Administrators announced this morning they are starting the process of winding down Debenhams, after attempts to find a buyer failed. Stores will remain open until stock has been cleared, but then -- unless a last-minute rescue is achieved -- they will shut.
Debenhams employs around 12,000 people at 124 stores around the country, who now face a very worrying time in the run-up to Christmas.
Geoff Rowley of FRP Advisory said Debenhams’ administrators had done their best to find a deal:
“All reasonable steps were taken to complete a transaction that would secure the future of Debenhams. However, the economic landscape is extremely challenging and, coupled with the uncertainty facing the UK retail industry, a viable deal could not be reached.
The decision to move forward with a closure programme has been carefully assessed and, while we remain hopeful that alternative proposals for the business may yet be received, we deeply regret that circumstances force us to commence this course of action.
Lucy Powell MP, Labour’s Shadow Minister for Business and Consumer, said the government must urgently set out how it plans to support the people affected by the collapse of both companies.
Debenhams collapse: What now for department stores?
Adrian Palmer, professor of marketing at Henley Business School, says Debenham’s collapse highlights that department stores are now being supplanted by new formats - such as ‘pop-up’ retailers as well as online specialists.
“The collapse of Arcadia and Debenhams has been long predicted, with causes that pre-date COVID-19. Lack of investment and slow adoption of online sales hit these companies hard, at a time when online sales now account for 26.1% of all UK retail sales.
But a long-term trend affecting them has been the gradual demise of department stores. They have lost out to niche retailers who focus on selling a limited product portfolio, doing so more efficiently and with greater depth of selection than general-purpose department stores.
The curation role of a department store has been declining, as buyers gain confidence in exploring new specialist retail brands, and find online means of identifying collections of products that meet their needs.
Andy Brian, head of retail at law firm Gordons, suggests department stores can still have a future as a ‘house of brands’, but as part of a wider digital strategy:
“The Arcadia administration has put the brakes on JD Sports’ proposed rescue deal for Debenhams and it looks like time may finally be running out.
Whilst the traditional department store offering may well be a thing of the past, there should be a bright future for a holistic ‘house of brands’ retail proposition, the principle purpose of which is to showcase products and to provide a bit of theatre and an afternoon out for shoppers, as part of a wider digital strategy.
“The problem for Debenhams is that building that model from the ground up is probably an easier strategy to execute than starting with an outdated legacy retailer with a transactional website tagged on the side.”
Chris Hunt, head of retail at law firm Gowling WLG, argues that Debenhams lacked the ‘brand resonance’ needed to survive this year’s retail crisis.
Despite the sensitive ongoing issues, this outcome is symbolic of the current unforgiving retail climate brought on by the pandemic despite any uptake in online performance during lockdown.
A lack of brand resonance has played a key part here, as the enduring customer loyalty that has sustained many throughout the industry becomes even more discerning and selective.
In the City, the FTSE 100 index of blue-chip shares has posted its biggest daily jump in over three weeks.
Optimism over the global economic recovery, vaccine rollouts, and a touch of Brexit deal hopes all drove shares higher - despite the gloom in Britain’s retail sector.
UK housebuilders and banks - two sectors vulnerable to an economic downturn or a no-deal Brexit - led the rally, with Taylor Wimpey jumping 7.8%, Lloyds Banking Group up 7.4% and Persimmon gaining 6.9%.
Other European markets posted gains, with the Stoxx 600 up 0.65%. Strong factory data from China also lifted stocks on Wall Street, where the S&P 500 and the Nasdaq are on track for record closes again.
David Madden, analyst at CMC Markets, explains:
Hopes continues to circulate in regards to vaccines being developed for Covid-19. The OECD now predicts that global GDP will contract by 4.2% this year, which is an improvement on the previous forecast of -4.5%. At the same time, it lowered its 2021 forecast to 4.2% from 5%.
The bullish sentiment is seen across the board as hospitality, transport, travel and property stocks are higher too. House builders like Persimmon, Taylor Wimpey and Redrow have been helped by the wider bullish mood and the Nationwide report that house prices increased by 6.5% on an annual basis in November.
Sterling jumped to as high as $1.3442 on Tuesday after Times Radio said that Brexit trade deal talks have entered the “tunnel” stage of negotiations.
The pound surged to hit a three-month high of $1.3442 at 1610 GMT, gaining half a percent in around 5 minutes.
“Tunnel was the key word that pushed the pound higher,” said Neil Jones, head of FX sales for financial institutions at Mizuho. “The market has taken this comment as a deal is very close.”
The “tunnel” is a term for an intense final stage of secretive, make-or-break negotiations.
Sterling has hit a three-month high against the US dollar this evening, after a report that the UK-EU trade deal talks have entered the ‘tunnel’ stage of intensive negotiations.
The pound surged after Tom Newton Dunn, Chief Political Commentator on Times Radio tweeted that “UK-EU trade deal talks have, at long last, entered the mythical tunnel”.
Newton Dunn added that there are “hopes (on both sides)” of a deal by the end of this week, but also cautioned that it could “still yet all fall apart”.
This sent the pound up by a cent to $1.344 against the dollar, the highest point since early September, although it’s dipped back slightly since.
