House of Fraser: Bold escape or last stand?

The retailer's new owner has a plan, but it might be too much to ask.

by Adam Gale
Last Updated: 10 Jul 2018

Warning! Disaster Area: You are about to enter the British high street...

Executive summary

House of Fraser is to close over half its stores as it further develops its turnaround plan, which also involves seeking a compulsory voluntary agreement (CVA) with its landlords to cut debt, and the acquisition of 51% of the holding company by Chinese firm C.Banner.

What’s the problem?

In one word, cash. The retailer’s cash and equivalents fell from £125.4m in January 2016 to £72.9m in January 2017 and just £7.4m in January this year. Operating cash flow is now lower than its interest repayments, though the main reason net cash has fallen so dramatically is that the company has kept investing in store refurbishments and online capacity, despite falling sales and margins.

Why has it happened?

This is just the latest in a series of collapses and frantic retreats seen on the high street over the last couple of years. House of Fraser, like most, blames a ‘perfect storm’ of declining footfall, business rates and minimum wage hikes, and Brexit-related currency issues.

A more apt metaphor would be the ‘final straw’. The fundamentals of customer shopping habits (and consequently of successful retail business models) have been changing for years in a very clear direction: from offline only to a form of multi-channel, where physical stores provide either convenience buys or a show room experience, while online provides the bulk of sales.

Stores like House of Fraser, Debenhams and M&S all failed to react quickly enough to this change. The surprise therefore is not that they have all encountered problems, just the timing of those problems.

What’s the turnaround plan involve?

C.Banner will provide £70m in cash to stabilise the company and help with its investments. The company hopes its CVA – and the store closures – will reduce rental costs by £20m a year.

It intends to use this stronger financial base to finance its shift to multi-channel, with major investment in online and a conversion of its stores into showrooms for brands. The company then hopes to be able to cut some of its debt.

That’s not enormously dissimilar from what it was trying to do before. What is new, aside from the store closures and CVA, is a shift in emphasis from its own ‘house brands’ to luxury brand concessions, both online and off.

Will it work?

Landlords agreeing to the CVA is essential. Assuming that happens, the real question is whether the pivot to online is just too late. It’s unclear whether House of Fraser will be able to translate its offline credentials as a place to go for luxury fashion into an online space that already has strong players like Matches Fashion. Much will depend on execution, both online and off.

If it doesn’t work, though, at least no one could accuse its leadership of lacking boldness: the proposed changes to its business model are quite profound, even if staying still is clearly no longer an option.  

Image credit: Andrey Pavlov/Shutterstock

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