The recent announcement from Debenhams that it is undertaking a Company Voluntary Arrangement (CVA) isn’t just a further reflection of the state of the UK retail market. It is the first time a high-profile department store has used a CVA to deal with rate liability on any scale.
The process – which allows failing businesses to avoid collapse by reducing rents and breaking leases on some stores – has been opposed by many landlords. Homebase faced criticism when it took this approach and there has been much discussion regarding Arcadia’s plans to launch a CVA, with landlords rejecting Phillip Green’s initial plan and forcing further consultation before casting their vote.
This arrangement presents a particular challenge for increasing numbers of local authorities who are taking direct control of their town centres. Many will be faced with a double hit, both as billing authority and as landlord, because although this is one of the first examples of rate liability being included within the scope of a CVA it is unlikely to be the last. Concern is building around which other struggling retailers may follow the likes of Debenhams and Arcadia.
While this position is still better than liquidation – both in terms of rates and rents – there is a difficult task for local authorities in balancing the need to maximise business rates receipts and the additional requirement to maintain and promote town centres, especially where assets have been bought with the primary objective of being an anchor for further retailers and driving footfall.
Unfortunately, once a CVA is set in motion, there is little a council can do unless they decide to take legal action against the arrangement. If no action is taken, it is inevitable that other retailers considering a CVA will also look to compromise rating positions.
So, what can authorities proactively do to protect their income streams as well as the vibrancy of their town centres?
Engaging with retailers at the earliest signs of trouble – or even before that – is the best course of action to pre-empt the CVA process that could follow.
Greater flexibility when working with retailers will also support long-term aspirations to help future proof town centres against the rapidly changing market. It has been well documented that Debenhams (and many other retailers) struggle under the weight of long leases and an unwanted number of stores, following changes in consumer shopping habits. Councils and retailers are beginning to embrace shorter, more agile lease terms to accommodate the rapidly changing retail environment, to the benefit of both parties.
Diversifying from retail is essential too. With the shift to e-commerce, town centres are increasingly visited more for a combination of leisure activities than for shopping and long-term leases can chain high streets to low footfall tenants.
Brands such as Samsung are using flagship experience stores, for example in Kings Cross, as a centre for direct interaction with consumers, who are offered a high end, live experience as an advert for the product but will likely make their purchase online.
Technology also has a huge role to play; an innovative new example of this is the use of smart apps such as ‘NearSt’, backed by Google, to help consumers see what is available in their local shops via the web. The app will tell people the distance to shops and the price of specific products that are for sale to help increase interactions with consumers who primarily shop online and give them the opportunity to visit bricks and mortar. Linked to this, Westfield also recently announced their trial of ‘The Trending Store’, which will stock the top 100 items of men’s and women’s clothing and accessories that are trending online that day, using big data and social media trends to inform strategies for footfall. Platforms such as ‘MAYBE’ assist with these strategies, allowing retailers and local authorities to track their digital influence and benchmark it with their physical business.
Most importantly, local authorities need to think and plan long-term. The smart use of planning policy and Business Improvement District initiatives as well as collaboration with other public sector partners, across police, education and health providers could ensure economic regeneration will assist decision making and make a real difference. This approach can help to create an environment for retailers and others to thrive, as well as maintaining and serving local communities.
Long term income is important – but so is breathing life back into town centres. At the heart of both, consumer experience is key: the right, dynamic, flexible tenant mix can revolutionise town centres and encourage a much stronger sense of place than one name alone.
Josh Myerson and Andrew Haughey are partners at Montagu Evans