This ‘curse’ can kill a business

BHS store © Getty images
BHS is taking on the supermarkets

Debt-ridden pawnbroker Albermarle & Bond tried everything to save its business. But its last-ditch effort – smelting down its own stocks of gold jewellery – wasn’t enough. The coup de grace came last week, when banks withdrew their support for the turnaround plan.

And now its motto, “For nearly 30 years, we’ve been helping our customers get the cash they need, when they need it”, has a bitter irony to it.

Albermarle & Bond is the latest big high street name to suffer the ‘curse of the long lease’. Many retailers don’t own the property in which they operate. And there’s no escaping the rent, even if you’re running your business at a loss. Shop owners are in many ways slaves to the landlord.

Several other big names are currently facing this issue. Some manage to adapt and make the best of a bad situation. Others, like Albermarle & Bond, are stuck. My advice? Always look out for property leases when assessing any business. Especially businesses that are having a tough time of it.

Let them buy cake

Retailing in the 21st century is profoundly interesting. Even the ‘King of the High Street’, Sir Philip Green, is having to adapt – and adapt quickly. The recent evolution of his Arcadia group brings up a few home truths. Home truths that any shareholder in the retail sector really must be aware of.

Despite a difficult trading environment, Green’s leading marques like Topshop and Topman are stretching their influence across the globe. But there’s one big, fat fly in the ointment… BHS.

This year, BHS built on its previous years of losses, reporting a deficit of £116m. Like so many in the retail sector, BHS is caught in the dangerous middle ground. It is neither at the budget end (Primark, Matalan, etc), nor is it at the top end (House of Fraser, John Lewis, etc).

Life in the middle lane is becoming increasingly difficult for the likes of BHS – it’s the most vulnerable to the internet, and it just doesn’t seem to chime with consumer preferences.

You might think that a hard-nosed businessman like Green could just shut up shop on non-profitable stores.

But it’s not as simple as that. You see, in the case of Arcadia, most of the properties are leased. You can’t just shut up shop without having to pay the landlord a fortune in future rents. That’s why I say that in many ways, the shop owner is a slave to the landlord.

Of course, Green is a man with a plan. If the punter isn’t interested in his homewares and clothes, then let them buy food instead.

Green is now going to offer groceries out of his BHS stores. He plans to undercut the UK’s leading retailer, Tesco, by a significant 10%. OK, so Green’s 150-store offering isn’t going to have the whole supermarket sector quaking. But it’s another competitor the supermarkets could well do without. And from Green’s perspective, it looks like a good move.

If it brings punters into these all too quiet stores, then there may be a chance they’ll make a speculative purchase of BHS’s traditional fare too.

Adaptation is the key to surviving on the high street. And way too many retailers don’t (or didn’t) have the vision to adapt their offering, so as to keep the landlord from the door.

Morrisons just sold its freedom for £1bn

Retail groups may own their stores, or lease them, or perhaps, a bit of both. Clearly, ownership is by far the safest option here.

Yet, you’ll often hear the City analysts urging groups with large property assets to sell them down. They’d rather see the cash now, and commit to a long-term lease with the new landlord instead.

The analysts have been urging supermarket chain Morrisons to bail out of their stores for ages. And after many years of waning influence from the founding family, chief executive Dalton Philips has finally buckled.

You will no doubt be aware of Morrisons’ troubles. Again, a retailer in the squeezed middle, it’s been struggling. So much so, that it recently launched a price war. A war that saw the whole sector de-rated.

But what you may not have picked up on is how it’s planning to fund its war. You see, a whopping £1bn is to come from property sales (and a few cost cuts).

This is all well and good in the short run. But be under no illusion, signing long leases with the new landlord locks Morrisons in. They will become a slave to these new landlords. And I suspect Morrisons’s ability to adapt and evolve won’t be half as effective as that of our Mr Green. Short-term gain will turn to long-term pain.

Dalton Philips may well have flown the nest a few years down the line. Many shareholders won’t have. Once you’ve sold the home and taken on a lease, you’re stuck with it.

As for me and the supermarket sector, my preferred bet is Tesco. As the only major player with a serious plan to tackle the internet threat/opportunity, I think it’s a great recovery play. Competing only on price seems short-sighted, especially when funding your war with a great, big mortgage.