Retail apocalypse: The ten great 'plagues' of the high street

Competition from the internet isn't the only big challenge that high street retailers face, warns Uniconta UK CEO Russell Lawrence

It is hard to underestimate the scale of the cataclysm playing out on UK high streets, changing town centres and the retail landscape forever.

Over the past decade, many well-known retail chains have disappeared from our high streets, entered into CVAs, undergone pre-pack insolvencies, changed hands (many more than once) or have radically slimmed down the number of outlets. Some have even gone on-line only.

If your ERP system doesn't integrate directly with your point-of-sale estate and website, you are Amazon's lawful prey

This trend seems to be accelerating rather than slowing - figures from the Centre for Retail Research are a real eye-opener. They show that figures for stores and employees affected in the first half of 2018 already exceed the whole of the 2017.

Retail failures over the past ten years. Source: The Centre for Retail Research

This is a retail extinction of almost biblical proportions. On that theme, here is is my interpretation of this modern day ten plagues of the high street, together with some advice for retailers pinched between Amazon, on one side, and high business rates, on the other.

1. The p lague of rivers of blood - retail market sucked out of the high-street and onto the internet.

Whatever the condition of a retail chain before factoring web-selling into the equation, losing a large percentage of your sales to a rival is not good for your health.

In effect, this is like having a competitor open up right next door, with their shop window next to yours, but with lower prices. They have the exact same goods at lower prices and they will deliver to your customer's door. Worst of all, the shop front is in their living room.

There is no risk from speed cameras, moped muggers, traffic wardens and no parking charges just to visit the shop. Worse still, distance selling regulations enable web-shoppers to return stuff just because they don't like it. It is impossible to compete with this - but you have no choice.

Leveraged buyouts are completely legal but are a very thinly disguised theft of assets from parties that have no real control over their own destiny

2. A plague of frogs

It is well-known that you have to kiss a lot of frogs to find a prince (or princess) and this is happening all the time in your store.

An acquaintance who owned a piano emporium was fond of describing customers that would come into the store and ask to try out a specific instrument, often bringing in a piece of (paper) music to play. They would sit and tinkle away at the ivories for 15 or 20 minutes, then leave the shop with a wave and never come back.

There is a happy ending here: The vendor realised that the internet was actually delivering a captive audience to him, and took full advantage.

He looked up price and delivery times on the main competitive websites and displayed them on a show-card on top of the piano, making sure that his own price and terms were right there as well, just on the right side of competitive of course.

Even if the customer had found a better price than he had, he made it clear that he was happy to underbid all-comers;, taking advantage of the fact that a human can always outwit a fixed-price website, no matter how low the price.

3. A plague of lice

Retail landlords are the much-hated capitalist owners of two of the four socialist factors of production. It is their job to convert investment capital into more capital.

For many decades, a severe shortage of retail space empowered property owners and managers to name their price. The value of retail space was measured in hundreds of pounds per square foot per year and a small shop on a London high street near a tube station could easily cost between £75,000 and £100,000 in rent per year year, plus dilapidations and the perennially unfair business rates on top of that.

If you wanted to sell to the public, you had no choice but to pay the asking price under the auspices of a brutally one-sided lease contract. A feature of these leases was upward-only rent reviews. Agreeing to one of these means that any downturn in business can only come out of the retailer's pocket - never the landlord's.

Out of town retail sites (the first I saw was Brent Cross, opened in 1977) were typically owned by the same property companies (and our own pension funds) and made no real difference to the cost of good retail space - although they did gradually increase availability.

So, the advent of the first UK web-shop sites in 1994 offered a glimmer of hope that the cost of merchandising goods to the masses could at last be freed from the landlord monopoly over retail space.

But - be careful what you wish for! That first site was a collaboration showcase between Barclays Bank and Argos, called BarclaySquare, and had a grand total of 20 items for sale! It didn't do well, but in the following years, retailers have been divided into two main groups: those that developed an efficient omni-channel sales and fulfilment model and the rest who didn't.

A customer is only a customer when they pay their bills. If it looks like they may not pay their bills, cut your losses and cease supply

Most of the rest are no longer with us of course. The current rash of CVAs, pre-pack insolvencies and administrations are an inevitable outcome of usurious and one-sided leases, combined with commercial landlord's inability to wake up and smell the coffee.

