BHS battles to stay on the high street

http://www.theguardian.com/business/2016/mar/19/bhs-battles-stay-on-the-high-street

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Until it closed its doors in January, BHS had had a department store in Carlisle city centre for more than 30 years. The retailer, which was once British Home Stores and can trace its origins back nearly 90 years, was an anchor tenant of the Lanes shopping centre when it opened in 1984, and gave BHS a prime site right in the heart of the city.

The closure has caused controversy, not just because of the loss of 50 jobs but because it has emerged that BHS was paid more than £5m to leave the shop, with about a quarter of that coming from Carlisle city council. The council and the owner of the shopping centre were desperate to replace BHS with Primark, which will pay far more rent and potentially attract more visitors.

The events in Carlisle shine a rather different light on the problems facing BHS than its bosses have outlined. Not only does it have huge financial problems, it also has to reinvent a business regarded as old-fashioned or, as one analyst said, “irrelevant”, with no obvious place on the modern high street.

The retailer claims that it is struggling and desperately needs to restructure its finances because the rent it is paying on its shops is too high.

BHS is trying to push through a company voluntary arrangement – an insolvency procedure – that will see rents cut at more than half of its 164 stores, with as many as 40 closing. Creditors will vote on the vital CVA on Wednesday. BHS needs 75% of creditors to vote in favour of the proposals and has warned that it will collapse into administration if it is rejected. Documents filed at the high court as part of the CVA show that BHS has debts of more than £1.3bn, including a pension deficit of £571m.

All BHS’s creditors, including suppliers, will have a vote in the CVA, despite landlords being the only ones asked to accept cuts. Darren Topp, chief executive of BHS, says he is confident of winning the vote, with a number of votes already posted to the company. “We are confident but are not complacent about that,” he said. “We will be grateful if they do. We believe we have a compelling story and a compelling turnaround. I think they [the creditors] do buy into it.”

That turnaround plan is designed to reinvent BHS, modernising stores, installing food departments, cutting the number of promotions in favour of lower everyday prices, and focusing on a smaller number of own-brand ranges.

However, the CVA document also underlines the true scale of the task facing Topp and his team even if creditors back the rent-reducing proposals. It shows that BHS still needs extra funds to be able to trade beyond 25 March and that it is trying to raise up to £100m. This includes a £60m loan, likely to come from restructuring firm Gordon Brothers, which will be secured against stock and debtors. BHS also needs to raise £30m from property, either by selling sites, sub-letting them or raising loans against them. Its flagship shop on Oxford Street in London and a site in Milton Keynes are thought to be part of a deal.

The final tranche of the £100m will come from the release of up to £10m tied up with letters of credit and deposits held by suppliers. This cash was handed to BHS’s suppliers after they had their credit insurance cut last year. Insurers who cover the possibility of a retailer going bust withdrew cover for BHS’s suppliers, leaving them with no financial protection if the retailer collapsed before bills were paid. BHS said this had a “substantial negative impact”.

The need for this extra funding shows that cutting costs is only part of the problem for BHS. The brand also needs to prove that it still has a place on the high street – and that will cost money.

“This has not happened quickly. It has happened over many years. BHS has been losing money for five years and more,” said Richard Hyman, a retail consultant. “I think it has become progressively irrelevant and it is a massive challenge to change that. I think the place to start is with understanding the customer better and editing the offers to become more relevant. It doesn’t have a place on the high street as it is. It has to change. It will need to invest money in these changes. It is not rocket science. I wouldn’t like to put a number on it, but it is going to be really tough, they have a mountain to climb.”

British Home Stores, as it was originally known, was founded in Brixton, south London in 1928 by a group of American entrepreneurs who wanted to create a UK version of Woolworths. Nothing was priced at more than a shilling (5p), though this increased to five shillings a year later when the business moved into furnishings. It floated on the stock market in the 1930s before merging with Mothercare and Habitat in 1986 to become Storehouse, which was led by Sir Terence Conran.

