House of Fraser: What went wrong?

A string of household names have begun to disappear from the high street in recent years. BHS went bust back in 2016, Marks & Spencers plans to close 100 UK shops by 2022, and a few weeks ago Homebase entered a Company Voluntary Agreement (CVA).

House of Fraser has been in the headlines lately too, as the struggling retail giant announced that it was entering administration on 10th August – only to be bought out by Mike Ashley’s Sports Direct mere hours later.

Ashley, who already owned 11% of the company and a third of its competitor Debenhams, bought House of Fraser for £90m.

Currently, it is still unclear if Ashley can resurrect the 169-year-old company. House of Fraser’s 17,500 employees, including 11,500 concession staff, are no doubt concerned about their future.

The company’s unsecured creditors – which include suppliers, landlords and the company’s 10,000 pension holders – also face an uncertain future, as Sports Direct is not legally obliged to take on any of House of Fraser’s debts as part of the rescue deal. House of Fraser’s debts totalled nearly £1bn, more of half of which were owed to suppliers.

But let’s look back: where did House of Fraser go wrong?

  1. The rise of e-commerce

Online competition is a real threat to the high street as a whole. The convenience of deliveries and the ease at which consumers can compare prices means that consumers increasingly prefer to do their shopping online. As such, e-commerce sales now account for a fifth of all retail sales in the UK and this proportion is only expected to grow in the future.

Yet the internet is an easy scapegoat for failing stores and it is down to the retailers to adapt to the changing consumer landscape. One effective way to entice consumers into physical stores is to offer more experiential shopping, akin to the original Victorian model of the department store. Examples of successful innovations include art installations at Selfridges, sewing classes at Liberty London and Christmas workshops at Fortnum & Mason. These special activities bring consumers into the store and encourage them to spend more time there, in turn increasing the likelihood of them making a purchase.

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Retailers also need to invest in their ecommerce sites. House of Fraser was slow off the bat in this regard, as it didn’t begin a major and much needed upgrade to its website until April last year, even though online sales constituted 20% of all the business’ sales. Moreover House of Fraser spent only half as much as ASOS did that year on online investment; this figure was dwarfed even more by John Lewis, which invested £500m that year in technology.

Department stores are not destined to fail because of the rise of e-commerce but they must adapt their business models accordingly.

  1. Too many stores

Retail analysts have critiqued House of Fraser for holding onto too many brick-and-mortar stores. In particular, House of Fraser sits within prime high street buildings and locations, which of course come with higher rental costs.

One of the ways that House of Fraser tried to raise much-needed cash in the late ‘90s was to sell the freeholds for a group of stores and then lease them back. However, the conditions for those leases were costly, with some tying the company in for 40 years.

By 2018 there were 59 House of Fraser stores across the UK. This number is roughly equal to John Lewis and significantly lower than Debenhams, but both of these competitors have been far more successful at staying relevant in a crowded marketplace.

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As part of the CVA agreement House of Fraser reached with its creditors in June 2018, the company announced they would be slashing the number of stores by almost a half. Ashley, however, has stated that he intends to keep 80% of the stores open.

This may save jobs in the short term yet it is a risky move if the company is not able to innovate quickly and effectively. 

  1. Cash flow problems

The retailer had been suffering from cash flow issues. According to Management Today, its cash and equivalents dropped from £125.4m in January 2016 to £72.9m in January 2017, and then to only £7.4m in January this year.

Moreover, House of Fraser reported an almost £44m loss in 2017.

It appeared as though House of Fraser was going to get the cash injection it so desperately needed from C. Banner, the Chinese owner of Hamley’s. C. Banner had agreed to purchase a controlling stake of the House of Fraser Group in return for a £70 million cash injection. But when their own share price plummeted by 70%, C. Banner pulled out of the plan, stating that it would be “impracticable and inadvisable” to proceed.

  1. Poor leadership

There appears to have been a revolving door at the top of House of Fraser, with the company having changed hands twice in the last 15 years – in 2006 and then again in 2014.

Moreover, CEO Nigel Oddy resigned abruptly in 2016, less than two years into the job. His successor was named as Alex Williamson, who had zero retail experience, and the handover left the company without a leader over the crucial Christmas trading period.

Other members of management departed after short stints at House of Fraser; for instance, since 2016 there have been three chief marketing officers.

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This turbulence at the upper echelons of the company hugely impacted performance, as each new leader brings their own vision. Frequent chopping and changing is disruptive to the company’s long-term strategy.

  1. Brand identity crisis

Possibly one of the most significant causes of House of Fraser’s collapse is that it struggled to find its place in the retail market.

The department store stocked a massive 677 third-party brands. But, unlike M&S or John Lewis’ own brand clothing, House of Fraser failed to have a distinctive brand identity that separated itself from the swathes of concessions. Consumers had little reason to choose House of Fraser over its competitors.

Moreover, with wages barely keeping up with inflation, the average consumer has less disposable income and so will be less likely to make luxury purchases. Lower-cost retail shops such as Primark are more likely to entice consumers with cheap, fast fashion. Wealthy consumers, on the other hand, are more likely to shop at luxury department stores like Selfridges and Liberty London.

By being neither high-end nor low-end, House of Fraser struggled to differentiate itself from the competition. Now that Ashley has bought out the company, however, perhaps change is afoot, as the Sports Direct founder has said that he wants to add more luxury lines and recreate House of Fraser as the “Harrods of the High Street”.

Only time will tell if House of Fraser can revive itself under Mike Ashley’s leadership.

About the author:

Hasib Howlader is a director at Hudson Weir, a boutique firm of Insolvency Practitioners, as well as a chartered accountant and chartered tax adviser.