As a Homebase employee might say to a confused customer, this is not a drill. The DIY chain is approaching a crunch moment, with landlords set to vote this week on a company voluntary arrangement (CVA), designed to put the company on a sound financial footing.
CVAs have emerged as the theme of 2018 for struggling high street retail and hospitality sectors. They are designed to give businesses financial breathing space by asking landlords to agree to rent cuts, usually accompanied by the closure of some loss-making stores. In this case, that’s rather a lot of them. Around 70% of Homebase branches make a loss, according to a report in the Financial Times.
Agreeing a CVA can dramatically reduce overheads for bricks-and-mortar chains paying rent on dozens or hundreds of properties around the country. Landlords considering whether to back such deals must weigh up whether they would rather help valued tenants survive to pay rent another day, albeit at reduced rates, or risk seeing them collapse altogether. It seems like a no-brainer. Some rent is better than no rent after all, particularly when an uncertain economic backdrop means finding new tenants could prove tricky.
But the sheer volume of CVAs has become almost farcical, with applicants so far this year including House of Fraser, Carluccio’s, Mothercare, Jamie’s Italian, Prezzo, Byron, New Look and Carpetright. This has led to accusations from the property industry that retailers see CVAs as a cheap and easy way to force landlords to bail them out, when other remedies might be available.
Amid building anger, Homebase needs to secure the support of 75% of its landlords for the CVA to go ahead. Even if Homebase gets the votes it needs, the burgeoning list of CVAs is a symptom of wider malaise on the high street that shows no sign of abating given industry trends. Traditional retailers are under threat from online competitors with low overheads, particularly Amazon.
The globe-straddling retail colossus could now benefit from the conditions it has helped to create. Amazon is reportedly keen to snap up some of the sites vacated by Homebase which, unlike town-centre retailers, owns many of its properties. Amazon could use these handily situated venues as mini-warehouses to boost its ability to deliver within short timeframes. A spokesperson declined to comment on whether Amazon would bid on any of the properties but it has plenty of cash to do so, having halved its already meagre UK corporation tax contribution to just £4.5m last year.
One major area of expansion for Amazon is food delivery and supermarkets are reportedly nervous. How long before traditional supermarkets, like high street shops before them, fall victim to a ruthlessly efficient competitor with tiny overheads and a minuscule tax bill?
The comic writer and producer Armando Iannuci once wrote a sketch that envisaged a future in which Tesco was so ubiquitous that it ran out of space in the UK and was forced to invade Denmark. Somewhere along the way, ran the skit, its slogan changed from “Every little helps” to “We control every aspect of your lives”. Perhaps the premise of the satire wasn’t so far-fetched – he just chose the wrong company?
