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Thursday 28 August 2014

Struggling retailers on rack over high rents

'Landlords charging Celtic Tiger rates will cause further job losses, closures'

JEROME REILLY

Published 17/02/2013 | 04:00

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An examiner was appointed to B&Q’s Irish division

MR JUSTICE Peter Kelly of the High Court last week revealed the double jeopardy facing the retail sector as he presided over the appointment of an examiner to the Irish division of do-it-yourself giant, B&Q.

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Speaking from the bench of the Commercial Court, he said the difficulties faced by the business that operates nine stores here in Ireland and has 690 mostly part-time workers was depressingly familiar.

B&Q had been "bedevilled", the judge said, by a 34 per cent drop in revenue since 2009. Crucially the judge highlighted the double-whammy that the company was also being forced to pay "extraordinarily high" rents at nearly twice the level of the market.

The rent roll for the nine Irish B&Q stores is currently €11.6m a year and the court heard this astonishing annual bill is €5.8m above the current market rates.

That was clearly unsustainable. Mr Justice Kelly, who has developed a reputation for his trenchant views, noted that B&Q was unusual among many of the companies that came before him because they had no bank debt and was up to date with its tax.

All in all the picture that was painted was of a company that was prudently, or at least responsibly managed in tough times and stymied by a combination of the general economic downturn that has slashed spending by consumers, allied with the crushing burden of sky-high rents.

The result is that the company will close its two stores in Athlone and Waterford with 92 jobs thrown by the wayside. Mr Justice Kelly expressed the view that if certain conditions were met the company had a reasonable chance of continuing trading.

It will be up to the court-appointed examiner to strike a deal with landlords to bring rents back to realistic and sustainable levels. While B&Q was encumbered with legally binding leases, the examiner will be able to enter into direct negotiations with the landlord and ask "what kind of deal can you do me on rents?".

Court examinership is costly, complex and time-consuming and is not undertaken lightly. But now, legally, the examiner will be working with a blank canvass and be able to repudiate or cancel existing leases – something that B&Q before examinership was unable to do.

Both Atlantic Homecare and Woodies DIY went into examinership last summer. Like B&Q, both were saddled with historically high rents set in the good times that were, before examinership twice the annual cost of current market rents.

While the prospects for B&Q's long-term survival are hopeful, there was a depressing end to the saga of HMV in this country which is to close for good with the loss of 300 jobs.

Of course HMV was blighted by the cataclysmic changes in its industry – especially the advent of web retailing in music and movies and the unstoppable tidal wave that is digital download.

But receiver David Carson, a partner at Deloitte Ireland who was appointed in January to carry out a root-and-branch assessment, said the problems posed by a changed retail landscape was "compounded by a number of other factors including high levels of rent".

Last week a major study by business and credit-risk analysts Vision-net showed that one in three retailers could be in danger of collapse.

The study stress-tested 5,597 retailers across the economy, selected at random, and found that 36 per cent, or 1,992, of them were showing signs of business failure.

The analysis showed that another 19 per cent were at medium risk of collapse while 45 per cent were deemed low risk.

Vision-net's survey should be an alarm bell to the current Government which promised reform of upward-only rents but failed to deliver once in office. Retail still employs 250,000, according to Retail Excellence Ireland, or 272,000, according to figures from Forfas. Most experts agree that five years ago the sector employed 320,000.

The Government seems unaware that 10 per cent of GDP comes from retail and 14.5 per cent of all jobs, but with retail sales declining by 30 per cent in five years it is clear that this could be a make-or-break year for many traders.

Christine Cullen, managing director of Vision-net, said the retail and wholesale sector was highly connected with other industries such as transport, storage, business services, IT and agriculture.

"The high street is feeling the impact of curbed spending as a result of pay freezes, job losses and sapped confidence. Anecdotally, we know that retailers and wholesalers are coming under increasing cost pressures from upward only rents. However, last week's deal on Ireland's debt burden could generate positive economic sentiment which is key to a recovery in the retail sector.

"The latest figures from IBEC showing that consumer spending power is expected to stabilise this year and improve next year are encouraging, too," said Ms Cullen.

Retail Excellence Ireland CEO David Fitzsimons said the survey findings indicating that 36 per cent of businesses surveyed are showing signs of failure comes as no surprise given that retailers are currently operating in an extremely tough environment.

"Costs such as rent and local authority rates remain extremely high and the fact that landlords are still charging Celtic Tiger rents which are not sustainable will result in business failure and job losses in the retail sector," he said.

Irish Independent

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