The high street merry-go-round

Department stores have suddenly become interesting, as a number of high profile entrepreneurs circle for the kill. But can their business wizardry turn these outlets into something that diverts customers away from a snappier, better presented

Shoppers searching for Christmas presents are probably unaware that a band of aggressive multi-millionaire entrepreneurs are invading the high street and that by this time next year their favoured stores may have new owners.

Among them could be Scottish entrepreneur Tom Hunter, reportedly a marketing graduate, who has made a play for department store chain House of Fraser (HoF). In addition, Terry Green, former Debenhams and British Home Stores (Bhs) chief executive, has been recruited by the property company Minerva to manage Allders if its formal offer for the group – due to be made this week – is successful.

They are following in the footsteps of Philip Green, no relation to Terry, who has already raided the high street. He snapped up Bhs in 2000, and earlier this year bought Arcadia, which owns the clothing brands Top Shop, Dorothy Perkins and Burton. Also this year, the reclusive billionaire twins, Sir David and Sir Fredrick Barclay, bought the Littlewoods group for &£750m.

Meanwhile, Icelandic retailer Baugur has built up a 15 per cent stake in the Big Food Group, which includes the troubled Iceland supermarket chain and catering wholesaler Booker. The latest name to emerge is Luc Vandevelde, chairman of Marks & Spencer (M&S), who is launching a &£300m European private equity fund – once he steps back to a non-executive role at the chain – that will consider buying businesses across Europe, including retailers.

Much has been made of the links between these retailers, who seem to be playing musical chairs on the high street. Hunter made his fortune by building up Sports Division and selling it to JJB Sports in 1998 for &£260m. A few years previously, Philip Green took a stake in the business, when sports retailer Olympus was merged into Sports Division. The two have been friends ever since, with Hunter taking a five per cent stake in Bhs when Philip Green took it over in 2000. Baugur, which owns 8.2 per cent of HoF, has pledged its support for Hunter’s &£200m bid for the company that has been postponed until after the crucial Christmas trading period. The Icelandic retailer, which made a huge profit when it sold its 20 per cent stake in Arcadia to Philip Green, is understood to have made an approach to Allders.

Analysts claim that it is extremely unlikely that Hunter, if successful in his bid for HoF, will end up running the business because he has no department store experience. Some say it is no co-incidence that Hunter made his bid for HoF at the same time as Minerva is making a move on Allders, with the intention of getting its hands on the chain’s freehold property interests.

High street mergers

Richard Ratner, a retail analyst at Seymour Pierce, favours a merger between HoF and Allders, which he claims would save the combined business about &£25m on central overheads and bring with it the skills of Terry Green. He adds that Hunter would be hard pressed to improve the profitability of HoF alone, which is already “reasonably well run”.

Hunter claims not to have had talks with Allders and that his old pal Philip Green is not involved with the bid for HoF.

Richard Hyman, chairman of retail consultancy Verdict, does not think that this handful of entrepreneurs will come to dominate the high street, which he says is “far too big”. He believes that they are merely leading a wholesale change in ownership in the high street. He says: “About six months ago we predicted that there would be a significant increase in mergers and acquisitions in the retail sector. The landscape of the high street is going to change and these people are in the vanguard of it.”

Mediocre market

For the past two years, buoyant sales have allowed retailers to get away with moderate performances. However, the high street has become more competitive, with shorter supply times and the addition of new entrants such as Zara and Mango. In addition the value of the stock market has fallen and demand from consumers has slowed, which has caused the value of weaker players to plummet. This has made them vulnerable to takeover by opportunists, who, in taking the company private, understand that tough strategic decisions are best made away from the public gaze of the stock exchange.

The latest figures from the British Retail Consortium show that sales in November – a month when consumers are expected to launch into Christmas shopping frenzy – were up just two per cent compared with the same month last year, which is the slowest growth for two years. However, according to FootFall, visitors to 100 of the country’s biggest shopping centres increased by 4.7 per cent for the week beginning December 2 on the same period last year.

