Retail

Under pressure

With no end in sight to high-street closures and job losses, IHL talks to retail GCs about the fight to adapt

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The crisis engulfing high-street retailers is showing few signs of abating. May saw the public collapse of almost the entirety of Jamie Oliver’s restaurant eateries and, in June, retail tycoon Philip Green’s Arcadia empire narrowly avoided bankruptcy with a rescue deal severing some 50 clothing stores.
shutterstock_1007432086According to data from Deloitte, 125 retailers went into administration last year compared to 118 in 2017, including 26 large companies.

High streets across the UK look set to become increasingly bare, with predictions that the retail sector will remain challenging for now as last year’s boom in company voluntary arrangement (CVA) – a form of restructuring that allows companies in financial difficulty to propose new repayment terms to creditors – continues into 2019.

In such testing market conditions, general counsel in the retail sector are having to respond as quickly as their businesses: renegotiating contracts with service providers and leases with landlords, and aligning to wider strategies, which are seeing bricks-and-mortar retailers refocus efforts on getting customers through the door. ‘Business models are changing. Retail is hurting, but there’s also a revolution of the bricks-and-mortar high street,’ says Specsavers’ group legal director Stretch Kontelj.

Bucking the trend

According to the British Retail Consortium (BRC), footfall on high streets dropped by 2.9% in June, a further decline from the 0.9% fall in the same month last year.

While some specialised food and drink outlets proved more robust – Pret A Manger acquired Eat in May and Hotel Chocolat saw revenue rise 14% for the year to 30 June amid the opening of 16 new stores – clothing retailers and department stores struggled.

Debenhams’ administration in April was the latest in a raft on the high street over the past 18 months, including LK Bennett, Coast and House of Fraser, which was swiftly snapped up by retail tycoon Mike Ashley. News that high-street bellwether Marks & Spencer could close more than 110 shops only underlines how far the malaise has spread.

Strong competition has come from the rise of a host of popular online clothing retailers like ASOS, boohoo.com and PrettyLittleThing, and a generation of young consumers who are less likely to turn to physical retail.

Weil, Gotshal & Manges’ London head of restructuring Adam Plainer says the story of the high street is beginning to focus on the impact of the CVA boom, however. Dubbed the ‘year of the CVA’, 2018 saw 38 retailers opt for a CVA, a 52% increase on the year before. The deals have not been without controversy, attracting criticism as distressed retailers look to take advantage of the restructuring process to negotiate rents down.

"We did look into doing a CVA but decided to do it the hard way and do a turnaround plan." Sara Mackie, French Connection
“We did look into doing a CVA but decided to do it the hard way and do a turnaround plan.”
Sara Mackie, French Connection

One of the more high-profile cases saw Ashley challenging Debenhams’ proposed CVA after the rescue deal thwarted his attempt to take control of the department store. His company, Sports Direct, later dropped the challenge.

Arcadia’s fate, too, hung in the balance before pushing its restructuring through when landlords, including major shopping centre owner Intu, refused to accept rent-cut proposals – and the retail giant now faces a fresh legal challenge from a property group in the US.

Plainer reflects: ‘There’s a perception that CVAs are only dealing with landlords rather than the restructuring of the entire business and that’s why there’s been push back. There’s only so far landlords can be pushed until they say: “Is this business going to last after the CVA is in place?”’

DLA Piper restructuring partner Richard Obank adds: ‘Even the smartest CVA can’t buck the downward market.’

French Connection, which has been loss-making for more than five years but turned a modest profit in the last financial year, has been exploring a potential sale of the business. Group GC Sara Mackie, who advises the brand’s 70-plus UK stores alongside a paralegal and a compliance officer, says the clothing company has opened and closed multiple stores, and grown its product range to try to boost sales and limit vulnerability to cash flow pressures.

‘We did look into doing a CVA but decided to do it the hard way and do a turnaround plan; negotiating leases with landlords rather than forcing a wholesale overhaul of all of the stores,’ says Mackie. ‘We had an old legacy estate of shops that we closed down and we’re opening stores where we think we have a better place in the market.’

Level playing field

Online shopping and the success of giants like Amazon have also played a major role in declining sales. According to RPC, online retail sales have increased by more than 12% year-on-year for March.

