A Hard Market: Treasury Challenges in the Consumer and Retail Sector

Five years ago the global financial crisis was starting to deepen yet relatively few analysts predicted that Woolworths UK, which first established a Btitish presence nearly 100 years earlier and had over 800 stores in  high streets across the country, would be closing down by the end of 2008.

However, the group has been in slow but steady decline since the end of the 1960s and the trend began to accelerate after the US parent sold out in 1982. By September 2008 the group was announcing a first-half pre-tax loss of nearly £100m and its future began to look uncertain as the world crisis intensified. A proposal by the restructuring specialist group Hilco Commercial that it buy the group’s retail operations for the nominal amount of £1 – a deal that would have cut its debt and allowed it to retain its profitable distribution and publishing businesses – was rejected by the banks, which recalled their loans. Within weeks, Woolworths UK was in administration.

UK Retail Sector Struggling

Over the successive four and a half years, the group’s demise has been followed by other well-known British high street names such as Comet, Habitat, Zavvi/Virgin Megastore, Oddbins and Borders bookshops. Last year was the worst since 2008 for UK retail casualties, with a total of 54 retail names affected, almost 4,000 stores closed and 48,000 employees made redundant. The first four months of 2013 suggest that this year is likely to be even worse as continuing pressure on incomes and economic uncertainty make consumers reluctant to spend on items other than essentials.

Not all struggling consumer goods and retail groups have disappeared. The sector’s problems have provided opportunities for both private equity groups and corporate restructuring specialists, such as Hilco, to buy up well-known names at favourable prices. Hilco’s own description of its business is as follows: “Acting as principle or agent, [we] work with directors, shareholders, lenders and turnaround professionals to maximise recoveries in distressed business situations.

“We understand underperforming business and are well equipped to achieve positive outcomes in difficult circumstances”. The group’s most recent move came earlier this month, when it agreed terms for rescuing HMV, the UK’s sole remaining music retailing chain, three months after the retailer went into administration. 

Hilco, which has worked to restore the fortunes of HMV Canada since acquiring the North American business in 2011, acquired 141 UK branches in a deal for which terms were undisclosed but believed to be no more than £50m. As in previous Hilco corporate rescues, the aim is to restore profitability partly through slimming down the business to reduce costs and debt.

Building an International Brand

For some of the retail sector’s major names, expansion overseas has lessened their dependence on a pressured home market. Spain’s unemployment rate has hit 27% but Spanish fashion group Inditex, the owner of fast-growing chains such as Zara and Massimo Dutti, goes from strength to strength internationally thanks to its ability to quickly capture the latest styles and get them from the design table to shops. Other names such as Burberry and IKEA have steadily expanded beyond their home country to secure an international customer base. 

Tesco Shows Pros and Cons of International Expansion

The UK’s biggest supermarket chain, Tesco, has also steadily lessened its dependence on British sales by expanding elsewhere in Europe and as far afield as China, Japan and Turkey. However, the group recently announced that it was abandoning its initiative to establish a presence in the US, where it launched its ‘Fresh and Easy’ stores in November 2007. Despite an investment of US$1.8bn and developing a chain of 200 stores in California, Arizona and Nevada employing around 5,000 workers, Tesco was unable to replicate its success in North America and has accumulated losses of £782m in just over five years.

Fitch commented that the US exit would at least benefit Tesco’s financial profile by halting several years of operating losses and allow the retailer to focus on addressing more pressing issues in its home market and other key markets. The news came as the credit ratings agency (CRA) downgraded the group from A- to BBB+, which it said reflected Tesco’s heightened business risk profile following weaker than expected results for 2012-13 and a 13% drop in group trading profit.

“The group has been negatively impacted not only in the UK but also in its international business,” commented Fitch. “This is reflective of a difficult consumer environment, increased competition in the UK and also the increased structural challenges facing large food retailers across Europe.

“These structural challenges include competition from specialist retailers and the internet on the food retailers’ non-food offer, the preference for convenience store format compared with large hypermarket stores, the price transparency available to consumers as a result of the internet and that consumers are less loyal to brands/retailers, switching between retailers for better promotions or deals.”

