Who can we trust as owners and custodians of our great retail brands?
Retail business failures make big news and prompt a lot of discussion. Whether it is administrations and bankruptcies or the CVAs and debt restructuring that often precede them, the death throes of a business have a high cost.
Lenders, investors and suppliers lose money and longstanding employees lose their jobs, often with only statutory redundancy as compensation.
When facing such a challenge to the sector, we need to ask some tough questions. Why is this happening? Why do so many businesses seem to die rather than evolve?
Family-run and privately held businesses are frequently paralysed by boardroom and family conflict
It is also tempting to ask another question. Whose fault is it?
One group emerging as a potential villain of the piece are the private equity businesses that own many of our most famous high street brands.
The case for the prosecution is easy to make. PE companies ‘load their portfolio companies with debt’, ‘extract huge fees that leave the company unable to invest’ and ‘are focused on the short term, not the long term’.
I’ve heard versions of this case made in connection with many troubled retail brands over the last few months. I’ve even heard private equity blamed for the tough times at Debenhams, though that business was last in PE hands more than 12 years ago.
Convinced? I’m not sure I am. Having sat on both private equity and Plc boards, I wonder if the real situation isn’t a bit more nuanced.
No perfect model
After all, there is an equivalent case to be made against having a business listed on the stock market. Plcs, after all, ‘extract huge dividends that leave the company unable to invest’, ‘are focused on the next quarterly result, not the long term’ and ‘reward deal-making and relentless expansion rather than operational delivery’.
And don’t get me started on the other ownership models available. Family-run and privately held businesses are frequently paralysed by boardroom and family conflict.
And the partnership model that has been held up over the past decade as representing a kind of corporate best practice? Well, the next couple of years will be an interesting test for John Lewis of whether that model allows the kind of innovation and change that the new economy demands.
Successful businesses innovate and take risks in order to continue to stay relevant to their customers
The reality is that all models of business ownership have their faults. As for private equity, well, there are some terrible PE companies out there and there are real examples of funds underinvesting in retail businesses or saddling them with too much debt.
But those aren’t structural inevitabilities of PE – they are just examples of short-sighted stupidity.
Successful PE investors must consistently sell their portfolio companies for more than they bought them for.
The potential buyers of those brands are smart enough not to buy some gutted, asset-stripped husk without spotting it for what it is.
While it is right to say that a PE investor’s time horizon is short, it doesn’t automatically translate that they will not invest for the long term in order to show a buyer that the business has a strong future.
The reality is that there are successful and unsuccessful retailers in every ownership category. So, what is it that really separates the winners from the losers?
Successful businesses innovate and take risks in order to continue to stay relevant to their customers.
A bold attitude to reinvention and a willingness to invest are what really generate value in the long run. All of us in the retail sector, including those PE funds, should heed that lesson. If we don’t evolve, we don’t survive.