Sir Philip Green, a near-billionaire with a superyacht, couldn’t afford to pay his rent. Nor, it seems, can Peter Simon, a half-billionaire whose preferred luxury is expensive art. The founder and owner of Monsoon Accessorize would like his landlords to take rent cuts on 135 stores.
From Simon’s point of view, there’s no harm in having a go. Nobody doubts that “fundamental changes have taken place in the retail sector,” as the company puts it, and the tune seems to be a winner. Green got his restructuring of Arcadia over the line, albeit at the second attempt, so why shouldn’t Simon expect similar leniency?
What’s the problem?
Physical retailers have been hit by a combination of changing habits, rising costs and broader economic problems as well as the coronavirus pandemic. In the past few years names such as Mothercare, Karen Millen, Toys R Us, Maplin and Poundworld have disappeared from the UK high street as a result.
In terms of habits, shoppers are switching to buying online. Companies such as 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. Uncertainty about the economy has also slowed the housing market and linked makeovers of homes. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit and the coronavirus, 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 to even up the tax burden with online players and to adapt more quickly to the rapidly changing market. 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. Many businesses which deal with complex supply chains also want additional help with the new red tape and import charges imposed after Boris Johnson's Brexit deal saddled them with extra costs.
What is the government doing?
In the December 2019 Queen's speech, the government announced plans for further reform of business rates including more frequent revaluations and increasing the discount for small retailers, pubs, cinemas and music venues to 50% from one-third. 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.
But how many more of these requests from wealthy individuals are landlords prepared to tolerate? Monsoon paid the Simon family £116m in dividends between 2008 and 2013, which is surely sufficiently recent for the property owners to expect a large chunk of the cash to come back into the business in tougher times. Nor can Simon be said to be going to extremes himself in his role as owner of Monsoon’s head office. He proposes that Adena Property, an offshore company he owns, will take a 50% cut on the annual £5m rent bill. Why not 100%?
Simon, it should be said, it also proposing to lend Monsoon £34m on an interest-free basis and give the landlords a £10m share on future profits. But, pound for pound, this proposal does not look more generous than Arcadia’s.
Yet one suspects the landlords will roll over again and try to convince themselves that this CVA will be the last big one. They hold a poor hand, but they’re also playing their cards weakly. If open season for retail CVAs follows, the landlords have themselves to blame.
The ‘equity income’ absurdity
It’s a sub-plot in the Neil Woodford saga, but here’s another piece of idiocy. The fallen fund manager’s Equity Income Fund was not an equity income fund. Or, rather, it formally lost that status in April last year.
The “equity income” label derives from the Investment Association’s categorisation of funds. To qualify, the trade body says at least 80% of the assets must be in UK equities and the income must meet or exceed the yield on the FT All-share index, a low hurdle and one that only has to be cleared on a three-year view.
The Woodford fund failed to match up last year, which, as everybody now knows, was due in large part to the oversized injection of unquoted companies into the portfolio. A few of the quoted companies also cut their dividends, which won’t have helped either.
But here’s the absurdity. Even when “income” status is removed, a fund can still keep the word in its name. Why would it want to do that? The answer is obvious: “income” is a magic word in retail investment circles and such funds outsell others by about two to one. Almost every big fund management house has an “income” fund and, as with Woodford, most don’t drop the name when the goods don’t meet the description.
“The fund name and its objectives are the responsibility of the fund manager,” says the Investment Association. “We don’t have the power to tell them to change the name.” This is ridiculous. The system could almost be designed to fool the unwary.
Dixons Carphone undergoes OS update
Alex Baldock, chief executive of Dixons Carphone, is too polite. He would be within his rights to say his predecessor, Seb James, agreed one of the worst deals in recent retailing history when he sanctioned Dixons’ merger with Carphone Warehouse five years ago.
For former investors in standalone Dixons, the combination has proved disastrous. Carphone is being tortured by its contracts with big mobile phone networks that were signed in the days when punters wanted two-year service deals. Customers have wised-up to the benefits of Sim-only arrangements, meaning Carphone has to discount to meet volume targets it had pledged to Vodafone, EE and so on.
The good news, of a sort, is that the legacy contracts have been “renegotiated”. But the thumb screws have not been removed; the setting has merely adjusted from excruciating to severe. There will be “more pain in the coming year,” conceded Baldock. It is only in the next financial year that the volume commitments start to wind down.
The shame is that old Dixons – TVs, PCs, fridges, freezers – has survived the growth of Amazon and is prospering, a real achievement. The mobile factor, however, has pushed the share price close to a 10-year low at 118p. At a rough guess, it would be three times higher if the Carphone deal had never happened.