4. Venomous snakes

These are the private-equity and hedge-fund asset-strippers, pre-packers, turnaround specialists and CVA specialists. There is a pretty well-established pattern of behaviour here.

First, find a victim with strong sales, but a weak balance sheet. Owning a retail property portfolio is a nice-to-have, but the main draw is a nice fat creditors' ledger.

It may seem odd that owing money is an attractive trait on a balance sheet. However, if you are going to treat the suppliers to a 100 per cent haircut, then their debt also represents a juicy disposable asset for the stock they originally supplied.

Your local neighbourhood asset stripper is always looking to ditch the liabilities and keep the assets and the poor old unsecured trade creditors will catch a cold every time. Very occasionally, commercial landlords are the unwitting victims brought along for the ride, too.

Extortionate rents will have dragged down profitability and made the victim cheaper to buy, so it is essential to ditch this unwanted burden ASAP in order to boost the apparent value of the enterprise. A CVA or administration will do this nicely.

The UK insolvency system works against landlords, because voting in a CVA is based on money owed. As most of the rental debt is in the future, they don't get much voting power in relation to their actual exposure (they may argue, not unreasonably, that the full value of the lease should define their voting rights).

Not all private equity and venture capital buyouts precede a business ‘restructuring' due to cashflow issues, but many do. This restructuring is not bad luck or an accident of fate - this is all part the plan.

Asset-strip warning signs (from a supplier's point of view):

My advice - a customer is only a customer when they pay their bills. If it looks like they may not pay their bills, cut your losses and cease supply. If they are genuine, they will come back to the table with cash in hand. If they see your stock as a strippable asset, they will just look for another mug.

5. Diseased livestock

This is the modern-day plague of poor range planning.

Retail is a traditional business and many buyers, planners and merchandisers are still living in the last century when it comes to sizes and distribution curves. The inevitable outcome from poor range planning are end-of-line sales, huge stock-exits, outlet stores and fire-sale stock disposals at cost or less.

The perfect scenario in Formula One engine design is an engine that gets you on pole position for qualifying, wins the race because it is light and powerful, then wears out and explodes just before you switch it off in park fermé.

So it is with fashion and general apparel. If you bought the right size and colour distribution in the first place, the entire range would sell out simultaneously on the last day of the season, just as you are planning stock-exit. We know that these things can't actually happen - there are too many variables - but that should be your aspiration as a buyer. Stock exit is a failure, not an inevitable process in retailing.

The same goes for end of line sales. What is really hurting apparel retailers is a lack of good data about the sizes and colours that customers will buy. You can't completely rely on sales data, because you can only sell what is in stock. If you didn't buy the red shirt in size 2XX, then you can't sell any can you?

Here is the thing:

I am one of the innocent victims of these policies. I know that I will never be able to buy a shirt, jacket, trousers or polo top in any high street store (or remaindered in TK Maxx) because my waist size is just two inches above the UK average. Their shelves and rails are chock full of unbought XXS, XS, S, M and L sizes. Buyers and merchandisers - wake up!

Retail apocalypse: The ten great 'plagues' of the high street

Competition from the internet isn't the only big challenge that high street retailers face, warns Uniconta UK CEO Russell Lawrence

6. A plague of boils (as curated by HMRC)

This is the 21st century plague of over-taxation, which every economist knows tends to depress consumer demand. We all know that the government is a highly efficient money-burning machine, fuelled by you and me.

After raking in 20 per cent VAT (once eight per cent), 63 per cent income tax and NI, 19 per cent corporation tax and 58 per cent fuel duty, they still need to raise more by fining small business suffering cash-flow problems caused by late-paying customers.

Although business rates and council tax are spent locally, the overall breakdown between central and local funding leaves local government too poor to repair and clean the streets. Venturing out in Brent or Barnet is likely to break the suspension on your car, so it is much less risky to have Amazon delivery it, right?

Why do so many properties in the UK have their roofs ripped off? To legally avoid paying business rates by devaluing the property

These days, you also have to deal with the high street appearing to be an off-road driving course populated only by moped thieves operating with impunity because the local commissioner can't afford to employ enough visible policemen.