‘We are not competing on a level playing field with the mighty Amazon, our largest competitor, but we fight to survive and thrive as a predominantly bricks-and-mortar UK retailer,’ says Waterstones GC Alison Campbell.

Many retail GCs are quick to criticise the government for not addressing the issue of business rates falling disproportionately on retailers. But from April next year, the government will impose a digital services tax of 2% on the online marketplace, which Campbell says while ‘encouraging’, does not do enough to relieve the burden of business rates.

Weil’s Plainer picks up the point: ‘It will not be popular that large companies don’t pay some level of tax so there likely will be attempts to make it fairer, but it’s just white noise. You would have to really hammer Amazon to make things fairer.’

Mobile phone providers have similarly borne the brunt of changing consumer trends in recent years, putting more pressure on legal teams to improve efficiency. Customers are delaying phone upgrades, which forced the closure of 92 of the more than 700 Carphone Warehouse stores last year.

‘It is important that we as a legal team are ruthless about the company’s objectives because there are customers out there who want to buy, so we’re trying to put customers at the forefront of everything that we do,’ says Nigel Paterson, GC of Dixons Carphone, parent company of Carphone Warehouse and Currys PC World. With around 30% of Dixons Carphone’s services online, adjusting to a trading slump has seen the 47-strong legal team re-negotiate and retender for IT and network contracts.

"We’ve always been subject to a high bar of scrutiny but the volume of work is challenging as the man on the high street has become more aware of his rights since GDPR." Julia Boyle, O2 “We’ve always been subject to a high bar of scrutiny but the volume of work is challenging as the man on the high street has become more aware of his rights since GDPR.”
Julia Boyle, O2

‘We need to turn legal advice around quickly so that the company can respond to new product launches by competitors if it wants to,’ says Julia Boyle, director of legal affairs at telecommunications provider O2.

Boyle, who runs a legal team of 32, adds: ‘I want us to look at how we can use technology to become more efficient because I’m not going to get a budget to hire ten more lawyers and yet the industry is so competitive, particularly on pricing.’

Pay attention

As retailers reposition themselves in an online world, however, legal chiefs face fresh challenges.

GCs have been paying attention to their online services in terms of how customer details are stored, following the General Data Protection Regulation (GDPR), which came into force last May.

‘If I were a GC the absolute core of what I’d be trying to do is get the CEO to pay more attention to the website,’ Obank says.

Data reporting has been a high priority for Campbell since joining Waterstones as its only in-house lawyer a few months before the regulation came into practice, while Boyle says the framework has created more work for her team: ‘We’ve always been subject to a high bar of scrutiny, but the volume of work is challenging as the man on the high street has become more aware of his rights since GDPR.’

GCs have good reason to prioritise data compliance. In the first penalty handed down under new GDPR rules in July, British Airways was fined £183m by the Information Commissioner’s Office after hackers stole around 500,000 customer details.

New regulation is also on its way in the form of EU anti-fraud regulation for online sellers. From 14 September, the Strong Customer Authentication (SCA) regulation will require companies to build in an extra layer of authentication into checkout flows for purchases over €30. Verification is likely to take the form of a text message to a customer’s phone or finger-printing ID.

‘The last thing retailers want during a transaction is people closing it down because it’s just too difficult and retailers face the cost of updating their checkout software and storage methods,’ says Jeremy Drew, RPC’s head of commercial.

Neill Abrams, online grocer Ocado’s legal head, says the consumer market for the company is strong right now, despite problems on the high street, but concedes the incoming SCA regulation has been a worry.

‘We don’t take cash payments so the concern is it’ll create more friction for consumers at the checkout. We’ve got a team working on finding a solution at the moment.’

Paterson, however, is more sanguine: ‘We don’t think the regulation will put customers off but that it’ll be a matter of explaining it. It’s something that affects the whole market and it’s a relatively routine IT requirement I wouldn’t say has taken up a disproportionate amount of the team’s time.’

Don’t blow things up

Efforts by bricks-and-mortar retailers to offer new or distinctive services to attract customers are clear. Willkie Farr & Gallagher restructuring partner Graham Lane says, regarding the administration of Toys R Us in the UK last year: ‘What Toys R Us didn’t do is invest in the retail experience in its stores.’

Enter ‘concept stores’, or the idea that physical retailers should give shoppers a better experience beyond queuing at a check-out if they want to boost sales. This has seen retailers open flagship stores rather than more and more generic shops.

