New Look strikes deal on rent cuts and payment holidays
New Look has won approval for a three-year rent holiday on 68 of its stores and big rent reductions on hundreds of others as it battles to stay afloat and save the jobs of its 11,200 employees.
Landlords and other creditors voted in favour of an insolvency process known as a company voluntary arrangement (CVA) on Tuesday which will also let New Look reduce rent payments on hundreds of stores.
Nigel Oddy, New Look’s chief executive, said the deal would provide the chain with the “financial strength and flexibility, and a sustainable platform for future trading and investment”.
He added: “We still fundamentally believe the physical store has a significant part to play in the overall retail market and our omnichannel strategy [online/mobile shopping, with the option of picking up orders in stores].
Why are UK high street retailers in trouble?
Physical retailers have been hit by a combination of changing habits, rising costs and broader economic problems as well as unseasonable weather. In the past few years names such as Mothercare, Karen Millen, Toys R Us, Maplin and Poundworld have disappeared from the UK high street as a result.
In terms of habits, shoppers are switching to buying online. Companies such as Amazon have an unfair advantage because they have a lower business rate bill, which holds down costs and enables online retailers to woo shoppers with low prices. Business rates are taxes, based on the value of commercial property, that are imposed on traditional retailers with physical stores.
At the same time, there is a move away from buying “stuff” as more people live in smaller homes and rent rather than buy. Uncertainty about the economy has also slowed the housing market and linked makeovers of homes. Those pressures have come just as rising labour and product costs, partly fuelled by Brexit, have coincided with economic and political uncertainty that has dampened consumer confidence.
Retailers with a high street presence want the government to change business rates to even up the tax burden with online players and to adapt more quickly to the rapidly changing market. They also want more political certainty as the potential for a no-deal Brexit means some are not only incurring additional costs for stockpiling goods but are unsure about the impact of tariffs at the end of this year. Retailers also want more investment in town centres to help them adapt to changing trends, as well as a cut to high parking charges, which they say put off shoppers.
In the December 2019 Queen’s speech, the government announced plans for further reform of business rates including more frequent revaluations and increasing the discount for small retailers, pubs, cinemas and music venues to 50% from one-third. It has also set up a £675m “future high streets fund” under which local councils can bid for up to £25m towards regeneration projects such as refurbishing local historic buildings and improving transport links. The fund will also pay for the creation of a high street taskforce to provide expertise and hands-on support to local areas.
Some retailers could go under. Weakened by a difficult Christmas – which accounts for the entire annual profits of many retailers, and with further potential Brexit wobbles to come – retailers are facing another tough year in 2020. The latest rise in the national minimum wage in April will also add to costs and hit profits. On the plus side, there are hopes of a boost to the housing market from increased certainty about Brexit after the general election. There are also signs that the shift to online shopping is slowing, potentially easing the pressure on high streets.
“We look forward to working closely with our landlords and all creditors to ensure we can navigate the uncertain times ahead together,.”
Rents will be slashed to between about 2% and 12% of sales on 402 of its shops. Such rents are not only likely to be lower than current levels but more flexible in the event of further high street lockdowns.
The approval came despite several major landlords, including British Land, NewRiver and Landsec, voting against the deal.
Approval for the CVA is an important step towards the fast-fashion chain securing its second rescue deal in 18 months.
The group’s debt holders have agreed to inject £40m in new cash into the business and cut debts by about £440m to about £100m if landlords agree to the rent cuts.
Creditors representing 75% of the value of the company’s debt had to vote in favour of the CVA to go ahead.
The vote was on such a knife edge that New Look contacted staff, who are creditors because they are owed pay, to encourage them to back the deal which is part of a wider rescue package for New Look.
Many landlords are opposed to the rent changes as they are based on a surveyor’s estimate of the appropriate rental value – rather than actual rents currently being paid on the stores.
One smaller landlord said: “There is a fundamental problem not with the detail of the rent cuts but the principle. You can’t get flexibility on turnover rents and base that on a surveyor’s estimate.”
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