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Most noticed business news stories in August 2018

As summer winds down, the biggest business story is the collapse and rescue of House of Fraser. Difficulties on the high street continue to capture the attention of the public as the tribulations of 169 year old high street staple cut through to more people (58%) than the royal wedding (45%) did earlier in the summer. However, unlike the marriage of the House of Markle and the House of Windsor – seen by many as a refreshing boost to a staid royal institution – the betrothal of the House of Fraser to the House of Sports Direct is more like a Faustian pact than a match made in retail heaven.

A-morality tale?

Mike Ashley, the owner of Sports Direct, purchased House of Fraser for £90m. The deal is a stay of execution for House of Fraser, but is far from perfect.

Only 31 of the 59 shops are likely to survive and Ashley waited for the business to collapse into administration before swooping on the retailer. As a result he has no obligation to support its pension fund, which is now likely to pay out less than anticipated to thousands House of Fraser employees.

Further, Ashley’s ongoing dispute with House of Fraser’s warehouse operator, XPO Logistics, over unpaid debts amounting to £30.4 million is indicative of wider problems. The warehouse operator hopes to be paid for services rendered. However, Ashley’s deal – including a company voluntary arrangement (CVA) – could see XPO Logistics disappointed.

Ashley claims that former House of Fraser directors, not Sports Direct, are liable for outstanding debts to the warehouse operator – and other suppliers. Consequently, XPO Logistics is currently holding out on deliveries, bringing the retailer’s website to a grinding halt.

Ashley may have no legal obligation to legacy suppliers, but some are angry about his bullish approach. Two stakeholder advisory groups are urging investors to vote against the re-election of Ashley as Chief Executive of Sports Direct, citing concerns – including those of MPs – about the lack of female directors and a failure to deal with complaints about employment practices.

However, this is cold comfort to most suppliers. For example, the CVA allows Ashley to bargain one-on-one with leaseholders as historic agreements become void. This means that House of Fraser can propose significantly reduced rates, and walk away if they are not accepted by landlords.

This may be supply and demand in action, but when there is no demand, the bargain is very one sided.

It’s the sector stupid

None of these problems are unique to House of Fraser. Problems across the retail sector are well documented.

At the beginning of the month, the FT reported that, since the start of the year, shares in UK food retailers have risen around 30% whilst shares in general retail – fashion, homewares and electricals – are down around 10%. The fashion sector has struggled particularly, with high street giants like M&S, Debenhams and John Lewis all having difficulties.

The causes are familiar: lack of investment and innovation in the sector, failure to adapt to an increasingly online business, retaining too many stores, unsustainable discounting, fast fashion and lack of differentiation.

The fall in the value of the pound, and rises in business rates and the minimum wage were the final nails in the coffin.

House of Fraser will not survive in its current form. Ashley has aspirations for the failing store to become the ‘Harrods of the high street’, but when that high street is crumbling and populated with retail zombies failing to adjust to the digital age, it’s difficult to be optimistic.

For now, House of Fraser staggers on, but without a radical overhaul of the business model and eye watering investment, it will continue its slow death march – following Woolworths, BHS, Toys ‘R’ Us, Poundworld, Maplin, Agent Provocateur and Jaeger into nostalgia and obscurity.

The disintegration of the retail sector with many great and highly regarded brands dying or on life-support is warning to all. Reputation means little if your business is unable to adapt to meet the evolving needs of your customers.

Big high street retailers with big reputations have to be braver. They have to forget about their storied histories and change their business models much more quickly, because a good reputation won’t save you from structural sectoral change.

Sectoral disruption is brutal. It disregards reputation. Those that don’t adapt die.

David Racadio

David is responsible for Populus's industry studies, which help clients in a range of sectors, including banking, insurance, food manufacturing, pharmaceuticals and retail, to benchmark their corporate reputations and understand the attitudes of key stakeholders that impact on their industry.

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