That Arcadia will be broken up is beyond doubt (and we predicted as much at the time of its original CVA). No one will acquire all the brands as one entity, they will be acquired on a piecemeal basis. But who will buy them? It would be naïve to think Sir Philip Green had not been trying to tout them round the market for some time, but with no success. Why would someone buy them now from the administrator, rather than then, from Arcadia itself? Put simply – price.
We are not in a position to speculate as to who will buy which brand, but there will inevitably be interest from both trade buyers and PE. Despite its relative fall from grace recently, TopShop/TopMan is likely to be the most sought after brand. Boohoo has already been touted as an interested party, but its previous acquisitions (Karen Millen/Coast/Oasis/Warehouse) have focused only on the online sides of the respective businesses. TopShop’s brand would be a decent fit within Boohoo, but would the online pure-play take on the store portfolio?
Arcadia’s other womenswear brands (Dorothy Perkins, Wallis, Miss Selfridge, Evans) all have some residual value that should ensure their survival under new ownership. Few remember that Evans was arguably the jewel in the crown of The Burton Group prior to its acquisition by Arcadia in 2002. The future is perhaps less bright for the Burton Menswear and out-of-town Outfit brands.
Debenhams is currently in the last chance saloon. The smart money was always on Mike Ashley making a last minute strike and this was duly confirmed earlier this week. At time of writing (10 December) negotiations are still ongoing and a deal has yet to be thrashed out either way.
Realistically, Frasers Group is Debenhams’ only prospect of survival. A rescue that landlords don’t know whether to hope for or not. If Mike Ashley does save the business, it won’t be for altruistic motives, he clearly still sees value in Debenhams, but will be ruthless in re-establishing its cost base. Impossible to speculate as to how many Debenhams stores would be retained, we don’t even have full clarity on House of Fraser 18 months on. But suffice is to say that many landlords are likely to face Hobson’s choice of nil rent or no tenant.
And if no deal is struck with Mike Ashley, then the liquidation of Debenhams will progress as planned. 12,000 staff stand to lose their jobs and the high street will lose one its longest-established and well-known names. UK retail’s darkest day since Woolworths went bust in December 2008.