It borders on the spurious to suggest that 2003 will be a year of consolidation in retail. In order to consolidate one’s prospects for earnings growth, there needs to be something solid with which to “con” in the first place.
This week’s trading statements for the Christmas period from the likes of Dixons, Next and Selfridges will have gone some way, by the end of the week, to establishing whether retailers will be facing the prospect of consolidation with liquid cement or sand. Only corrupt Third World engineers try to build something with the latter, rather than a properly constituted mix of the former.
Tom Hunter, almost universally called “the Scottish entrepreneur” (as if there is only one – would we call Philip Green of Bhs “the English entrepreneur”?), must have pondered such thoughts lately. Indeed, I imagine he knows the answer by means of an intuitive process, or he wouldn’t be so rich and successful.
Hunter is in a complex corporate play for retail chains Allders and House of Fraser, with a view to merging the two groups to form a department-store conglomerate. A six-cent tour of this play is necessary for the point I wish to make.
The Caledonian Colossus (to call him something equally pointless) has had his eye on House of Fraser for a year or so. He has had a near-&£200m offer for the combine, which incorporates Army & Navy, Barkers and Dickins & Jones in London and Rackhams in Birmingham, rejected and is thought capable of going higher and being willing to do so.
Meanwhile, he has built a 5.3 per cent stake in Allders, but he needs to pick up 7.5 per cent to block a &£132m agreed offer for the retailer led by Minerva, alongside former Bhs chief executive Terry Green and others. Minerva already holds 25 per cent of Allders.
Hunter, meanwhile, controls some 15 per cent of House of Fraser, in a concert party with Baugur, an Icelandic retailer. It is no secret that what Hunter wants to do is to see off Minerva, spark a run on Allders’ shares that would hand him control, then raise his offer for House of Fraser and fold Allders into it.
The consolidation would come from stripping costs out of the combined business, presumably by closing the worst, underperforming stores, rationalising local competition between stores and centralising buying. No rocket science there – and I dare say shareholders in both businesses (even Minerva) might welcome the prospect of a more tightly run enterprise.
The only niggle that I have relates precisely to the question of whether the whole new edifice would be built on cement, or just on sand. And this isn’t rocket science either. I just ask: what can be done with the department-store concept that hasn’t already been done and which, in recent history, usually land on the scrap heap?
House of Fraser has been a dog since it was spun off from Harrods in the Nineties (and was similarly canine, it has to be said, during its period of Fayed stewardship). This sad record is not because it has always been badly managed – there is something fundamentally flawed in the department-store concept.
It was not always so. The department store was, with the benefit of hindsight, the precursor of the US-style shopping mall. I don’t want to over-simplify matters, but the department store was the early British way of shopping without getting wet. The vibrant, eclectic and price-competitive mall has replaced that.
What I would call the tourist department stores – Harrods and Selfridges in London, though most capitals have them – have survived through being a visitor attraction in their own right (though their offer in this regard has worn thin).
Even these stores – and certainly the central-city league of department stores – have evolved by emulating the mall, offering concessions to specialist retailers within their premium space.
Now, it may be that Hunter has plans we can only speculate about to turn a combined House of Fraser/Allders into a highly profitable and new breed of retailer. Or, more prosaically, it may simply be that there are sufficient cost savings and economies of scale, as described above, to deliver an adequately attractive alternative to shareholders in both companies.
My guess is that it is the latter. And there’s nothing wrong with that. Miserable shareholders in such retail groups will be thankful to be thrown an imaginative line in the shape of consolidation. But it’s not a trading solution.
This circumstance, created by the predatory Hunter, will be the mark of many a corporate consolidation this year. It is a style of management that delivers temporary relief for shareholders (who may then be sellers of the stock), but hardly long-term earnings growth – the kind that economic growth and stock-market booms are built on.
With the major shares’ indices having bucketed along with little sign of life for the past 12 months, we could witness a number of occasions on which two bad companies come together to form one big, bad company. In some cases, two big, bad companies will come together to form one small, bad company.
That’s not to say that there won’t be opportunities for big players to snap up cheap under-performing opportunities. But, in major mergers, at the bottom of the market it’s a fair bet that rubbish just attracts more rubbish.
George Pitcher is a partner at communications management consultancy Luther Pendragon