Reading the coverage of Arcadia’s company voluntary arrangement (CVA), one could be forgiven for thinking that rather than being a matter of commerce it was, in fact, a popularity contest.
Headlines such as “Landlords give Green bloody nose”, followed by “Green lives to fight another day”, dominated the story, with some suggesting that certain votes were a protest against the owner as opposed to the underlying commercials of the proposed deal.
Certainly, the Sir Philip factor should not be underestimated, but not for the reasons alluded to above.
As the UK’s most high-profile retailer – if no longer its most successful – Sir Philip has acted as a totem for those who take the view that the CVA has become a commoditised process in which certain stakeholders take disproportionate pain as a result of a business’ failures.
At the head of this pack, we have landlords, a collective which within the footprint of the 600 or so Arcadia shops neatly reflects the fragmented nature of UK retail, spanning everything from private individuals holding single units in high streets to mall owners housing multiple Arcadia fascias.
“For retailers, property costs are being regularly positioned as an existential issue”
Regardless of scale, each of these parties would claim that their arrangements with tenants are transparent, mutually and contractually agreed and with full visibility of costs for retailers to plan accordingly.
As a result, their business models are built on a linear basis with clearly defined income streams and little scope for variability as they seek steady cash flows for investment and/or debt servicing purposes.
Set against this we have the retailers who claim that property costs – rent plus rates as CVAs increasingly target local authorities – are overly burdensome and out of sync with what the present-day market would dictate, while also frequently citing the perceived inequity of upward-only rent reviews.
In short, for retailers, property costs are being regularly positioned as an existential issue.
Room for compromise
Recently in the face of continuing decline in the market, the retailer argument would seem to have held sway as landlords have had to flex as successive CVAs have cut income streams and injected greater uncertainty into the property market.
The CVA has become an increasingly popular tool to the extent that it is now – somewhat naively – seen by many as the default choice for retailers looking to address their financial woes.
So why then the backlash against Arcadia? The short answer is to send a message, and what better forum to send that message than the most high-profile retail situation to date involving the most high-profile retailer in the UK?
To be successful, a CVA must marry compromise and willingness. The disadvantaged creditors are expected to compromise but in return need to see willingness on the other side.
In Arcadia’s case, the root of revolt was an acutely felt view that Sir Philip was seeking far too great a compromise as regards to property but offering much too little in terms of willingness to provide funding and support for a credible turnaround plan.
This last point is vital to the success of a CVA; it cannot simply be used as a device to cut a line on the P&L. To be successful it has to be supported by robust and credible measures designed to address the issues that underpinned the malaise in the first place.
Landlords are pragmatic, they don’t want voids, but they need to see that retailers who seek their forbearance and disrupt their model are in it for the long haul and committed to improving their trading positions for mutual benefit.
Many have speculated as to whether events at Arcadia herald the end of the retail CVA. The short answer is no, but there are salutary lessons to be learned.
The most obvious of which is that proposing CVAs on an assumptive basis and with insufficient commitment or ability to effect a deeper turnaround is an increasingly dangerous game, a lesson those in the process of contemplating such a proposal must heed.