A more recent problem, affecting Tesco and a number of its European peers, is the revelation of overly extended and complex supply chains when the content of a number of ready meal products was found to contain horsemeat. Store shelves had to be cleared of the offending products, expensive publicity campaigns mounted in a bid to restore consumer confidence and risk management procedures put into operation. The latter is likely to involve the retailers affected sourcing closer to home in future. It will mean a restructured physical supply chain, but also a different financial supply chain for treasurers.

US Growth: Potential and Pitfalls

Tesco is not alone in finding North America a tough nut to crack. A recent report issued by Barclays indicated that 46% of UK retailers regard the US as the hardest market in which to achieve commercial success, despite being the current destination of choice. Entrepreneur Sir Philip Green, whose budget fashion chain Topshop has enjoyed success in the UK, still entertains hopes of extending it into a US$1bn business within five years and the upmarket Hobbs fashion label has similar, although smaller-scale, plans.

Barclays’ survey questioned UK retailers on their attitudes towards international expansion and whether they plan to expand via online channels, opening stores or joint ventures. It found that they are generally daunted by the US, despite the growth of online retailing, which provides a low-cost means of entry, and the seemingly similar cultures and values shared by British and American consumers. China came second for international growth plans, with around 33% of UK retailers saying they had experienced difficulties when trying to set up shop. Asia, more widely, was third with 19% of retailers questioned claiming they had experienced difficulties setting up in the region.   

Asked about future expansion, 23% of retailers named Germany as their number one choice for overseas expansion in the next five years, closely followed by China and Australia.

“On the surface the US would appear to be an easy market in which to secure a foothold but its sheer scale means achieving commercial success across the whole country is an incredible feat,” commented Richard Lowe, head of retail and wholesale at Barclays. “As for China, nothing is impossible but, everything is difficult.

“It would be unreasonable to say there is no further growth in domestic markets, but it is becoming increasingly difficult to extract in the current climate. The economic realities across the western world mean that retailers now have international expansion firmly on their radar.”  

The figures explain UK retailers’ keenness to explore opportunities overseas. Between 2012 and 2016 total UK retail spend is expect to grow by around 11.5% to £345.6bn, while for the US the figure anticipated is 17.5%, to £2.3 trillion by 2016, and for China as much as 85% over the same period to £3.6 trillion, the highest in the world.  Fellow BRIC economies Russia and Brazil also enjoy particularly strong growth predictions over the next five years, with 68% to £649.8bn and 49% to £536bn respectively.

Compare this with Europe, where Fitch predicts on-going price pressures in the food retail industry, due to government austerity measures, high unemployment rates, as well as intense competition in the non-food segment from specialist retail chains and the development of internet shopping.

As Barclays notes, the growth of the internet has presented retailers with the opportunity to enter new markets without the need to commit to building a large and expensive network of stores. This is reflected in the survey results: asked how they plan to expand, 33% of UK retailers named online as their preferred route to market. Among those who had already gone abroad, the figure rose to 52%. Second choice was wholesale with 10% of responses and franchise partnerships with 8%. Only 6% plan to open physical stores, although the bank suggests this figure is likely to grow among those retailers who have already tested a new market successfully using online. 

Africa is the Future

Africa remains one of the ‘final frontiers’ for retail growth, but Walmart’s acquisition of a controlling 51% stake in South Africa’s Massmart last summer shows how seriously global retailers are now taking the continent. Nearly a quarter of UK retailers surveyed stated that Africa will be the new retail growth story within a decade, with first mover advantage – cited by 33% – considered to be the most important consideration when expanding. Only 21% said that they currently generate sales on the continent. Of those which do, 53% named South Africa as their top market, with Chad, Congo, Morocco and Nigeria the other main African markets currently providing revenues for UK retailers.

Asked where in Africa they would consider expanding in future, South Africa remained the most popular choice with 18%, followed by Ghana and Kenya with 6% and 4% respectively. The reasons given for this interest was Africa’s burgeoning middle class followed by the take up of mobile technology.

“Many of the trends which have driven the economic development of emerging economies in Asia and South America are beginning to take hold in Africa,” says Lowe. “Its rapidly expanding middle class increasingly need goods and services which cannot be catered for domestically, providing a golden opportunity for internationally-minded retailers. This is a truly ‘ground floor’ moment in many African economies.”


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