Ethel Austin is the latest fashion name to go into administration, but could it have been avoided? Amy Shields investigates
Wednesday, April 16, 2008 will go down as a black day in the near 100-year history of value fashion retailer Ethel Austin.
At 1.15pm, barely 24 hours after being told that the retailer had collapsed into administration, head office staff were gathered together. They listened as the administrators reeled off the names of the 181 people who would no longer be required to come in to work the next day.
Among them were senior executives, buying staff and distribution centre workers. It was revealed that there would be blood on the shopfloor too, with the shutters to be closed on 33 of its 300 stores, leading to a further 265 job losses.
In the run-up, Ethel Austin’s directors had worked frantically behind the scenes with their previous backers to secure a deal that would enable the business to survive as close to its existing incarnation as possible.But, after a potential private equity deal fell through and an interested retail party’s offer came in below the mark, they were left with only one option.
Former MK One executive Elaine Gray, also known as McPherson, emerged as a possible suitor for the business two weeks prior to the administration. Both the consortium of backers – including Credit Suisse, private equity firm Eos Partners and ABN Amro – and management, headed by chief executive Simon Cooper and acting chairman Steve Smith, were relieved to have found someone whom, they hoped, would secure the future of the business as a going concern.
By 7pm on Monday April 14, the deal was done and Gray bought Ethel Austin’s debt for an unconfirmed£14 million. However, by 8am the next day, it emerged that she was behind the administrator being called in.
Gray, via a newly created company Project Steve Debtco, handed over a letter seen by Retail Week to directors, demanding the outstanding£24.8 million debt back from the retailer. The rest is history.
Ethel Austin was a successful community retailer begun in Liverpool’s Anfield in 1934, the legacy of a Liverpool family whose name became a fixture on The Sunday Times rich list.
So how did a company that survived for almost a century, regarded as the grandmother of value fashion, come to such an end?
It is not alone in its plight. Ethel Austin is the latest of a string of value and fashion retailers to face uncertainty following a first quarter when the full brunt of the credit crunch, poor weather, an early Easter and rent day demands combined to create the perfect storm. It follows Select, Dolcis, Stead & Simpson, Toyzone and The Works, which have all hit the buffers. Others, such as MK One, have put up for-sale signs – Elaine Gray is thought to be among MK One’s interested suitors.
Ronald Austin would no doubt turn in his grave at Ethel Austin’s troubles. He inherited a chain of knitting shops from his mother in 1947 and built the retailer into a powerful high street force.
At the time of his death in 2000, Ronald had opened his 200th store. Two years later, the Austin family decided to retain the property part of its business and sell the retail venture to Lloyds Development Capital in June 2002 in a£55 million management buy-out.
However, by March 2004 it was once again up for sale and observers say the rot had already set in.
A source close to the retailer said: “Because [the retail business] was so successful, Lloyds did not change the formula, but took costs out and pumped up the profits. It was the halcyon days of retail at the beginning of the noughties, but at first they ignored the growth of the retail space commanded by the value guys, like Primark and Asda, in the supermarket sector. Ethel Austin had not moved on and private equity missed a major thing on the way.”
The business was auctioned and ABN Amro Capital – as it was then called – bought it for£122.5 million in a 50:50 debt and equity split deal. Roger Peddar – best known for his work at Clarks – was drafted in as chairman by ABN Amro Capital two months after the deal, charged with overseeing the kind of turnaround for which he was lauded at Robert Dyas.
Peddar took the bull by the horns and kick-started a refurbishment plan for stores in urgent need of modernisation and examined ways to overhaul product and logistics. “Product was very commodity price-driven,” continues the source. “There was no clear classification, no clear market targets. It was dowdy. The only thing to commend it was that it was cheap.”
But a competitive market just got more competitive and Ethel Austin was attempting to turn around into a head wind. Primark was frantically acquiring stores and the supermarkets pushed deeper into value clothing, while Marks & Spencer and Arcadia were experiencing a renaissance.
Ethel could not keep up. It was restricted by its estate of secondary and tertiary locations and it did not have the economies of scale of its rivals.Poor trading in 2005 led to a business review and the drafting in of Simon Cooper and Steve Smith, who left last week in the roles of chief executive and acting chairman respectively.