Sir Philip Green, the retail tycoon, bought BHS for £200m in 2000, turning it into part of his Arcadia empire. Green paid more than £400m in dividends to his wife, Tina, during his 15-year ownership, but he struggled to revive the brand and it remained deep in the red.

The billionaire sold BHS last March, for just £1, to Retail Acquisitions Limited, a little-known collection of financiers, lawyers and accountants. Since then concerns about the future of the retailer, which now employs more than 10,000 staff, have only grown.

The man who led the buyout, Dominic Chappell, has twice been declared bankrupt and the Guardian recently revealed that the new owners took a £8.4m loan out of BHS in the days after the takeover, with £3m going to four directors of Retail Acquisitions, including Chappell, handing them a multimillion-pound windfall. Retail Acquisitions explained the loan was for “professional fees”.

Chappell is also understood to be getting paid £540,000 a year, which is more than Topp. When contacted by the Observer, Chappell offered only a brief comment about the CVA. “We are very positive on a good outcome,” he said. He has previously said that he has always acted correctly in the eyes of the law.

But a lot is at stake for BHS’s 10,000 staff and the 20,000 members of its pension scheme. The voluntary arrangement has triggered a process that is likely to lead to the scheme and its £571m pension deficit entering the Pension Protection Fund. For those yet to reach retirement, this means a cut of 10% to their benefits. Chris Martin, chairman of the trustees of the BHS pension scheme, said: “Our focus is on clear communications with the members. I can’t speak for members, but from the trustees’ perspective a defined benefit scheme, when combined with a sponsoring employer with a weak covenant, is almost the perfect storm for pensions.”

The Pensions Regulator has the power to pursue parties that it believes should contribute to underfunded schemes, and experts believe that it is considering whether to pursue Green.

John Ralfe, a pensions consultant, said: “The regulator has legal powers to make a claim up to £571m against some of the companies in the Taveta Group, controlled by Lady Green and her immediate family.

“Looking at what the regulator has done in other cases, once the BHS pension schemes enter the PPF it will start the legal process. Although this will take years to work through the various courts, the amounts at stake are so huge the regulator will be prepared to spend as much time and money as it takes.”

It has been reported that Green has made an offer to put £80m into the pension scheme, with £40m in cash and £40m from a loan against the assets of Green’s Topshop, Dorothy Perkins, Wallis and Evans empire.

If BHS does go bust, Green will be at the front of the queue to reclaim debts. The CVA shows Arcadia is one of BHS’s secured creditors and is owed £35m, though Green has written off another £215m of debts. This means Green still has influence over the company and it is understood he has played a role in talks with landlords about the CVA.

This week is pivotal for BHS. Even if the CVA is approved, as expected, the 88-year-old brand has a long battle ahead if it wants to enjoy a bright future on Britain’s high streets.

RISE AND FALL

“If I give you my plane, right, and you tell me you’re a great driver and you crash it into the first fucking mountain, is that my fault?”

So said Sir Philip Green after he sold BHS for £1 to Retail Acquisitions, a consortium led by Dominic Chappell, a former bankrupt. The comment was Green’s response to questions about whether his reputation would suffer if BHS collapsed under its new owners.

Green owned BHS for 15 years after buying it for £200m in 2000. He initially sparked new life into the department store chain, but the online shopping revolution and the rise of new high street rivals such as Primark has taken its toll on BHS, which has lost money for several years in a row.

If BHS does collapse then its disappearance from the high street would have a similar impact to the recent failure of two other town centre stalwarts, Woolworths and Comet.

British Home Stores was launched in 1928 as an attempt to build a UK version of Woolworths. A group of entrepreneurs from the US, where the original Woolworths was founded, opened a shop in London.

The retailer went on to become one of the best-known names on the high street. Today it has 164 stores and 67 franchise stores across 16 countries, employing more than 10,000 people. Despite its problems, the chain still generates one million transactions a week.

Green bought the department store chain from Storehouse, a collection of retail brands put together by Sir Terence Conran, the designer. Storehouse, which also owned Habitat and Mothercare, led the international expansion of the brand.