The imminent rental quarter day on March 25^th will no doubt be the trigger for more retail casualties, after 2012’s high profile Q1 administrations of Peacocks, Bonmarche, Blacks and most recently Fenn Wright and Manson,amongst others.

We estimate that this ongoing process of insolvencies will contribute to a reduction in non-food retail capacity of some 15% over the next 3 - 5 years – being disproportionately higher in sectors facing structural decline such as entertainment or electricals, and certain discretionary segments such as clothing.In short, we’re facing a once in a generation clean-up of UK retail as the sector adapts to the structural threat to physical space from the internet, grocers expanding aggressively in non-food, consumer confidence bumping along the bottom of the trough, and deepening cost pressures from higher sourcing costs, energy prices and business rates.

What we mustn’t lose sight of though is that by definition restructurings result in smaller businesses with recapitalised financial structures capable of reviving the business as it goes forward. This has certainly been our experience of situations where GA Europe has been the principal restructuring protagonist, such as Speciality Retail Group, British Bookshops & Stationers and TJ Hughes.

And it’s not all bad news: recent figures from FRP Advisory suggested that almost 70% of the 39,000 staff at the larger retailers falling into administration in 2011 retained their jobs after the companies emerged from administration. And even where significant numbers of shops are scheduled to close, as at Peacocks, sensible renegotiations with landlords can restore the viability of some outlets within a restructured and refinanced core business.

Over the next couple of years, there will be more restructuring of businesses with a decent underlying proposition and a realistic pitch to customers – but carrying the legacy of overlarge store portfolios and unsustainable levels of debt. These are exactly the types of business in which restructuring specialists like GA Europe are looking to invest. The changes needed are not just financial: putting a retail business back on a sound footing almost always requires hands-on expertise to carry out the hard operational restructuring, as well as an injection of new capital.

Media hype about carnage on the high street may be overplayed, but at GA Europe we do believe that the UK retail sector is near the start of an extended period of fundamental rebalancing.  We think that we’ll see the withdrawal of approximately 10% - 12% of non-food capacity over the next three to five years – a mix of healthy retailer store portfolio rationalisation and distressed retail shake-out. So far this year, we estimate some 3.5% of UK non-food retail capacity has been withdrawn from the market although the DIY sector accounts for over 50% of this figure with the demise of Focus DIY.  

Whilst the pace and shape of restructuring will vary considerably by sector, it’s pretty clear that the most exposed segments of the market are:  other housing related sectors, discretionary purchases, particularly the fragmented clothing space (value and middle-market), and what we call ‘structural’ ie those sectors where the internet has permanently changed the rules of engagement, such as entertainment and electricals.  The sustained weak macro-economic climate, coupled with ongoing changes in the way consumers shop, demands  this  ‘once in a generation’ clean-up, followed by an uncompromising focus on turnaround and repositioning.  Although the next few years will be a white-knuckle ride for many retailers, those left standing should be well placed to capitalise on tomorrow’s growth.    

As part of GA Europe’s retail delivery capability, we have a network of field consultants, who we’re able to catapult into stores at short notice following the completion of a transaction.  Lenny Ruback, for instance, has 39 years of retail experience – all in store operations and largely in menswear, including 18 years at Moss Bros.  In other words, he was perfectly suited to oversee a number of stores on one of our deals, Speciality Retail Group.

Questioned about a typical day on the SRG transaction, it’s clear that there’s no such thing for Lenny.  “No two days are the same - I get round all seven stores two or three times per week and I might even be on the road, moving stock between stores”, he explains.  It goes without saying that maximising time on the shopfloor is crucial, in order to ensure that merchandising standards are high and consistent, and that point of sale materials are fresh and interesting.  Ensuring that all the stock in each store is selling at the right price is also no small feat, particularly as price changes and markdowns are a constant feature of managing distressed retail situations. 

However, Lenny’s in absolutely no doubt that the people side of the business takes centre stage. “Being involved in tough retail situations often means dealing with emotionally charged store staff - and that’s where experience is so vital.” And the importance of good communication skills cannot be overstated - whether it’s holding store conference calls across his seven stores every other day, dealing with individual staff issues, acting as the gatekeeper for store instructions from the centre, or implementing staff incentive schemes and creating a healthy rivalry between stores.  As Lenny concludes, “Empathy, the ability to motivate a team and the need to be a first-class communicator are right at the top of my ‘must-have’ list.”