It seems that no news is good news when it comes to tales of insolvency and corporate debt across the UK economy at the moment. Maternity and baby specialist Mothercare is the latest name to join the swelling ranks of high street retail chains teetering on the brink of collapse.
Mothercare has announced plans to close a third of its stores - a total of 50 outlets - as part of a proposed Company Voluntary Arrangement (CVA) to offset losses of £72.8m in the last financial year. If approved by creditors, the move is expected to see up to 800 jobs cut.
According to new research from Colliers International, the number of retail chains seeking to enter CVAs has risen sharply this year. Mothercare joins the likes of New Look, Carpetright and House of Fraser in drawing up drastic restructuring plans in a bid to stave off administration or worse.
With major chains such as Toys R Us and Maplin having already gone to the wall this year, Colliers has labelled current trading conditions retailers the worst in a decade, since the post-credit crunch recession claimed names such as Woolworths, Stead and Simpson and Zavvi.
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Concern over CVAs
On the face of it, CVAs are a positive way for businesses to deal with financial difficulties - certainly preferable to simply letting a company fail, triggering an often fruitless bum fight between creditors to recover debts from remaining assets.
Under the terms of a CVA, creditors will often have to accept a reduction in the total amounts of money they are owed. But on the proviso that something is better than nothing, the upside is that it allows a company to continue as a going concern, saving jobs and maintaining business throughout the supply chain.
However, the Colliers report raises the question of whether some companies are misusing CVAs as a quick-fix solution to reduce debt. As a property consultancy, Colliers’ main concern is with the lot of commercial landlords, and the report claims that retail brands are using CVAs to force landlords to lower rents and to shut stores with high overheads.
Under insolvency law, CVAs can help free tenants from leases without penalty or ongoing financial responsibility.
With the shift towards digital commerce, it is difficult to see the tide of retail store closures being reversed. Mothercare operated 400 stores nationwide a decade ago - if its CVA is approved, it will have fewer than 80. There are also reports that Marks & Spencer and Next are likely to announce store closures in the near future.
CVAs are not the vehicle for carrying out store closures. But it is in the interests of the wider retail ecosystem, and suppliers especially, that major brands are able to adapt to find profitable new ways of operating and stay open for business.
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Image “Losses Key” by flickr user “Got Credit” is licensed under CC BY 2.0