Thursday, 23 January 2020

An increasing rollcall of retail collapses has had a heartbreaking impact on workers and their families, and has unsettled the economy, but it need not be so damaging.

The human element of the retail decline is too seldom talked about but it causes enormous stress and strain at home and across so many other areas.

Australia has seen significant retail collapses in the past few years: Dick Smith, Harris Scarfe, Bardot, Ed Harry, Toys R Us, Roger David and Napoleon Perdis, to name just a few.

And as recently as last week, Jeanswest is also in administration, putting 1000 jobs at risk.

The ramifications of these ­closures are wide-reaching: Landlords losing a revenue stream, changes in tenant mix and therefore a likely change in valuation for landlords, a lessening of consumer choice of retailers, and retail advertising revenue declines are just some of the damaging results.

Often, in the short-term, re-employment of these staff is difficult as the retail industry is facing headwinds and jobs are scarce. Employees undoubtedly will feel the biggest financial stress and strain, particularly when any mortgage burden is factored in. To put the scale of the problem into perspective, retail is the second largest employer in Australia behind the healthcare sector, and the industry is struggling — rest assured, many more jobs are at risk.

Job losses during the past two years from retail collapses include 440 at Harris Scarfe, 547 at Bardot, more than 100 at Napoleon Perdis, 498 at Ed Harry and 700 at Toys R Us.

Without doubt the biggest challenge for a retailer is the inflexible and large liabilities attached to the property leases with landlords. It is well documented that retailers have leases with their landlords ranging from five to sometimes 30 years. The financial liability attached to these leases is the core reason successful retail restructures are the exception and retail collapses are the norm. As it stands, financially distressed retailers often have no ­option but to close unprofitable stores to make the remaining retail business financially stable.

They too often do not have the cashflow to exit expensive lease agreements (because of the remaining lease years).

The legislation in Australia needs to adapt and modernise to enable a retailer to exit unprofitable stores without collapsing the whole retail network and incurring mass redundancies.

To find the solution, or at least a giant leap in the right direction, we should look to Britain for legislative leadership. While the British retail market is also facing considerable headwinds, it is the world leader in retail restructurings through what are known as company voluntary arrangements. A CVA is a mutual agreement between the company and its creditors, including landlords, in an attempt to remain solvent.

With CVAs, the retailer allocates its stores into three categories: strong and profitable stores (green), marginal stores (amber), and failing and unprofitable stores (red). These categories form a three-layered compromise.

The retailer then proposes a new deal to the landlords in each of the three categories — a change to the present lease terms. Generally speaking, the strong and profitable stores keep the same lease terms or have only minor amendments. The marginally profitable stores renegotiate the lease, including improved lease terms and rents, to make the store profitable. And the failing or financially unviable stores are generally closed, with the landlord being paid an agreed early exit payment.

This new arrangement with stores identified as being green, amber or red is then voted on by all creditors - this requires a 75 per cent positive vote to implement. This means that all ­landlords have full transparency across all stores being negotiated. On a successful vote, it then ­becomes binding on all creditors, including landlords.

The CVAs allow retailers to downsize their operation and let go poorly performing stores, without the retail network becoming insolvent and leading to widespread job losses.

The legislative framework within which we work in Australia does not enable this type of restructure. Yet in Britain there are numerous examples of successful CVAs saving thousands of jobs and ensuring businesses can continue to trade.

They include such well-known names as Travelodge, House of Fraser, Homebase, Gourmet Burger Kitchen, Jamie’s Italian and Byron Hamburgers.

Of course, CVAs will never ­prevent all struggling retailers from collapsing, but they significantly increase the chances of ­successful restructurings.

We urgently need the ­introduction of CVAs or similar legislation in Australia. It would be a bold and positive step towards saving so many jobs while supporting a stressed retail industry.

This article was originally written by Scott Langdon for The Australian.

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