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Distressed retail: The new landscape

The retail sector has been badly affected by temporary covid closures. But with this coming on top of major structural changes in the sector, the damage is extreme. We have seen mass closures and the disappearance from our high streets of many well known names. Some have been rescued but often by transforming them into businesses much more orientated to online sales and with less (or no) ongoing high street units. And we fear that there is more to come, particularly for  medium sized and smaller chains as they emerge from government temporary protections against creditor actions, supported loans and the furlough scheme.

This is a threat to many but an opportunity for others.

In the articles below our experts look into a variety of topics to be borne in mind by retailers or their prospective rescuers to navigate through this new environment.

We hope you find it useful.

1. Rescue of distressed retailers in the new environment: A users’ guide

The pandemic has massively accelerated changes in the retail market.

The shift of consumer preferences from shops made of bricks to those powered by clicks; the gravitation to major brands with global presence; and the competitive drive for cost reduction were all spreading disruption when the pandemic hit.

Then the widespread and extended closure of much of the high street hit- and the disruption became turmoil. A number of well known names have entered administration over the last year- Debenhams, Arcadia group, Monsoon, Warehouse, Oasis, Jaeger, Peacocks, TM Lewin… and the list goes on.

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2. Rescue of distressed retail business in the new environment: What are the procedures?

Where the business requires a formal insolvency procedure, the main choices are company voluntary arrangements (or “CVA”s) or administration – usually a pre-pack administration. How do these work?

CVAs

A CVA is an agreement between a company and its creditors, which, if approved by 75% of creditors by value, binds all creditors. They can be used for a range of deals – paying debts over a period of time, paying a proportion only of debts or more elaborate compromises.

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3. Rescue of insolvent retail business in the new environment: Brand considerations

Buying the brand of an insolvent business can be a commercially attractive proposition for any potential buyers. In recent times, this has been highlighted in a spate of acquisitions of fashion brands. However, the purchase of the brand of a company in administration can have its pitfalls, and given the time-sensitive nature of the process, there are a number of things purchasers need to be aware of:

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4. Rescue of distressed retail business in the new environment: Employment issues

In many recent rescues of retail businesses the buyer has acquired from administrators the brand and website but excluded from the sale some or all of the physical shops- see for instance Debenhams, the various Arcadia business sales, Oasis, Warehouse, and TM Lewin.

Clearly, at least part of the rationale for this deal structure is for the buyer to avoid taking over the cost of employing shop staff.

However, the legal position is not as straightforward as the deal press announcements may suggest.

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5. Rescue of insolvent retail business in the new environment: Commercial contracts on Insolvency

While, in general, a buyer of a business and assets from an administrator will not take over any liabilities of the seller, there are exceptions. One exception relates to employees (on which see the separate article in this series on the impact of TUPE), but there will also be certain commercial contracts of the business to consider, especially those which are integral to “business as usual” activities.

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6. Rescue of insolvent retail business in the new environment: Property issues

Struggling to make retail units profitable, many retailers are seeking to reduce costs by negotiating reduced rents or shifting to turnover based rents.

Management of smaller groups may be able to renegotiate leases individually with landlords. But how can retailers proceed if they can’t reach agreement with all landlords, or have a large lease portfolio making lease by lease negotiations impractical?

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7. Rescue of insolvent retail business in the new environment: Data protection and GDPR

One of the key assets for a buyer of a retail business may well be the database of customers and/or interested consumers.  This will apply particularly if there is an existing e-tail operation for the business, but even bricks and mortar operations frequently have mailing lists. Buyers should check if they are getting the database as part of the assets and if they are, be alive to the data protection issues raised by compliance with the UK GDPR.

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8. Retail sector restructuring in 2021: How we can help you

In 2020 we saw a startling number of familiar high street names disappear from shop fronts, or at least diminish their high street presence. Recent research commissioned by PWC quantified this as an average of 48 UK shops in chains closing every day during 2020.

High street retail was hit hard by the coronavirus pandemic. However, this came at a time of massive structural change for retail. As the Economist’s special report on the future of shopping this week put it, “Not since the Industrial Revolution has shopping been in such upheaval”. The shift to digital is accompanied by other powerful trends- a rise in consumer activism and a re-orientation of international brands from the US and Europe to Asia.

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