The headlines almost write themselves. As yet another high-street chain calls in the administrators or puts itself up for sale, the same story gets repeated over and over. The high street is in crisis. The internet is blowing away sales and profits. Cash-strapped consumers have stopped spending. Costs have spiralled out of control. The way things are going, soon all that will be left in your local shopping centre are a couple of charity shops and a bookmaker. It's a good tale, and easily understood. There is a problem, however. It is not really true.
The real story is far more interesting. This is not a retailing crisis, but a financial one. The City has loaded up far too much debt onto companies that can no longer support it. And if there is a question that should be asked, it is why they were allowed to get away with it.
There is certainly no shortage of well-known retail brands running into trouble right now. Just before Christmas, the lingerie retailer La Senza, which has 146 shops across the country, announced it was calling in the administrators. Thorntons, the chocolate retailer, has run into trouble, and is having to close shops. The toy and gadget retailer Hawkin's Bazaar is shutting down shops and so is the clothes retailer D2. The 100-store chain Past Times plans to put itself into administration. Peacocks is considering selling off its Bonmarch chain as part of a restructuring. Others, such as HMV and New Look, have managed to stay in business, but have suffered big falls in profits. It all adds up to a grim picture.
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These are challenging times for many high-street retailers. The internet has undoubtedly taken a big chunk of sales away from them. All kinds of things from books, to gadgets, to clothes that we used to buy from familiar retailers we now buy with the click of a mouse and get delivered to our house. They are usually a lot cheaper, and we don't have to fight our way through the crowds or worry about finding a parking space. Online retailers don't have to worry so much about business rates, rent reviews, or staff costs and so can offer cheaper prices.
Then there is the recession. Faced with soaring inflation, stagnant wages, minimal house-price growth, and sparse credit, consumers are feeling the pinch. They are cutting back. Luxuries the kind of thing you might buy at Thorntons or La Senza are the first to go.
So far, the grim tale about the high street makes sense. But here are some details that challenge the picture. In December, retail sales rose at the fastest rate since May, according to the Confederation of British Industry. This week, the British Retail Consortium said Christmas sales were up by 4% this year. In November retail sales dropped by 0.4%, according to the Office for National Statistics, but they were up in October, and over the latest three-month period they were up by 0.7%.
The numbers jump around a bit, as they always do. Broadly speaking, retail sales are flat, just as you might expect when the economy is going through a hard time. But it is not exactly a bloodbath. If anything, it is remarkable how well retail has done considering the state of the economy. The retail industry is certainly changing as technology moves on and consumer preferences also develop. That is all part of a completely normal and healthy process. It shouldn't be a catastrophe.
The one big problem is the debt. Take a look at who actually owns the retailers. La Senza, for example, was owned by the private-equity company Lion Capital, which bought it in 2006. Past Times was owned by Epic Private Equity. New Look is owned by the private-equity firms Permira and Apax. Hawkin's Bazaar was owned by a company called Tobar Group, itself partially owned by the venture capital firm Primary Capital. Peacocks is backed by the American hedge funds Och-Ziff and Perry Capital.
In short, nearly all the retailers in trouble are owned by private-equity companies. They bought them in the good times and put a mountain of debt on them. The result? If there is a minor drop in sales and profits they get into trouble, because their balance sheets are in such terrible shape.
The City loved retailing. It had stable cash flows and usually lots of property assets. So it was a perfect arena for financial engineers to come up with clever schemes for sweating the assets' and making the balance sheet work harder'. It was all fine so long as the economy was booming and not so good as soon as it got into trouble.
It's not hard to understand. If your own income went down, say, 2% this year, you wouldn't expect the house to be repossessed. But the City has stretched many businesses to the point where they can no longer cope with any kind of adversity. We are seeing the results everywhere. A company such as EMI couldn't cope with the turmoil in the music industry. Now swathes of the retail industry can't cope with the challenges on the high street.
That is crazy. Businesses need to be able to survive through both good times and bad. The financial markets are supposed to be there to help companies go through difficult times not to put them straight out of business as soon as they face a slight bump in the road. Instead of seeing what's happening as a high-street crisis, we should recognise this for what it is: a crisis created by financial engineering.
This article was originally published in MoneyWeek magazine issue number 571 on 13 January 2011, and
was available exclusively to magazine subscribers. To read all our subscriber-only articles right away,
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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