The Struggles of House of Fraser:
Competition in the British retail sector - Part 2
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Edoardo Pisciotta London 20/06/2018
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Following our exploration of Poundworld in our previous article, we have identified that the British retail sector is in turmoil. Two of the most famous brands on the high street, House of Fraser and Poundworld were in the news, the former for a make-it-or-break-it restructuring, the second for closure. As we have already analysed the reason for Poundworld's demise, in this article we will focus on House of Fraser.
The world of high street retail has been under pressure in the past years. Economic uncertainty, austerity and the rise of online shopping have threatened the very existence of traditional high street chains. Today, 20% of UK shoppers do their shopping online and while specialist shops thrive online, generalists such as House of Fraser, continue to struggle. Traditional retail chains are hooked on long and expensive rent leases, an increasingly expensive labour force (due to the apprenticeship levy and minimum wage), and rising IT and logistics costs that prevent online expansion. House of Fraser is a British department store chain that grew to a national presence during the 20th century. The company went public and eventually moved into the FTSE index before being delisted by new owners in 2006. In 2014, Nanjing Xinjiekou Department Store Co, a leading chain of Chinese department stores, bought the majority of House of Fraser in a deal that valued the company at approximately £450 million. House of Fraser has been underperforming and struggling to adapt its business model to the digital age. Moreover, the company did not develop its own brand as much as its competitors did, remaining quite dependent on famous and successful brands. To add to this, the lease on many House of Fraser stores is longer and more expensive than the average of its competitors. The last release of company data shows that in the 6 weeks leading to December 23, revenues fell by 2.9% with online sales down by 7.5%. The Chinese owners of House of Fraser have reached an agreement with Hong Kong-listed C.banner International to inject £70m of fresh capital into the company in exchange for 51% of the company shares. The final amount is yet to be confirmed and it is part of ongoing negotiations -- it would be an addition to the £25 million already injected earlier this year. The restructuring of House of Fraser will continue during the year with store closures (31 out of 58), lease renegotiations and a transformation of the business. That is, if an agreement can be reached with the bond-holders of the company who have subscribed to £171 million floating rate notes due to expire in 2020. The stories about House of Fraser and Poundworld depict a grim picture for the British retail sector. According to the Guardian's research, of the 270,000 shops in the UK, up to 74,000 could close down in the next year. The majority of the closure would be in North England and Wales. Moreover, the Financial Times reported a study of the British Retail Consortium, predicting that one million jobs in the sector could be cut by 2025. Automatisation and levies will reshape the industries in the years to come. |