My colleague Peter Walker explained how the tunnel works last year:
This is a Brussels-coined term for intensified Brexit negotiations intended to take place between small teams from the UK and EU, insulated as far as possible from the pressures of leaks and media scrutiny.
The talks involve only senior negotiators, with no documents, media briefings, or anything else that could be used to derail the process.
He expects stores would trade through the Christmas season, adding:
“The whole challenge of Debenhams has been, from the time I was there, is there’s a fantastic business inside it - probably 70 stores and a very good website which I’m sure someone will be buying, so I don’t think all these jobs are going....
Cheshire predicts that some of Debenhams profitable stores could be split up between different buyers. Its website, and some of its own label brands -- the Designers at Debenhams concept -- are “interesting assets”, and will carry on in some forms, but be digitally led, he added.
Earlier in parliament, Chancellor Rishi Sunak said the Government “stands ready” to help workers affected by job losses at Arcadia and Debenhams.
Press Association has the details:
Speaking in the Commons, Mr Sunak said: “The news about Arcadia, and indeed Debenhams, is deeply worrying for employees and their families and the Government stands ready to support them.
“With regard to various things that are ongoing, there are negotiations between various parties and the companies at the moment - particularly with regard to pensions - and it wouldn’t be right for me to comment specifically on those.
Responding to a question from Labour MP Ruth Jones, Mr Sunak said she could “be rest assured we keep an eye on the situation.”
The OECD’s latest economic outlook makes tough reading for the UK - showing that Britain’s economy will be among the hardest hit by the pandemic.
The Paris-based thinktank expects the UK economy to shrink by 11.2% this year, and only grow by 4.2% in 2021 and 4.1% in 2022.
That’s much weaker than the global average. The OECD predicts the world economy will shrink by 4.2% in 2020, then by 4.2% next year and 3.7% in 2021.
The eurozone is expected to shrink by 7.5% this year, followed by 3.6% growth in 2021, while the US is on track for a 3.7% contraction then a 3.2% recovery.
A strong recovery in China should GDP back to pre-crisis levels by the end of 2021, it forecasts.
But as this chart shows, Britain is far behind - with Argentina the only G20 nation expected to perform worse.
The OECD predicts the UK will suffer weak business investment, increased border costs once the Brexit transition ends, and a rise in unemployment and bankruptcies - although the furlough scheme and Covid-19 crisis loans will cushion the blows.
In its report, it says the UK’s ‘initially strong rebound’ in the July-September quarter is set to go into reverse this quarter, after Covid-19 cases rose again.
It also warns that growth could be even weaker if the health situation worsens further, saying:
A deterioration could prompt additional restrictions on economic activity and lead to a slower recovery.”
The forecasts underline that Britain is set to suffer more economic pain from the pandemic than most other nations, as well as running up a record deficit and suffering over 58,000 deaths (within 28 days of positive test)
As the FT’s Chris Giles puts it:
Towards the end of next year, Britain’s economy would still be 6.4 per cent smaller than it was in the fourth quarter of 2019, the OECD predicted. This was better than Argentina’s projected loss of 7.9 per cent, but lower than all other leading economies.
China’s economy was on course to be 9.7 per cent larger than it was at the end of 2019, with gains also seen in South Korea and Indonesia. The US was set to have lost only 0.1 per cent and the eurozone 3 per cent.
The UK’s problem, the OECD said, was allowing the virus to spread extensively in the first and second wave along with very extensive lockdowns to control the extent of the disease. The economic shock was “particularly sudden”, the organisation said.
The collapse of Debenhams will leave vacant spaces on the high street that will “impossible to fill” in a like-for-like way, warns Dr Gordon Fletcher of University of Salford Business School.
Today’s announcement reconfirms what has long been known. The UK high street is increasingly a fragile house of cards that suffers from a concentration of ownership, insufficient investment to keep pace with online developments and a general lack of dynamism and engagement between brands and consumers.
“This decision affects the 200 year old chain’s 124 outlets and 12,000 employees across the country. It is a closure of the chain that mirrors the complete failure of Woolworths over ten years ago.
The parallels are important too. As a department store retailer the spaces that will be left on the high street are large and will be impossible to fill like for like.
UK factories are holding up better than the retailers.....thanks to Brexit stockpiling.
New figures this morning showed that output growth, and new business orders, both accelerated last month, helping to slow (but not stop) the downturn in employment.
Data firm Markit, which compiles the monthly PMI report, explains:
The upcoming end to the Brexit transition period meanwhile led to rising levels of input purchasing, stockpiling of raw materials and stronger gains in new export business as EU-based clients brought forward orders.
But the consumer goods sector had a poorer November, with back-to-back decreases in both production and new business.
Duncan Brock of the Chartered Institute of Procurement & Supply says manufacturers were running at full pelt to meet Brexit stockpiling demands, but 2021 could bring disruption:
Job shedding continued last month and new business could drop off a cliff in January as potential border disruptions are thrown into the mix.
The prospect of an extended recession continues to hover above the UK economy until clarity around a Brexit deal is reached and hopes for an effective vaccine supply chain are realised bringing much-needed normality.”
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