How They Saved Carpetright from CollapseJune 24, 2018
Carpetright is an extremely well-known high street brand. Established in 1988 by Lord Harris of Peckham, the business grew rapidly through the 1990s and 2000s and by 2015 had 470 locations in the UK and revenues of £470 million.
However, all businesses will experience challenges and Carpetright is no different. Increasing competition from new retail businesses, the emergence of online shopping and changing consumer habits contributed to falling sales and shrinking profits, which unsettled the flooring giant.
In June 2011, Carpetright announced it was to close a number of shops and seven months later, the business posted its first loss in 18 years.
With stagnating sales and crashing operating profits, the company limped on for the next seven years without much improvement.
In March this year, news broke that Carpetright was seriously struggling. The company had already issued three profit warnings in the past four months and announced it was entering into a company voluntary arrangement (CVA) in an attempt to avoid formal insolvency proceedings.
A CVA is a debt management tool that allows an insolvent company to reorganise itself, write off some of its debts and repay the remainder over an agreed fixed period.
CVAs are attractive options because it leaves the Company intact and in the hands of the original owners or shareholders while avoiding formal insolvency.
In the last few months, several high street brands — New Look, Mothercare, Select, among others — used CVAs.
With 2,700 jobs and a 30-year-old business at risk, there was a lot riding on the success of the CVA.
Carpetright’s Company Voluntary Arrangement
Under the guidance of chief executive Wilf Walsh, Carpetright presented a CVA to its creditors in April.
CVAs require 75% of a companies creditors to approve the proposal before it can proceed. Thankfully, the proposal was accepted and Carpetright could push ahead with its restructuring plans.
The CVA planned to close poorly planned and underperforming stores. Walsh himself admits that many of the worst performing stores were signed up on 25-year leases in the 1990s and 2000s, and some now lose hundreds of thousands of pounds per year.
The CVA singled out 92 loss-making shops for closures.
While shop closures are never good news, shedding these underperforming units will allow Carpetright to cut their losses, invest in profitable shops and continue trading with a smaller portfolio of 317 units.
Carpetright will also negotiate with its landlords for reduced rent at a further 113 sites, hoping its rates can be renegotiated to match its current trading.
While the long-term outcomes of the CVA remain to be seen, the immediate impact is clear. Carpetright has secured the short-term future of 317 stores and 2,400 jobs.
What Can We Learn?
In today’s challenging retail climate, it’s not unusual to read about once-successful high street brands entering insolvency proceedings. Unfortunately, many of these companies do not recover.
When a company does halt its decline, it’s worth investigating its behaviour and seeing if there is anything we can learn.
Having reviewed Carpetright’s CVA, here are a handful of points I think all businesses can benefit from.
Negotiate with suppliers
As Walsh admits, many of Carpetright’s problems originate from long-term rental deals they signed back in the 1990s and 2000s. While those deals probably seemed great at the time, an evolving retail landscape has made them steadily less profitable over the years.
As part of Carpetright’s CVA, they are opening up negotiations with their landlords at 113 sites where rents are based on historic trading performance. Carpetright’s argument may go something like this.
“We agreed rental rates twenty years ago but our trading is nowhere near where it was back in 1998. I think we need to revalue the lease based on current trading and draw up a new agreement. If we can’t renegotiate the rents, staying here simply isn’t viable.”
So, now the landlord has a choice: renegotiate the rents or face the prospect of finding a new tenant. In this situation, renegotiating the rent may well be in the landlord’s best interest as finding a new tenant isn’t cheap, especially given the less-than-stellar performance of the unit.
Reevaluate loss-making parts of your business
Business owners, especially small business owners, tend to treat their business as one big organisation. If the business is underperforming, it’s the whole business that’s underperforming.
However, businesses are often composed of several different components, which can be profitable, loss-making or somewhere in between.
When we investigate struggling businesses, we often find that there are, in fact, profitable parts to the business but there are underperforming elements pulling the whole business down.
If one section of your business is loss-making and it brings no other benefits, you should consider whether it is worth retaining it.
Seek specialist advice
CVAs must be arranged and supervised by an insolvency practitioner, which means Carpetright’s management will likely have worked with an insolvency practitioner to design the most viable and attractive proposal.
Whether or not your business requires a formal debt management tool like a CVA, it’s still advisable to seek advice from an insolvency practitioner as soon as you suspect your business is struggling.
Your insolvency practitioner will be able to critically and objectively analyse your business, and recommend what you need to improve its performance.
Are CVAs a Silver Bullet?
Early last year, I wrote an article about the worryingly high failure rates of CVAs. Unfortunately, far too many directors treat CVAs as a silver bullet, thinking that they can set it up, write off their debts and get back to running a successful business.
While a CVA can provide a company with legal protections and some financial relief, it won’t fix any underlying issues that brought the business to this position.
Effective business rescue through a CVA requires an experienced pair of hands and serious changes to the business. The insolvency practitioner you select needs help, advise and challenge plans to ensure your CVA proposal has the best possible chance of being a success in the long-term.
If you choose an insolvency practitioner who rubber stamps a poorly planned proposal, you shouldn’t be surprised when the CVA inevitably fails.
Is Your Business Struggling?
Turning around a struggling business is difficult and, unfortunately, there is very rarely one simple answer. However, if you select a knowledgeable and skilful insolvency practitioner and give them enough time to work, they stand a good chance of saving the still-profitable parts of your business.
If you believe your business is starting to struggle, give our team a call on 0141 280 3221 and we will set up a free, confidential and no obligation meeting to explore your circumstances and discuss what options are available to you.