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How the Homebase debacle highlights the hidden issues in retail

The demise of Homebase has highlighted how underlying business weaknesses lie behind the collapse of a number of major UK retailers, according to a retail expert. 

The chain, which was once the UK’s second-largest DIY retailer, is to close 42 of its 241 stores after being saved from going into administration after a deal with its landlords and creditors. Sadly, it is likely that more retailers will follow in due course.  

[aoa id=”1″]The Homebase store at Newport Road in Cardiff, as well as those in Bristol, Exeter, Oxford, Poole, Salisbury and Swindon, are among those that will close in late 2018 and early 2019. In addition, the units in Bournemouth and Swansea will see the landlords facing a 90% cut in the rent.  [/aoa]

Overall the CVA (Company Voluntary Arrangement) will result in an estimated 1,500 redundancies around the country. Whilst these redundancy figures are bad, some of these stores were coming to the end of their leases in any case – Oxford for example. 

Nick Turk, director in the retail parks team covering the South West at real estate services company Colliers International, pointed out that although retailers are facing challenging market conditions it has often been those with fundamental internal problems that have ended up having to enter into CVAs or administration. 

“The dramatic decline of Homebase has highlighted how business weaknesses in some major retail chains has made them vulnerable, and these weaknesses have precipitated their collapse rather than purely changing shopping habits,” he said. 

“Homebase had been making gross annual earnings of between £20 million and £40 million until 2016, when it was bought by Wesfarmers, the company behind the Australian DIY chain Bunnings, for £340 million. 

“By May of this year it had been sold for just £1 to restructuring firm Hilco Capital, and Wesfarmers had been left facing a financial hit of about £450 million this year after a (arguably very misguided) management strategy of reducing the presence of homewares and soft furnishings and increasing that of building materials and power tools, in addition to changing the management and importing a mainly Australian team. 

“What has happened here is an example of huge value destruction and cannot be blamed solely upon challenging trading conditions resulting from the rise of ecommerce, or the economy being affected by concerns about Brexit. 

“This situation is more directly related to the effects of a failed management strategy as outlined above. In other cases – for example, Maplin – the debt and the interest rates that are burdened upon a profitable company by the private equity purchasers are often too much leading to the company going into administration.” 

Mr Turk added:

“Meanwhile, Primark – which does not even sell online – provides a vivid example of a modern retail success story. They are very close to their customer base and have a very clear and consistent retail offer. 

“Similarly, Malcolm Walker at Iceland is a highly experienced retailer and has enjoyed undeniable success with Iceland, and is now rolling out the Food Warehouse brand across retail parks around the country.  

“Hence, there are retailers that are facing up to the challenges of business rates, e-commerce and Brexit and succeeding. Low debt, experienced management and constant improvement can overcome, and thrive, in these tough conditions.”