Retail Restructuring: Why CVAs alone are not the answer

The retail headlines this year put a spotlight on Company Voluntary Arrangements (CVAs) of some well-known household names. Retail CVAs have peaked this year, but a detailed look at the historical numbers tells us that about half fail. However, CVAs are a symptom of a wider retail transformation that goes beyond a shift from off- to on-line. Legacy retailers therefore require a more tailored restructuring solution that touches customer proposition, sustainable cost savings and new money investment. 

A brief history lesson

A CVA is a UK-specific statutory insolvency procedure that allows an insolvent company and its creditors to agree the repayment of a portion of the company’s debts over a specified period of time. A CVA is approved if 75% (by value) of creditors vote in favour of it.

We have performed some in-depth research and analysis of all CVAs, since their introduction in 1986, to help accurately assess their success. Over 400 CVAs have been registered of which business services and retail account for the highest proportion at 19% and 15% respectively (followed by engineering and construction at 11%, industrial manufacturing at 11%, and hospitality and leisure at 9%). The majority of retail CVAs are triggered in Q1 of the calendar year (typically after Christmas trading), unlike CVAs in other sectors which are balanced across the year.

But our analysis shows that just over half of all retail CVAs have failed, with 51% resulting in another insolvency procedure, 31% completing successfully and 18% are still ongoing. CVAs can provide a temporary liquidity bridge to turn around performance. However in isolation, they often don’t address the fundamental issues or engage all key stakeholders (e.g. landlords). CVAs still remain a popular insolvency tool with 7 retail CVAs this year alone as of August 2018, the highest level since 2014. Their use has spread to others on the high street including restaurant chains and now hairdressers too.

A challenged retail sector

In the short-term, retail will remain challenged. Revenue pressure and cost headwinds make a difficult margin equation. PwC’s recent consumer survey in September suggests consumer confidence remains relatively resilient. However, consumers intend to cut back spending in the next 12 months across all non-food categories (particularly eating out, big ticket items, technology, and going out). Other industry retail metrics are similarly discouraging, with footfall down, store closures up, and like-for-like (LFL) sales for non-food erratic at best.

In the longer-term, online is expected to account for 25% of non-food sales by 2022 (versus 20% today) which will impact legacy store estates. But there will be more profound changes in how consumers shop and how retailers serve them. Consumers will increasingly shop across multiple platforms (e-commerce, m-commerce and now social commerce), connect with brands directly or with each other, and demand personalised experiences. In response, retailers will need to explore different business models that might resonate with consumers, be it re-sale, subscription or market places.

Our restructuring solution

The transformation of the UK high street – both physical and virtual – raises questions on how legacy retailers should restructure and what new money investment is required. We believe that CVAs and other insolvency procedures can be helpful re-structuring tools, but alone are insufficient.

Legacy retailers need to redefine their role on the high street by investing in a compelling customer proposition, redesigning its operating model, and funding those investments. There are multiple challenges to navigate. For customers, retailers will need to evolve the end-to-end experience with both digital tools and human touch points across a mix of bricks, clicks and third party channels. For operations, retailers will need to optimise quality, speed and flexibility including single view of stock and shorter lead times. To fund these investments, retailers will need to reduce and reallocate costs from non-customer facing activities (such as procurement or head office head count) to customer-facing activities (such as new product development and AI).

Legacy retailers are also likely to need to raise new money given the lag between the costs of re-structuring in the short term and performance improvement in the longer term. A sound re-structuring plan can provide a platform to improve the success rate of CVAs (and other insolvency tools), and importantly, establish wider financial stability (cash, headroom and facilities) with a clear rationale for any new money investment.

In summary, we would encourage rethinking the role of CVAs to reflect the new retail realities and we see our role at PwC as advisor in helping management and owners to negotiate the difficult landscape of addressing customer proposition, sustainable cost savings and if needed new money investment.

Note on methodology

Taking a list of over 100,000 registered companies, we used the company registration number to query Companies House to understand if the company has been through an insolvency proceeding, and if so what proceedings were used. Taking this information we have been able to analyse the number of companies that have entered a proceeding by sector (based on SIC code).

The retail sector is defined by a SIC (standard industrial classification) code that is adopted by UK's Companies House and other agencies in other countries.

Contact us

Zelf Hussain

Zelf Hussain

Partner, PwC United Kingdom

Tel: +44 (0)7801 976521

Lisa Hooker

Lisa Hooker

Leader of Industry for Consumer Markets, PwC United Kingdom

Tel: +44 (0) 7802 882 562

Jacqueline Windsor

Jacqueline Windsor

Partner, PwC United Kingdom

Tel: +44 (0)7801 074 739

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