Imagine a business model in which you broadly break even for most of the year and rely on one six-week window in which you make most of your profits. That doesn’t sound so appealing to an investor, does it? Welcome to the world of retail.
Historically, this was not an issue as sales and profits always materialised during the Christmas trading window. Investors, management, suppliers and all other stakeholders understood the cycle and saw retail as a robust business model. This certainty led to the significant fixed cost investment in retail.
The recent Christmas trading results highlighted the current volatility faced by the retail market, with traditional retailers losing market share to internet rivals and sales being undermined by fast moving trends. Hence, the historic certainties of retail have now ended, and retailers face the structural issue of having a slow-moving fixed cost base compared to rapidly changing variable sales.
This contradiction is at the heart of many of the recent retail failures and these trends will continue accentuating a variety of issues for retailers.
Retailing in its current guise can only continue if the stakeholders accept that the historical certainties have ended and that in a more dynamic environment, retailers need flexibility to address the challenges they are facing. Hence, it would appear the key fixed costs of rents, rates and staff costs with their annual cost escalators need to be re-visited.
If landlords and the government do not respond to these issues, the options available to retailers will be restricted to the radical restructurings illustrated by the recent spate of Company Voluntary Arrangements (CVAs).
We have recently worked on a range of assignments in which the rapid implementation of CVAs have prevented the failure of various retailer and ensured the businesses rapidly returned to profitability.
Our focus in any CVA is to ensure retailers benefit from an appropriate cost base and have the flexibility to address the rapidly changing retail environment. The flexibility within CVAs, although not appreciated by many stakeholder groups, potentially provides a blueprint for how retailers can survive during this period of dynamic change.