Although the much-hated business rate tax is based on supposed rental values, it doesn't reduce when real rents decrease, nor does it change if the property is unoccupied (for more than three months).

Why do so many properties in the UK have their roofs ripped off? To legally avoid paying business rates by devaluing the property. This is a clumsy and inept system that leads to many stores, warehouses and factories being put beyond use, making it much harder for a depressed region to regenerate enterprise and so recover its jobs and prosperity.

This is a stupid and unnecessary race to the bottom fuelled by outdated tax laws and greedy central government, who can't see beyond the end of the next budget deficit.

7. A plague of thunderstorms

Or, in this case, the British weather. Yes, we had a difficult winter and the summer has been hot. But this is a green and pleasant land where it drizzles from time to time and may even logjam our roads with 2mm of snow. Let's face it, it could be Moscow (where my Jeans once froze to my legs at -25oC), or Qatar during the next world cup (+50oC).

This leads to a retail storm: You discount everything, which improves cashflow, but allows your traditional customers to buy what they wanted at half-price. Then, you have to introduce permanent reductions, with John Lewis matching your prices, forcing discounts ever higher.

What is the answer? Plan better and smarter, invest in shorter supply lines (i.e. not the far east) and get over it.

There are a lot of things that cause stores to become unprofitable and close, but in nearly all cases there was an imaginative finance deal involved

8. A plague of locusts

Retailers now have to deal with a new 21st century plague - the credit insurers and invoice discounters.

Suppliers to retail have been on the receiving end of poor payment practices for decades and have been expected to finance a lot of retail stock, while waiting for the consumer to buy it. This pay-when-paid approach reduces the risk of retailers being stuck with unsold inventory, putting the cashflow burden on the supplier who typically makes far less margin then the retailer anyway.

In response, suppliers have turned to invoice discounting to improve their cash flow. Like it or not, this adds substantially to overheads and the consumer ends up paying the price because the retailer chose not to keep to terms. This kind of short-term thinking is typical in UK plc - not confined to retailers of course - but someone has to pay in the end.

If I know a customer is going to be a bad payer, I have to put up the price to cover the cost and inconvenience. If I have to discount the invoice, I have to put up the price to cover the discount. Do you see the common theme here? To protect themselves further, importers and manufacturers often insure their retail debt, but this is a fools' paradise. No insurer is going to take a serious risk of being stuck with a bad debt and they will often withdraw cover just when it is most needed.

The whole point of credit insurance is to enable a business to carry on selling to a retailer when the risk of non-payment increases, rather than withdrawing credit, which may save a write off but does nothing for turnover. This gets worse with full-recourse discounting, when the debt can often revert back to the vendor if it is unpaid long term. This will actually do more damage, because fees and interest have been paid for an illusory benefit. The best advice here? Don't do it.

9. The plague of darkness

There are a lot of things that cause stores to become unprofitable and close, but in nearly all cases there was an imaginative finance deal involved.

These leveraged buyouts are completely legal but are a very thinly disguised theft of assets from parties that have no real control over their own destiny.

Let's look at a worse-case scenario. I approach a well-known family shoe retailer that has been trading profitably for 40-odd years. It has acquired about 50 freeholds over the years and rents about 100 stores on the high street and in malls. It also has about 50 concession operations.

The EBITDA is around £25 million, so I offer £50 million to the family shareholders and eventually settle at about £60 million. I borrow £50 million from a friendly hedge-fund chum I know from school and add my £10 million stake money, both as high interest bonds.

The first thing I do is freeze recruitment and remove the most expensive layer of head-office staff. This makes it look as though I care about running the business efficiently.

Retail property owners are profit maximisers. They don't care about your brand, your staff, your customers or your future

I immediately move those retail assets into a separate cost centre and start charging internal rent against the store. This rent should be the equivalent of last year's gross profit (usually much more than a fair market rent), so profitability is neatly massaged into the new cost centre away from the retail unit.

I then build a new shell company in Luxembourg or Switzerland and raise a commercial mortgage on the freeholds, transferring them to the offshore vehicle. We now have about £100 million cash in the original company, but no profit.

