Company voluntary arrangements (CVAs) have been a mainstay in the financial news over the last six months due to their status as the restructuring tool of choice for many of the UK’s high street stores. House of Fraser, Mothercare, New Look and plenty more retailers besides have all used CVAs to try to renegotiate their existing debts with unsecured creditors. But with this increasing use has come more scrutiny, with a number of parties unhappy with the way the current system works.

Are CVAs fit for purpose?

There is growing concern among a number of parties that CVAs, as they stand, are being abused. Company voluntary arrangements are an insolvency tool that’s designed to give struggling businesses more time to repay their debts and an opportunity to restructure away from the constant threat of legal action from creditors. However, they are increasingly being seen by creditors as an easy way for businesses to avoid administration and downsize their operations to the detriment of their creditors.

Landlords, in particular, feel like they’re getting the raw end of the deal. That’s because many struggling retailers, with House of Fraser being a recent example, are using CVAs to force reductions in the rent they pay and even break leases to close stores. It’s not only landlords who are feeling aggrieved. Other retailers that are battling to stay afloat are having to watch their rivals secure lower rents through CVAs while they are left to pay the going rate.

Landlords feel they’re not having their say

For a CVA to be put in place, it must receive the approval of 75% of the company’s creditors by the value of debt. However, while it is only unsecured creditors that will be affected by the terms of the CVA, secured creditors like banks and other financial institutions are still allowed to vote on the proposals. That means many CVAs are being approved without being accepted by landlords and other unsecured creditors who will take the financial hit.

Landlords are also concerned that CVAs are not always being used by retailers as an absolute last resort. Some landlords claim that retailers are not ‘on the cliff edge’ and are simply seeking a way to reduce their debts. This is often to the detriment of landlords and the benefit of the retailers’ shareholders. As an example, House of Fraser asked its UK landlords to accept a 30% rent cut, yet in the same month it opened a new 400,000sq. ft. store in China.

What reforms, if any, are needed?

The insolvency trade body R3 recently published a report that evaluated the success and failure of CVAs and recommended some changes that could be made to make the process more attractive. The report made a number of recommendations:

• CVAs should not last longer than three years without good reason.
• The duties of company directors should be made clearer and include a requirement to address financial distress immediately.
• CVA documentation that’s filed at Companies House should be more transparent and informative.
• Public sector creditors that vote on the CVA proposal should have to explain their decision fully if they refuse to support it.
• Standard terms and conditions for CVAs should be made available and adopted.

This will provide some relief to landlords who will be pleased to see the recommendation relating to director’s duties and the requirement to address financial distress earlier. They will also be reassured by R3’s agreement that CVAs in their current form are too long.

As yet, there’s no indication as to whether the recommendations are likely to be implemented. However, the report does make a strong case for the government to look again at the CVA process and implement at least some of the reforms.

Mike Smith is the Senior Director of Company Debt and a turnaround practitioner who specialises in giving small and medium-sized businesses debt advice and guidance on CVAs.

Finance Monthly delves into the potential impact of an ‘Amazon tax’ and the alternative solutions that can help the struggling British bricks-and-mortar retailers.  

With a series of high-profile collapses and CVAs, including the recent turbulences that House of Fraser is faced with, Britain has seen its fair share of high-street horror stories in 2018. Stores like Toys R Us UK, Maplin and Mothercare are all facing extinction, whilst online retailers such as Amazon are stronger than ever, cashing in $2.5bn per quarter and paying less and less corporation tax with Amazon’s UK tax bill falling about 40% in 2017, and it paying just £4.6 million ($5.6 million). In times like these, the UK retail industry has naturally called on the Government to review its outdated corporation tax system and take action to help the struggling high street. Chancellor Philip Hammond has in turn announced that he is considering a special retail tax on online business, dubbed the ‘Amazon tax’, in order to establish a “level-playing field” for online retailers and high-street shops. But is a new tax really the solution that will balance the market out? Will it be the solution that traditional trade needs? 

Is Amazon’s Existence the Biggest Problem?

Consumer habits are changing rapidly with the continued growth of online shopping, but the truth is that the extraordinary success of web traders is only one of the aspects to consider when looking for the reasons behind the decline in traditional retail. And even though a hike in the tax that Amazon pays may seem like a necessary and logical step, it will be nothing more than a minor distraction from the bigger issue and something that will mainly benefit the Treasury.

It is worth noting that the UK store chains that have collapsed recently did so due to not having the right products at the right prices, not staying up-to-date with consumer trends, not targeting the right customers or not investing enough in their businesses. Surely, online-only merchants have transformed the trade landscape and the UK tax system needs to be adjusted in order to reflect the current retail dynamics – especially when Amazon’s tax bill for 2017 was only £4.6 million on £2 billion of sales. But is the fact that the web giant is paying such a low amount of tax the reason for the collapse of a number of bricks-and-mortar retailers? I think not.

