Sir Philip Green is considering breaking up his Arcadia Group retail empire to prepare for a potential sale of some of its biggest brands.
In a development that could gradually dismantle the group behind some of the country’s biggest fashion brands – including Topshop, Miss Selfridge, Burton and Wallis – Green has reportedly started laying the groundwork to split and sell parts of the company over a period of time.
What’s the problem?
Physical retailers have been hit by a combination of changing habits, unseasonably warm weather, rising costs and broader economic problems. 2018 saw the disappearance of Toys R Us, Maplin and Poundworld as a result.
In terms of habits, shoppers are switching to buying online. The likes of Amazon have an unfair advantage because they have a lower business rate bill, which holds down costs and enables online retailers to woo shoppers with low prices. Business rates are taxes, based on the value of commercial property, that are imposed on traditional retailers with physical stores.
At the same time, there is a move away from buying ‘stuff’ as more people live in smaller homes and rent rather than buy. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit, have coincided with economic and political uncertainty that has dampened consumer confidence.
What help do retailers need?
Retailers with a high street presence want the government to change business rates. They also want more political certainty as the potential for a no deal Brexit means some are not only incurring additional costs for stockpiling goods but are unsure about the impact of tariffs after October 2019. Retailers also want more investment in town centres to help them adapt to changing trends, as well as a cut to high parking charges which they say put off shoppers.
What is the government doing?
In the October 2018 budget the government announced some relief on business rates for independent shopkeepers. It has also set up a £675m ‘future high streets’ fund under which local councils can bid for up to £25m towards regeneration projects such as refurbishing local historic buildings and improving transport links. The fund will also pay for the creation of a high street taskforce to provide expertise and hands-on support to local areas.
What is the outlook in 2019?
Some retailers could go under. Weakened by a difficult Christmas – which accounts for the entire annual profits of many retailers, and with further Brexit wobbles to come – retailers are facing a tough 2019. Another rise in the national minimum wage in April and the falling value of the pound against the dollar, which is used to buy goods in the Far East, have also added to costs and hit profits.
The planning work is being overseen by Arcadia’s chief executive, Ian Grabiner, according to a report in the Sunday Times. The newspaper said Grabiner had convinced Green that the strategy was better than keeping the group together.
Arcadia has already started to untangle shared functions such as IT and HR to help the groundwork for a potential separation, according to the report.
The move comes as Green’s empire battles declining sales and profitability amid an increase in competition from online retailers, after years of underinvestment by the former billionaire.
Employing about 17,000 with brands that have been household names on the high street for decades, Arcadia managed to stave off collapse in June after winning the backing of its creditors for a rescue plan that involved closing 50 of its 570 stores and 1,000 job losses.
The plan involved seven company voluntary arrangements (CVAs) – insolvency procedures allowing businesses to renegotiate their debts – which required approval of 75% of all creditors and at least half of the landlords behind the company’s shops.
Arcadia had faced legal challenges in the US from two property groups battling the outcome of some of its CVAs. However, the landlords Vornado and Caruso agreed deals last week to drop their claims as part of an out-of-court settlement.
The Sunday Times said Green had been waiting to resolve the disputes before taking steps towards separation .
Carving the company into several parts could help maximise value by enabling the company to stagger the sales process for each of its brands.
Any sales process would be watched closely by the Pensions Regulator, which has veto powers over disposals due to a £750m deficit in Arcadia’s retirement scheme.
Green, 67, was heavily criticised for his sale of BHS to Dominic Chappell, a former bankrupt, for just £1 in March 2015. The company collapsed a year later with the loss of 11,000 jobs, leaving a pensions black hole of more than £500m.
Green agreed to hand over £363m to the scheme in a deal with the regulator amid a whirlwind of political pressure and calls for the businessman to lose his knighthood.
A spokesman for Arcadia declined to comment.
