I thought I’d solved the mystery of who murdered the high street. Then an article in Money Week came up with a new prime suspect.
Matthew Lynn’s view is that it’s not the government, local councils, landlords or even the slump in consumer spending. He blames the City. His reasoning certainly explains the anomaly of why Peacock should go to the wall but Primark continue to prosper, Burberrys weather the storm while La Senza goes bust.
Mr Lynn points out that although the growth of retail sales seen before the recession has stalled, spending is still showing small increases. Therefore he finds it odd that some companies are suffering as much as they clearly are. Our Poirot from the City used his little grey cells to work out that La Senza, New Look, Hawkin’s Bazaar and Peacocks and nearly all the other retailers in trouble have something in common. They are all completely or partly owned by private-equity companies.
As Lynn says, ‘The City loved retailing. It had stable cash flows and usually lots of property assets.’ So they bought retailers and ‘put a mountain of debt on them.’ This wasn’t a problem when times were good but ‘the City has stretched businesses to the point where they can no longer cope with any kind of adversity.’ In other words, a small drop in income and they can no longer pay the massive interest to the bank.
‘Businesses need to be able to survive through good times and bad,’ says Lynn and the financial markets should help them. Instead, we have a high street crisis ‘created by financial engineering’.
This makes a lot of sense to me and while it doesn’t solve the current problem, it suggests there may be hope for the future. I have been gloomy about high street shopping of late but, looked at positively, my own retail business Your Life Your Style and quite a few others are managing to get through the current economic downturn. Turnover continues to rise albeit sluggishly. Perhaps most significantly, we have no debts, except the money my wife and I loaned it.
Furthermore independents like us (and some bigger companies like John Lewis) actually want to be retailers, as opposed to managers of a financial asset. When times get better, independent shops could be well placed to fill some of the gaps left by these over-leveraged multiples.