Meanwhile, Barclays, one of the holders of the£60 million debt raised by ABN Amro Capital, sold its position to Credit Suisse for 34p in the pound. Credit Suisse then approached the remaining lenders to sell the residual debt and a new consortium of lenders including Credit Suisse, New York investors Eos Partners and ABN Amro ended up owning the business. ABN Amro Capital stepped out and Ethel Austin was subsequently refinanced in July last year.
In parallel to the chaos behind the scenes, profits were bleeding, there was a six-month hiatus on revamps and capital was lacking. By the year ending August 2006, sales were down 3.8 per cent to£158.2 million and profits had fallen from£4.8 million the previous year – excluding a one-off fixed asset sales charge – to£217,000.
In a debt exchange for almost all of the retailer’s equity, Credit Suisse, Eos Partners and ABN Amro wrote down debts to less than£20 million, from£57 million.
Trade deteriorated further between October 2006 and March this year and, as the credit crunch hit home, insiders say the word came down from on high to go liquid and realise underperforming debt.
Things came to a head on March 14 at a board meeting, when the lenders began to negotiate their debt. Credit Suisse sold some debt to a division of Hilco and Roger Peddar resigned as chairman, citing differences with the distressed debt holders.
A meeting took place with the remaining management and Elaine Gray and her representatives where, according to sources, it was agreed that Project Steve Debtco would do due diligence on the company for two weeks before deciding on its future. Satisfied that Project Steve Debtco would provide the fresh impetus they had so long been seeking, management agreed to the sale of their debt and holdings.
Acting chairman Steve Smith said: “I am bitterly disappointed that Ethel Austin has been placed into administration and people laid off when the company had plans for a turnaround, which we thought the new buyer was going to back. I was feeling very pleased that Elaine Gray was coming in with a fresh face, fresh ideas and a pair of fresh eyes, but bitterly disappointed that it ended the other way.”
The former Ethel Austin management maintain that the business could become profitable in the long-term, given the right backing. Gray defended the move, however. “Both the turnover and margin have dropped rapidly, and putting the business into administration was the only viable option,” she said.
One source close to the retailer says: “It would always have been difficult, but it was always possible. Ethel Austin needed long-term equity finance rather than short-term debt finance. It doesn’t mean it is perfect but, with a more focused ownership, it could have made it.”
However, that view is not held by everyone. One retail observer says: “It is quite clear that Ethel Austin’s proposition was overtaken by people who were doing things better than they do. The value approach was infiltrated by Peacocks, Primark and the supermarkets. There are so many examples where the business has moved against them at a faster rate.”
He adds: “What the situation tells us is that administration is only the flag that a solution has been found. Very often it is a way in which backers get out with as much as possible. Usually, the arrival of the administrator is a sign that it is going somewhere. All they are doing is altering the capital investment in the business.”
The source believes that the alternative may have been worse. “Maybe administration is better than it going into receivership and having the vultures pick over the bones,” he says.
However, Peddar argues: “The administration would seem to be for the generation of short-term cash as against the longer-term interests of the business.”
More such stories are likely to come as leveraged buy-outs implemented within the past few years seek returns while liquidity dries up. With declining consumer confidence and the worst March sales for footwear and clothing for eight years, the picture is bleak.
So where does that leave Ethel Austin? Administrator Menzies Corporate Restructuring says that it has been approached by several interested parties including retail and property businesses – the latter would be likely to further carve up the store portfolio.
Menzies administrator Philip Duffy says he has “every confidence” the business will be sold as a going concern. He has no plans to close any more stores and will try to save the remaining 2,400 jobs, although “there is no guarantee”, he adds.
Verdict analyst Maureen Hinton says: “Ethel Austin has been on the brink for some time. I think it’s going to be very tough. It could be slimmed down and cut costs, but I am not sure it has profitable stores. They need to generate higher margins but, to do that, they need to cut costs in stores – make job cuts and sell higher-priced products that people want. They have got to differentiate.”
She points out that Peacocks is located in higher footfall locations and the retailer has the economies of scale to demand lower prices from suppliers. She says: “The price-led end of the market has been under fire and the small retailers are most exposed because of rising costs and weakening demand. We can’t have as many operators in that end of the market as there was. There is only so much low-value price product. Price is no longer a differentiator. Overcapacity has exposed those that have a weak proposition.”
Credit Suisse and Eos Partners declined to comment and ABN Amro and Elaine Gray did not return calls as Retail Week went to press.