I use the cash to pay off the bonds, so I have my £10 million stake money back and my chum is paid back and happy too.

I now slowly starve the company of cash, moving money offshore to cover the rent charged by the Luxembourg vehicle. I start to extend credit terms so that the original £25 million of creditors on my balance sheet grow to about £50 million, hoping that the credit insurers don't spot my gradually weakening balance sheet and withdraw cover.

There is a slight downturn in trade, making the business unprofitable because of the huge rent and debt burden. Credit insurers impose special terms or withdraw cover. I withdraw financial support causing short-term cash insolvency and, blaming the lack of support from credit insurers, call in my administrator.

The administrator sells me the business (with stock) for £2 plus their fees. The suppliers, HMRC and the pensioners take a bath. I have £100 million in Switzerland and a property portfolio worth the same again, but the stores are currently dark and awaiting new tenants. Charity stores move in, saving me the business rates until I find a commercial customer.

10. The plague of death of the firstborn

Retail property owners are profit maximisers. They don't care about your brand, your staff, your customers or your future. Armed with their upward only rent-reviews and medieval dilapidation clauses, they check your profit figures and raise rents by precisely that amount.

You have to ask whether your flagship Oxford Street store or Westfield unit is ever going to turn a profit. These usurious tactics may have worked in the golden years of poor credit regulation, mild inflation and high disposal income, but not today.

Afraid of losing even more market share to the four horseman of the retail apocalypse (Amazon, Ebay, Google and Philip Hammond), you ask the landlord to reduce the rent. They refuse to talk to you.

You know that you won't make the new rent bill, wages and VAT payment, so you have no option but to close the store when the old lease ends.

The landlord then wonders why they have a lot of empty properties. You have to close several of your original chain of stores - including your first one - and move out of town.

A remedy

This has been fun, but what are the answers to all of this?

Multi-channel selling is not a threat to retail - it is retail

1) Be well capitalised

Cash is still king. The possibilities of raising start-up or continuation capital for retail operations is somewhere between zero and no-chance, so If you can't finance the venture from your own cash pot, then forget it.

The old British standby of raising capital against your home is long gone - if you mention that you are borrowing to fund a business, your application is automatically declined by risk-averse ‘underwriters'.

You could always lie and say that the money is for a new car or kitchen extension, but that would of course be fraudulent.

2) Drag yourself kicking and screaming into the 21st century

Multi-channel selling is not a threat to retail - it is retail. Unless you are one-man corner store, you must have a multi-channel offer. Despair not - this is not too difficult - if you choose your software wisely, you can handle product lifecycle management (PLM), stores, POS, web, mail order and finance in one system.

3) Sell what people want to buy

Please stop buying sizes that you are going to be stuck with and be forced to discount. Discounting is the root of all evil - you are competing with your own full-priced product and inviting your competition to race you to the bottom.

Take a leaf out of Argos's book - if you don't have the right size or colour in stock, get it delivered to the customer next morning

Pay attention to your own sales stats and modern demographics. Differentiating yourself from the lemming herd will pay you back every time.

4) Buy and replenish accurately

There are no excuses here. You must know what is selling and what is not in real time. If your ERP system doesn't integrate directly with your point-of-sale estate and website, you are Amazon's lawful prey. They already eat your lunch - don't let them swallow you up as well.

Also take a leaf out of Argos's book - if you don't have the right size or colour in stock, get it delivered to the customer next morning. If your supply chain and distribution channel are set up efficiently, keep one of every size and colour in stock at each store and replenish in real-time as sales are logged.

5) Making informed decisions - one version of the truth

Once again, being informed and up-to-date are critical. Your ERP system should also be your business intelligence system, because the inventory and sales figures fed into the accounting record are also your replenishment and stock-out data stream. You need all of this information in one system - not three or four or seven.

6) Call us

Finally, you could consider calling us. Uniconta for Retail cloud software does all this for between £16 and £32 per user per month and you can even try before you buy.

Russell Lawrence is CEO of Uniconta UK, the cloud software company started-up by Erik Damgaard, and a veteran of more than 200 ERP implementations