These factors have meant that HoF, Allders and Iceland have all come under the scrutiny of retail predators such as Hunter and Baugur. Other retailers that are expected to attract attention include Safeway, rumoured to have caught the watchful eye of Asda; and Woolworths, which has been looked over by Philip Green. Now that Vittorio Radice has joined M&S, leaving his role as chief executive of Selfridges, some industry experts believe this makes the department store vulnerable to a takeover.

But not all the moves to be made on the high street are likely to be successful. Philip Green may have made millions out of his acquisition of Bhs by overhauling its supplier base and slashing costs, but it remains to be seen whether others will be so lucky. JJB Sports’ acquisition of discount department store TJ Hughes this year has already been met with disapproval from the City.

Changing trends

For some analysts, the attractions of Allders and HoF are not clear. Rachael Waring, a consumer analyst at Numis, is particularly negative about department stores. She says: “The returns on invested capital are average at the best of times.” She believes that the time to buy into department stores – a sector which requires a large amount of capital expenditure – is at the first sign of a recovery in the economic cycle, not when it appears that growth in consumer spending is slowing.

Although the sector has a large number of players and is ripe for consolidation, competition rarely comes from other department stores. Instead it comes from high street brands such as M&S, now in recovery mode, and Next, which according to some is turning itself into a department store. Furthermore, there is a trend in consumer shopping habits towards disposable and innovative fashion. This has been triggered by the adoption of fast turn-around supplies by players such as Top Shop and Zara.

Branding experts claim that the department store players have also suffered, because they have been slow to carve out a strong identity and are generally perceived to be stodgy, stuffy and unexciting. Exceptions include Debenhams, rated for its use of designers in producing own-label ranges; John Lewis, which has become known for its furnishings and homeware products as well as service, quality and value; and Selfridges – a byword for the ultimate shopping experience.

Michael Finn, chief executive of DFGW – an advertising agency that worked with Bhs before Philip Green took over – says: “A department store is a place where consumers can find everything under one roof. It is no good unless its constituent parts can compete with other retailers on the high street.”

He says that the product mix has to be right before marketing can be used to drive customers into the stores and that is where the likes of HoF and Allders fall down. Interbrand chairman Rita Clifton says: “Above all, what they need to do is to establish clarity about what they are.”

Maureen Johnson, chief executive of WPP’s retail consultancy The Store, agrees: “They [Allders and HoF] are a retail mish-mash. They look tired and shabby. There is no focus and they don’t stand for anything.”

Nowadays, she says, people do not have the time to wander from one store to another, which means that retailers need to differentiate themselves from other players to provide shoppers with a reason to visit.

HoF marketing director Meg Gilmore says: “It is more complicated for a department store brand to distinguish itself because it has a broad customer base, whereas other high street outlets can make a play for customers in isolation. It’s a complex position to be in, with stores in a variety of locations, serving local communities that are different.”

The names have been changed

Not only that, but HoF’s 48 stores trade under 15 different brand names, including Army & Navy and Rackhams. As stores are refurbished they are being rebranded HoF, just as John Lewis is doing with its stores that trade under different names.

Hunter has recognised these factors and is proposing to rebrand about 16 flagging stores and reposition them in the mid-market, selling primarily own-label goods.

Gilmore claims that HoF differentiates itself by selling a wide range of brands and quality own label products through its Linea, Therapy and Fraser brands. Linea, which includes men’s and women’s fashion as well as homeware, is recognised as a strong brand by the retail industry and has even been featured in HoF advertising.

But when it comes to marketing department stores, as at least one retail advertising expert suggests, advertising is by no means the answer. He suggests that events which create a sense of occasion and energy, such as Selfridges’ Bollywood, often do more to attract shoppers.

Loyalty schemes are also being used by stores. Debenhams is one of the founding partners of Nectar, and Tesco has recruited Allders to join its loyalty scheme.

But loyalty schemes are hardly likely to produce the kind of returns that thrusting entrepreneurs demand as they play for a seat on the high street. Although Philip Green claims that his recent acquisitions are for the long term, entrepreneurs tend to get bored once their cost cutting has generated as much value as possible. There will inevitably come a point when they will want to cash in by selling or refloating the businesses, causing the high street ownership pattern to change yet again.

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