Financial distress in the retail sector



FW moderates an online discussion looking at distress in the retail sector between André Medeiros at Booz & Company, Lee Manning at Deloitte, and Kon Asimacopoulos at Kirkland & Ellis International LLP.

FW: How would you describe the general performance of companies operating in the retail sector over the last year or so? What major challenges is the sector battling to overcome?

Asimacopoulos: Retail sector performance continues to be materially challenged, with recent figures showing an unexpected deterioration in performance over the past six months. While there was only a marginal increase in retail sales volume in the UK over the past 12 months, over the same period volumes for the eurozone as a whole fell. Quite clearly the continued constrained economic growth, limited access to capital and over leveraged capital structures, are working to make conditions for the retail sector difficult.

Manning: The retail sector has faced its most challenging year since the onset of the recession in late 2008 which saw the collapse of Woolworths, Land of Leather and Stylo Barratt amongst others, leading to shrinkage in approximately 8 percent of the retail space. The next few years were highlighted with notable Company Voluntary Agreements (CVAS) such as JJB, Blacks and Focus DIY, but there was a falling off in the number of high profile insolvencies. The impact of the consumer recession throughout 2011 and 2012 has hit retail particularly hard, coupled with the overall acceptance by the general public of purchasing goods online. The top 15 insolvencies in retail during 2011-12 have impacted 41,000 jobs of which 22,300 have been retained, and over 2700 stores of which 1350 have been closed. We therefore face a case of the ‘survival of the fittest’ and a willingness of retailers to look ahead in the long term and to plan their store rationalisation in advance of reaching crisis point.

Medeiros: Consumer sentiment over the past year on both sides of the Atlantic has continued to erode. In recent months we have seen the sharpest drops in continental European consumer confidence since 2008, along with similar record-low figures in the UK and the US. The reduction of consumer spending and the increase in commodity prices had a double impact on our sector, driving heavy price competition across both grocery and non-grocery retailers. Pressure from lower fixed cost online retailers has also increased, driving down the profitability per physical square metre of sales space. In this tough trading environment where price competition is increasingly important to attract frugal consumers, we are seeing our retail clients focus more than ever on end-to-end value chain operational efficiency and differentiated sourcing capabilities.

FW: Are retailers finding it difficult to access loan markets and refinance existing debt in the current climate?

Manning: The acceleration in failure rates of high profile retailers in 2012, of which perhaps Game Group, Peacocks and Blacks are most notable, reflects the difficulties in available refinancing to the retailer community. The prospects for financing other than from private equity – distressed investors for struggling retailers – remain thin and it is inevitable that we will see a rolling over of debt, perhaps with some conversion into equity and increased pricing, from existing lenders to retail clients who struggle to refinance elsewhere. Another serious brake on the ability for retailers to access funding is the tightening of credit lines by suppliers and their credit insurers, which starves retailers of vital working capital.

Medeiros: The retail sector encompasses a wide range of business models and scale players which is resulting in quite a diverse set of financing outcomes. One needs to segment the specialty retailers, from the large grocery/general merchandise players, and possibly also the luxury houses. Mid-sized specialty retailers are struggling to agree refinancing terms with lenders, and the burden of proof regarding operational efficiency and cost cutting plans are increasing. At the larger end of the retail market, leading players are still able to access bond markets relatively cheaply, with both Walmart and Tesco active with issuances in late 2011. The luxury retail sector is riding the current market turmoil reasonably well, with the East Asia not only providing strong consumer demand but also acting as a strong source of financing, as seen by recent Asian IPOs of luxury European retailers. 

Asimacopoulos: The number of retail failures over the past 12 months and the retailers in continued difficulty demonstrate that, as the sector remains distressed and lending remains constrained, many retailers are finding it difficult to access the debt markets. There are exceptions in every industry, but in retail those are rare at present.

FW: Broadly speaking, what restructuring strategies are being adopted by under performing and distressed retailers? For example, why is the administration approach increasingly used in retail restructurings?

Medeiros: Over the past year a number of restructuring approaches have come to the fore, beyond standard administration. Pre-packed administrations have been popular, particularly in cases where the founding family is still involved in the retail business – naturally leading to objections from creditors when pre-negotiated sales are to known parties. CVAs are also being increasingly used by retailers to force down their fixed costs – mostly store rents. Under these agreements, a retailer brokers a deal with unsecured creditors to avoid administration. Landlords particularly are likely to be hit hard by future waves of CVAs as they acquiesce to lower rates in the hope of maintaining store occupancy. Struggling retailers however should not view these tactical survival approaches as the route to sustainability or indeed future growth. The difficulties faced by many retailers are deeply structural and require a significant reassessment of business models and capabilities.

Asimacopoulos: In order to preserve the most value, retailers and their stakeholders are seeking to combine financial and operational restructurings. On the operational side, they have tried to reduce the often overwhelming retail lease cost base by use of either pre-packs – which allow fast enterprise sales with minimal disruption – or CVAs. Both have their advantages and disadvantages which are impacted by a number of competing variables. In any event, conditions in the retail sector at present mean tenants have the most leverage they have had since 2009 in seeking to redress lease costs. 