If I were a GC of a large retailer experiencing distress, I’d be most worried about whether my directors were complying with their duties. Philip Hertz, Clifford Chance
If I were a GC of a large retailer experiencing distress, I’d be most worried about whether my directors were complying with their duties.
Philip Hertz, Clifford Chance

O2 is adjusting stores to be more customer-support orientated; Marks and Spencer has taken a 50% share in Ocado in a joint venture to sell its products online; and Dixons Carphone has introduced gaming hubs in stores.

But whether a trend towards concept stores or more slick flagships will be enough to stabilise struggling retailers is far from clear. What is more certain is that spending on customer experience in stores is likely to mean investment in technology and modern innovation like AI, which does not come without cost and is a gamble for businesses with strained balance sheets.

‘Experiential stores won’t work for many and they will get it wrong at the worst possible time for them when they can’t afford to lose money,’ argues Drew. ‘One thing a GC should be doing is helping to manage the risk so things don’t blow up and make sure the banking arrangements are flexible.’

Whether it is new regulation, following protocol for going into administration or kick-starting a rescue plan, retail GCs will need to be vigilant and ensure compliance.

‘If I were a GC at the helm of a large retailer experiencing distress, I’d be most worried about whether my directors were complying with their fiduciary and statutory duties in the light of the prevailing financial condition of the retailer, and taking proper board-level legal and financial advice, and fully minuting those meetings,’ says Philip Hertz, global head of restructuring and insolvency at Clifford Chance.

Consider cake chain Patisserie Valerie, which went into administration in January and is alleged to have committed accountancy fraud, leading to the arrests of five senior individuals.

As more store closures look set to hit the high street this year, retail GCs will likely face a cocktail of legal challenges, including employment matters. With there no longer being a fee for filing cases in the employment tribunal, there has been a rise in cases: the BRC says some 70,000 retail jobs were shed last year, with Jamie Oliver’s restaurant group now being sued by former workers over an alleged improper redundancy process.

‘Being a retail GC, you’re going to have a lot that keeps you up at night that you can’t control,’ says Obank.

As Nestlé’s GC Mark Maurice-Jones reflects, the world of retail is not going to get less competitive: ‘The danger is that if you’ve got financial targets and people are under a lot of pressure to meet them, they might do whatever it takes,’ he says. ‘There are going to be winners and losers.’

Major retail collapses and CVAs in 2018/19

February 2018 March 2018 July 2018 August 2018 September 2018 October 2018 December 2018 January 2019 March 2019 May 2019 June 2019 July 2019
The UK domestic businesses of Toys R Us and Maplin both collapsed into administration. Maplin employed 2,335 people across 217 stores while Toys R Us had 105 stores, employing 3,000 people. New Look’s CVA approved, with 60 stores singled out for potential closure out of 593, as well as an extra six sub-let to third parties. Steak chain Gaucho collapsed but was bought out by lenders a few months later, saving all 16 outlets. House of Fraser appointed administrators but was quickly bought by retail tycoon Mike Ashley for £90m, while a CVA for Homebase was approved under agreement of shutting 42 stores. Orla Kiely ceased trading after its parent company Kiely Rowan collapsed. Women’s fashion retailer Coast went into administration with the closure of 24 stores while clothing company Karen Millen bought parts of the business. HMV called in administrators for the second time in six years and was subsequently bought by Canadian record store Sunrise Records. Patisserie Valerie collapsed following fraud allegations but was saved by a management buyout backed by private equity firm Causeway Capital Partners, securing around 96 branches. Paperchase’s restructuring gained approval, with at least five stores planned for closure out of 145. LK Bennett collapsed but was bought by Byland UK, its Chinese franchise partner, with 15 stores not included in the deal closing. Jamie Oliver’s restaurant group business went into administration, seeing 22 out of 25 eateries close and causing 1,000 job losses. Debenhams’ CVA was approved after its lenders took control of the department store. At least
22 stores out of its portfolio of 166 will close next year.
Arcadia’s restructuring won the backing of creditors, narrowly avoiding going into administration and triggering the closure of around 50 stores, including Topshop, Miss Selfridge and Wallis. Monsoon Accessorize, which operates under two separate chains, called on landlords to approve rent reductions on some of its 258 leased stores under a CVA.

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