Moreover, as Bloomberg points out, an internet shopping tax could end up backfiring and hurting the bricks-and-mortar retailers it is intended to help. According to the British Retail Consortium, in 2017, more than 17% of sales were made online. Over half of them were with businesses that also have shops. Thus, retailers such as Next Plc, which has both online and offline businesses, could face “a double tax whammy”.

The Real Problem

Driving restrictions around city centres, increased parking charges by local councils and state demands such as minimum wage legislation and Sunday trading laws have had a negative impact on bricks-and-mortar retail. Then there is the main challenge in the face of sky-high business rates which have been the bane of countless entrepreneurs trying to establish a high-street presence. In an article for The Telegraph, Ruth Davidson wrote that the UK retail sector, which makes up 5% of the country’s economy, is paying “25% of all business rates, over £7 billion per year”. One might argue that in order to help bricks-and-mortar retailers and keep British town centres bustling with thriving commerce, politicians could perhaps work towards reducing the financial burden they’re faced with, before punishing web giants for offering an easy and convenient way to shop in this digital era. In order to keep up with their online competitors, traditional stores need to focus on technology innovation and redesigning the experience that the modern-day customer expects. But most importantly, they need the budget to do so and a reduction in business rates for high-street stores could be one way to provide them with some extra cash to invest in technology.

Another thing to consider, as Andrea Felsted suggests, could be raising business rates for offices and warehouses and cutting them for shops. That would “address the disparity between shopfront-heavy retailers and online-only businesses, which rely on distribution centres to serve their customers”.

A potential Amazon tax for all web-only retailers will not help bricks-and-mortar retail to innovate. Surely, it will level the playing field, but apart from that, all we can expect will be a slowdown in online shopping without doing anything to solve the current problems that traditional traders are struggling with.

A series of high-profile collapses and CVAs in recent months are clear signs of the challenging conditions currently facing the UK High Street. While many retailers are facing falling sales and increased overheads, it is the stores that fail to adapt to changing consumer habits, such as Toys R Us, which end up paying the price.

By putting a strong business strategy in place to harness the growth potential of e-commerce channels, retailers can mitigate the risks posed by their rising cost base and stay ahead of competitors in this fast-moving industry.

Increased consumer caution, food price inflation and wage stagnation have all contributed to High Street incomes being squeezed. Factors such as the increased National Living Wage and minimum pension contributions, when combined with the introduction of the apprenticeship levy and higher business and property rates mean that many retailers are facing higher overheads than ever before.

The growth of the ‘bricks-to-clicks’ phenomenon has been accelerated by the rise of the ‘on-demand economy’, with consumers less willing to wait to get their hands on goods and more online retailers offering same-day delivery. Developments in technology have also streamlined the online shopping experience, with processes such as returns now easier than ever before. As a result of these changes, it is no surprise that footfall on the High Street is falling, with many shoppers choosing to avoid the crowds and find products at a competitive price online.

With consumer habits changing rapidly, it is essential that retailers build their business models accordingly. Toys R Us is a prime example of a chain which failed to move with the times. As well as relying on large, highly-stocked warehouses, which proved costly to run, it failed to invest in the development of an effective online sales channel with expedited shipping options. Securing access to customer data, via methods such as targeted marketing, will allow retail businesses to adapt quickly to new trends before they are able to have a negative impact on sales.

A number of retailers, including Mothercare, have recently announced an intention to secure a company voluntary arrangement (CVA), which could allow them to restructure their finances and agree voluntary repayment schemes with creditors on a one-to-one basis. Helping the business to continue trading and the existing management team to retain control during negotiations with creditors, this route is often viewed as a more attractive option than pre-pack and other types of administration. However, large numbers of empty stores could have the effect of driving more consumers online, away from the High Street, as well as increasing the likelihood that local councils will try to raise business rates to account for the potential shortfall in payments.

Taking action at an early stage to negotiate shorter leases with landlords could enable retailers to cut costs. Additionally, allowing companies to take advantage of the most profitable times in the retail calendar and hire staff only when needed, pop-up stores could reduce costs and increase flexibility.

Consumers are increasingly treating bricks-and-mortar stores as ‘showrooms’, allowing products to be viewed first-hand before finding them online. With this in mind, retailers should employ a joined-up approach, with on and offline sales channels. If businesses are going to encourage repeat business and meet consumer expectations in the future, simply offering a website is no longer enough. It must complement or even enhance the in-store experience, whilst reflecting the brand identity and being quick and easy to navigate. For example, we may see more customers venturing into stores for product advice, supporting the overall decision-making process, before carrying out their transactions online.

As e-commerce delivery slots become shorter and shorter, it is increasingly important for High Street retailers to have a strong logistics network in place, especially around Christmas and other key times in the retail calendar. Locating reliable local suppliers could also help to ensure supply chain agility, facilitating short lead times whilst allowing stores to vary their purchases depending on what is selling well.

While there is no doubt that these are challenging times for retailers, physical stores will continue to play an important role as part of the consumer buying process. For this reason, the High Street is unlikely to disappear completely. By heeding shifting consumer habits and adapting their business model accordingly, retailers can stay ahead of the curve and secure their position in the High Street for many years to come.