Manning: Whilst CVAs have been seen as a popular tool in restructuring retailers, the failure rate of those retailers that have entered into CVAs indicates that CVAs are not as effective a tool for restructuring a business as retailers might hope. Might importantly, it indicates that retailers do not cut deep enough in their store restructurings or negotiations with landlords and tend to retain too many marginal stores only for them to have to face up to a second round of restructuring. This has also been evidenced by a number of retailers going into administration and then falling rapidly into administration again only to emerge for a third time with a dramatically reduced footprint. Examples of this are MK One, Adams, Ethel Austin and Stylo Barratt. The beauty of the administration approach is that an administrator is able to rationalise a business more thoroughly and purchasers are able to cherry pick those elements of the business they wish to take forward and operate stores on a flexible licence basis rather than immediately binding themselves to formal leases. The balancing act is for purchasers not to be over eager to take on too many stores only to find that the new portfolio in their hands is still heavily weighted down by under-performing stores.

FW: Could you provide some insight into the operational issues that should be addressed when attempting to turn a retail business around?

Asimacopoulos: There are no off-the-shelf solutions for retail businesses: a retail turnaround solution needs to be tailored to the particular business. Retail turnaround success stories have used product sourcing and supply chain optimisation, store portfolio rationalisation, cost management, and product mix among other strategies. Each aspect of the strategy should be considered in terms of its benefit and the potential adverse impact of its implementation. Where cash is tight the cost of each strategy needs to be carefully considered.

Medeiros: In this tough environment there are three key pillars retailers and investors need to focus on for sustainable success. The first is to not forget the consumer and ensure delivery of a coherent product assortment – the breadth of available online ranges means that the physical store needs to provide a highly-curated offering that excites consumers through a differentiated sourcing approach. The second pillar for success is tight supply chain control, retailers need to upgrade the responsiveness of their supply chains, improve the flexibility and dynamic nature of demand forecasting across store portfolios, and enter into closer collaboration with suppliers further back in the value chain. It is this set of capabilities that will enable a retailer to avoid both value-destroying markdowns and lost sales opportunities. The third pillar is the development of a solid property management capability detached from short-term trading pressures that can take a strategic view of the optimal property mix. 

FW: To what extent have you seen an increase in distressed M&A and consolidation in the sector? Does the current market present attractive opportunities to potential acquirers and investors?

Asimacopoulos: Distress in the sector has driven a consolidation of sorts, but only in very specific situations and by a limited group of participants. Certain private equity and related funds with particular retail expertise have used distress in the retail sector to either purchase businesses out of pre-packs or to purchase debt and convert that debt into an ownership play. For parties who have the capability of completing transactions faster, with more certainty than the competition, and with the underlying operational expertise to effect meaningful turnarounds, there will be significant opportunities at least for the next few years while Europe remains stressed but participants remain cautious.

Manning: In 2010 there were only six well known retail insolvencies in the UK – Suits You, Adams, Faith, Cruise, Envy and Ethel Austin. In total these employed 7750 staff and had 576 stores. With the exception of Suits You, all had already been through a previous insolvency process. Only about 100 stores emerged intact as retail operators. 2011 saw the insolvency of Alexon, Blacks, Stylo Barrett, Jane Norman, Habitat, Focus DIY, Homeform, TJ Hughes, Oddbins and Hawkins Bazaar which between them employed over 22,000 staff and had 1250 stores. This was followed in 2012 by the insolvencies of Game, Peacocks, La Senza and Past Time which between them had 21,000 employees and 1730 stores. Current market conditions mean there are opportunities for suitably funded investors to take advantage of distressed retail opportunities but it is critical that they bear in mind that the impact of ‘multichannel’ in retail means that store portfolios should be trimmed down accordingly and concentrated in areas where the consumer demographic suits their product best in a bricks and mortar retail format, leaving their online offering to cover the more marginal areas.

Medeiros: Despite the ongoing trading difficulties experienced by many European mid-sized retailers, we are seeing only very selective and opportunistic M&A activity across the market. Private equity buyers generally continue to struggle to access low cost debt for retail acquisitions and are shifting much of their consumer sector deal attention to higher-growth markets. There are, however, a number of funds that, as notable exceptions, have recently been particularly active in the specialty retail space. These acquisitions have been based either on the expectation of significant margin recovery through operational scrutiny, or on the traditional retail buyout expectation of unlocking real-estate assets. Beyond specialty retail, we are seeing a number of our larger general merchandising and grocery retail clients seriously assess opportunities across higher growth markets. Many are particularly looking at deploying cost-effective ecommerce entry strategies that leverage their strong home market brands and established multi-channel capabilities.

FW: What opportunities and challenges does real estate present for retailers in distress?

