Fashion tycoon Sir Philip Green is seeking out new growth opportunities despite harsh trading conditions at home. George MacDonald reports.
It’s a cold trading climate on the high street. But while retail tycoon Sir Philip Green might wish for weather that would boost seasonal clothing sales, he is anxious not to add to the chill factor afflicting consumer sentiment and spending.
Despite posting a fall in full-year profits at his Arcadia fashion empire and a bumpy start to the current year, the billionaire entrepreneur is determined to be as positive as he can to avoid adding to the downbeat mood afflicting retail overall. “I want to be careful – the gloom is bad enough,” he explains.
So while he admits that conditions are challenging and has flagged the prospect of more than 200 shops closing as their leases expire, he is more interested in talking about the opportunities he still sees and is determined to take advantage of over the next few years – multichannel and international growth in particular, and often in combination.
While performance at some of Green’s stores took a hit over the last year, Arcadia’s online business has been growing. In contrast to the underlying retail like-for-like fall of 4.3% in the year to August 27, ecommerce sales advanced 27%.
The trend has continued into the current year. VAT-inclusive like-for-likes dropped 4.4% in the first 12 weeks, but online revenues climbed 21%.
Topshop and other Arcadia brands are already sold through dedicated websites for France, Germany and the US – where the retailer has also opened two high-profile stores in the past two years – and more such sites are likely.
Green sees the opportunity to take a bricks-and-clicks approach in other international markets, notably China where he hopes to open his first Topshop store next year.
Excited about China
Arcadia already has 600 franchised stores in 36 countries but in China, Green says, the business will not be franchised. It’s a market he is hugely excited about. “China could be a £500m to £700m business for us in three to five years. What’s clear is there’s a market – Zara’s there, H&M is there. That could be a particularly huge physical and online opportunity.”
Green expects to have meetings before Christmas with potential partners about his Chinese plans. “Lots of people are interested in the brand and are talking to us,” he says. He is also pondering the possibility of taking some of his other brands, such as Miss Selfridge, to China.
Along with the Far East, Green is expanding elsewhere. A Topshop store is slated to open in Las Vegas in the US next March, the first standalone store in Australia launches this month and another store should debut in Brazil next year. His Evans, Dorothy Perkins and Wallis brands were introduced in Canadian department store The Bay this autumn.
Green expects more overseas developments. He says he is talking to “many people around the world” about how Arcadia can leverage the retail skills and prowess it possesses.
While the tycoon has identified plenty of potential overseas, much attention last week was focused on Arcadia’s profits fall and, in particular, news that he may shut between 200 and 300 shops as their leases expire over the next few years up to the middle of 2014. In fact, the stores will not all definitely close – dependent on the willingness of landlords to negotiate – and Green emphasises that the situation should be seen in the round. “Within all of that, we’re opening new stores,” he points out, adding that a “reshuffling” of the portfolio will be an ongoing process.
Arcadia booked a £250m write-off arising from the possible closures. Green said that although that meant his business technically reported a pre-tax loss for last year, it was an accounting loss rather than a cash item.
Arcadia posted a pre-tax profit of £133.1m compared with £213.2m the previous year.
He pointed to investment of £113m in the business last year, and more than £550m over the past five years, as evidence of his confidence in the future.
Last year’s figures were affected by the retailer’s decision not to pass on higher costs – primarily the VAT rise – to customers. As reported in last week’s Retail Week, that meant that Arcadia bore a £53m additional cost burden and contributed to a margin decline of 1.8 percentage points.
While trading in the current year has been mixed, he is certain that Arcadia remains fundamentally strong. “You can’t sell winter goods in summer,” he maintains, referencing the unusually mild weather in October and November. “In those circumstances, the businesses have performed as well as could be expected and probably in line with the market.”
He also points out that Arcadia’s cash generation was almost £300m last year, indicative of its strong foundations. “We remain strongly cash-generative, enabling us to invest in all of our brands,” he says.
While Arcadia does not break down its numbers by specific brand, he acknowledges that his Bhs chain “lost a bit of money”.
“Where we’ve refurbed, those stores have done very well. We haven’t done enough of them,” he says. He hints that options include reinstating dropped categories. “I’ve not ruled out selling food,” he says.
He points out that his young fashion businesses, Topshop, Topman and Miss Selfridge have all been trading positively in the current financial year as shoppers continue to spend on the latest styles. “In our market, where we’ve got new product every day, they buy it,” he says. “It’s got to be new, new, new.”
He believes that Arcadia’s ownership structure gives it an advantage. “People are appreciative of being in a private, family-run business,” he says. “We continue to invest. We are committed to making the business work.
I feel we are better positioned to see opportunities and to act on them [than some retailers]. We can make decisions in 60 seconds.”
Green is of course renowned as a dealmaker, so how does he read the transactions market at present? He says that in these difficult and unusual economic times, it is hard to get a handle on what the right price on deals may be. “Nobody’s got a good enough barometer on what’s cheap,” he says. “You have to think ‘what do you like, where can you add value?’ Any transaction is different now to what it was before.”
He can see scope for deals, but says: “It’s tough to add value in this market.” Arcadia is strong in areas such as design, distribution and back-office and he says: “I’ve got to think of what makes sense. There’s got to be a lot of synergy.”
At the moment, all retailers are thinking about Christmas. Green claims he does “not have a clue” how the crucial trading period will turn out in the end, but is certain that Arcadia will power on in the long term.
“As a company we’re willing and active, and we’re pursuing many channels of potential opportunity,” he says. “We’ve got lots of balls rolling. Hopefully we’ll knock a few skittles over.”
ARCADIA IN NUMBERS
2,507 Company-owned stores
600 Franchised stores
£133.1m Group pre-tax profit
£2.68bn Total sales
Arcadia’s SUPPLY CHAIN
The retailer’s annual Responsibility Report showed that almost half its suppliers (46%) have worked with the group for three years or longer.
Arcadia brands’ top 20 suppliers provide 41% of their product and altogether they work with 700 suppliers that manufacture in about 1,060 factories. Just over three-quarters of Arcadia’s product comes from five sourcing countries – China, Romania, Turkey, India and Mauritius – but Arcadia sources from a total of 56 countries.
Bhs works with 550 suppliers and the top 20 provide 35% of goods. The top five countries supplying most of Bhs’s goods (74%) were China, the UK, India, Vietnam and Bangladesh.
Last year there were 915 ethical audits of factories supplying product to Arcadia brands and Bhs. Factories are graded green, yellow, orange and red – the latter means there is a “critical concern” and the factory cannot work with the retailer until the issue is resolved. Last year the retailer refused set-up permission to 33 new factories because of a red grade; 46% of goods came from green-graded factories last year.
The retailer also reported: “This year we have increased our attention on UK factories.
“The business is keen to support UK manufacturing because this gives us improved speed to market, greater flexibility and helps recreate a local sourcing skill base.
“In terms of ethical trading, it is important to monitor some of the specific challenges in the UK, such as regular employment or non-payment of minimum wage.”