One of the most obvious economic casualties of the pandemic has been the UK High Street. At various times during lockdown non-essential shops across the UK have been forced to shut. Whilst furloughing has helped to retain staff and rate reliefs have offset some running costs, the loss of significant profits has been a problem for many and a disaster for some. The latest lockdown, coming on the verge of Christmas and removing the opportunity to benefit from modern innovations such as Black Friday and Cyber Monday, has been just another blow. A number of retail jobs have already been lost due to the economic downturn; but this week saw a new peak in the scale of the losses.
Not one but two major blows hit home this week from two indirectly-connected entities in the form of Arcadia and Debenhams. In fact the connection between the two used to be more direct; until a couple of decades or so ago they were part of the same concern. Even after they were broken up and went their own separate ways Arcadia outlets had space in Debenham's shops so the demise of the former was a serious blow to the latter. In terms of where both entities are, Debenhams are ahead of the game if that is the right phrase. The company has been in administration for some time and for a while the acquisitive-minded JD Sports appeared to be interested in buying at least some of the business. It was hoped that a deal could be agreed protecting some of the stores and their staff at least. But JD have now decided that this is an opportunity that they do not wish to pursue and have withdrawn their interest. This is a catastrophe for Debenhams and the hope of an 11th-hour rescuer being found are fast evaporating. It now looks as if Debenhams is in wind-down mode, selling off remaining stock before closing their doors for good. As a result 12,000 jobs are at risk, potentially bringing to an end a business that has been around for 242 years. That said, some analysts have hopes that parts of it may be saved piecemeal though very likely more in a digital environment rather than through the medium of an elegant High Street store.
Arcadia were the other big casualty of this week. Included in their portfolio are some famous High Street brands such as Topshop, Evans, Wallis and Burtons (where I, in common with many others I’m sure, acquired my first suit though that was much longer ago than I care to admit). Arcadia has some 13,000 staff whose jobs are now at risk. Deloitte has been appointed as administrator and is looking for a buyer. There will be no redundancies at this stage and stores will remain open for now. Arcadia's chief executive Ian Grabiner blames the pandemic for this unwelcome development, saying that at one stage the business hoped to weather the storm but this is no longer seen to be a realistic proposition. After the statement made by Arcadia on Tuesday 1 December, it was suggested by the Financial Times that this might also presage problems for Debenhams. Just how prescient this forecast was became apparent when Debenhams made their announcement on the very next day.
Covid has ultimately potentially 'done for' both of these businesses but there is plenty of evidence that the pandemic has merely brought forward the inevitable. Debenhams and Arcadia have been struggling for a while. Analysts quoted by the BBC suggested that Debenhams had become increasingly irrelevant and had found it hard to compete with newer retailers such as Primark, Boohoo and Asos. They also felt that the fact that Debenhams were tied in to expensive High Street properties made for a high-cost business model. Neither, they suggest, have the right financial decisions always been made. The business is locked into expensive leases for up to 35 years with annual guaranteed rent rises of 2.5%. This is a potentially disastrous anchor weighing Debenhams down financially.
Arcadia's story is fairly similar. Pre-tax profits peaked at £300m in 2013 but had fallen to £122m by 2018. Even that number was worse than it looked as part of the profit arose from interest payments from related companies rather than trading. The most revealing statistic perhaps is that its market share in clothing and footwear has dropped by a third in the last decade. Both companies sadly were already on borrowed time before the pandemic. Its impact might be the final straw for both of them, though for the sake of the employees hopefully something can be salvaged; but to blame the pandemic entirely for their possible demise would be somewhat missing the point.
Wayne Bartlett is an author for accountingcpd. To see his courses, click here.
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