Manning: The overriding challenge for retailers is recognition in advance that a target operating model for future years is likely to involve fewer stores for those retailers which have reached maturity. Therefore, a strategy should be employed well in advance which anticipates a shrinkage in sales from the bricks and mortar retail format – to be replaced by online sales – and a strategy of off-loading those marginal stores at a stage when a particular retailer is not at crisis point and has sufficient resources to negotiate settlements with landlords to hand back underperforming stores or those projected to be underperforming in the future. In addition, landlords should consider the alternative uses for their store portfolio for other retailers and seek specialist advice in terms of the potential for disposing of leases to incoming operators for alternative uses at a time when it is still possible to generate a premium for those leases. Bricks and mortar retail is here to stay but it has to recognise the imbalance at present which exists between supply and demand which inevitably falls on the shoulders of those companies that have a less attractive and diverse retail offering, and hence are more vulnerable to adverse shifts in demand.

Medeiros: Across mature markets, many retailers are finding themselves burdened by excessive, expensive floor-space as consumers reduce total spending, and continue shifting purchasing online. Closing stores still within lease agreements is costly and selling owned sites leaves a retailer vulnerable to low valuations. Retailers need to view centralised property management as a critical capability that can objectively assess the optimum number of physical outlets required for different potential business models. They need to invest in building this capability that can often release significant synergies across banners and geographies – something Georges Plassat did so well at Vivarte and will now be hoping to replicate at Carrefour. In emerging markets, innovative ways of releasing property values are still being tested, an example being the IPO of a Tesco property fund in Thailand late last year raising approximately US$600m.

Asimacopoulos: As the retail sector remains constrained, high street real estate suffers in parallel. The challenges include ensuring there is sufficient cash to meet typically quarterly rental payments, with opportunities including potential purchase options, lease rationalisation options and more substantial real estate strategy revision.

FW: What trends do you expect to see in the retail sector over the next 12-18 months? Are you seeing more evidence, for example, of a shift to online retailing – so-called ‘bricks to clicks’?

Medeiros: Consumers do not view the retail landscape through the lens of different channels, but simply seek to interact with retail brands in whichever manner is most convenient at any given time. Their expectation of a seamless retail experience is already high, and will be increasing over the coming years. The challenge for retailers is, therefore, how to deliver consistent service levels to consumers across the different possible touchpoints, so as to fully maximise the value from the consumer relationship. 

Multi-channel success will require an overhaul of many currently struggling business models, and will significantly alter our understanding of the role of the physical store outlet. The consumer ability to price-compare instantly from the shelf-edge, means that the physical store will need to work hard to prevent itself from becoming an expensive showroom for lower cost competitor ecommerce sites. Retailers choosing to maintain a physical store network will need to offer differentiated in-store experiences, potentially developing the opportunity to complement the product sales with value-added services. We are also likely to see better tailoring of physical store formats, assortments and pricing to meet the targeted needs of smaller consumer segments. As retailers struggle with the trading environment, it is important to not lose sight of the strategic endgame. The current wave of restructuring is a good opportunity to lay the radical business model foundations for future retail success.

Asimacopoulos: Further expansion of online presence but more specifically integration across bricks-and-mortar, online and mobile, and bricks being seen as part of a wider retail offering not necessarily the core element is clearly the most significant trend in recent years and one that will continue. In addition, continued expansion into high growth/emerging markets is another trend that will continue as retailers search for longer term enhancements to growth and profit.

Manning: It is inevitable that the momentum of online retailing will increase and those retailers whose product is more commoditised than others – for example, electrical goods, books, music, gaming and films – will continue to come under increasing pressure from the online offering. Retailers need to do whatever is possible to make the shopping experience convenient for customers and therefore linking online ordering to collection from local stores is likely to be a considerable growth area. Linking a retailer’s online offering to its in-store shopping experience is important to ensure that a retailer avoids competing with itself through its online offering and driving away customers from its stores. The extension of offering customers a user friendly means of shopping through their mobile devices will present yet another challenge to bricks and mortar retailers.


André Medeiros is a principal within the Consumer and Retail practice of Booz & Company. He has extensive experience in working with leading retailers and financial investors on retail growth strategies and operational improvement / turnaround programmes across Europe, the Americas and Asia. Mr Medeiros can be contacted on +44 (0)207 393 3333 or by email:

Lee Manning is a partner in the Reorganisation Services practice at Deloitte. He joined the firm in 2004 after spending 14 years at Kroll. Here he initiated and developed Kroll’s receivership practice and established a reputation as a hands-on adviser to struggling businesses across a range of industries. Mr Manning has experience of the telecoms and IT sectors as well as football, retail and leisure, catering and manufacturing. He is a fellow of the Institute of Chartered Accountants and vice-president of the Association of Business Recovery professionals. He can be contacted on +44 (0)20 7936 3000 or by email:

Kon Asimacopoulos is a partner in the European Restructuring Group of Kirkland & Ellis International LLP. He acts for a range of stakeholders in national and international financial restructuring, insolvency and complex dispute resolution matters, for debtors and insolvency practitioners of national and multinational corporations in cross-border insolvencies and reorganisation transactions, and for debt and equity investors in par, stressed and distressed transactions. Mr Asimacopoulos is recognised in Chambers & Partners, Legal 500, and IFLR 1000 as a leading corporate restructuring and insolvency lawyer. He can be contacted on +44 (0)20 7469 2230 or by email:



André Medeiros

Booz & Company


Lee Manning



Kon Asimacopoulos

Kirkland & Ellis International LLP

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