The inevitable collapse of Arcadia is a cautionary tale for British capitalism | Philip Green


Philip Green wasn’t much cop at capitalism. That may sound a strange way to describe a very wealthy man who lives on an ocean-going yacht moored in the tax haven of Monaco. It perhaps sounds doubly weird given that Arcadia consists of some of the best known names on the high street: Topshop, Wallis, Miss Selfridge and Dorothy Perkins among them.

But even a halfway decent capitalist should have seen that the writing was on the wall for large swaths of traditional bricks-and-mortar retailing years ago. Green was unaware of, or indifferent to, this week’s collapse of Arcadia and the wrenching structural change in his own industry.

Sure, life on the high street and in shopping malls has been tough this year. No question, the Covid-19 pandemic has put paid to businesses that would otherwise have been viable. These are unprecedented times, and it is a sign of how difficult life continues to be that Green has not even waited until after the Christmas sales before calling in the administrators.

That said, the challenge from online retailers has been real and growing for the best part of two decades. Digital disruption is not a new phenomenon. It is now a quarter of a century since Jeff Bezos started Amazon from the garage of his rented home, time enough for the savvy to sense the way the wind was blowing and prepare. Tough social distancing rules are the proximate cause of Arcadia’s demise, but in truth the events of 2020 have merely turbocharged a process that was already happening.

The trend will not be altered by the arrival of vaccines and the merciful end of lockdown, because the change is big and permanent. It also threatens to be brutal. For manufacturing in the 1980s, read retailing in the 2020s. Arcadia is one example of the new reality; Debenhams, this week’s other big retail casualty, is the other.

While it’s convenient to blame the virus for the liquidation of the department store chain, its future looked bleak when the crisis began. As my colleague Zoe Wood has noted, Debenhams never really recovered after a debilitating period in the hands of private equity in the early 2000s. In a textbook example of short-termism, 23 stores were sold and the sites leased back on terms that have made Debenhams unattractive to potential buyers.

Such are the perils of doing business the British way. Green bought Arcadia in 2002 – mostly with borrowed money – cut costs aggressively to raise profits, refinanced on better terms, and extracted a whopping £1.2bn dividend for the company’s biggest shareholder: his wife.

In the early 2000s, this approach was all the rage. Load up on private equity debt, pare investment to the bare minimum, increase short-term profits, and top things off with a bit of financial engineering. With the City of London geared up for these sort of transactions, why waste time and effort innovating and planning for the long term? Green certainly had an eye for a deal; what he lacked was the nous to reinvest some of the profits into building a company strong enough to see off more nimble rivals. Early on, it came from Primark and Zara, but more recently from the pure online retailers, which paid much lower rent and business rates and were even better at cutting costs.

Are there other Arcadias or Debenhams lurking out there? It would be brave to assume otherwise. Corporate debt had been rising for eight years ahead of the pandemic, much of it used to keep shareholders sweet. After the US, the UK was one of the biggest users of share buybacks in 2019, according to the Bank for International Settlements. There is certainly no evidence that rising corporate debt has been funding an investment boom. The loans that the chancellor, Rishi Sunak, has provided have saved many retailers from bankruptcy but the crunch will come when that debt has to be repaid.

Clearly, some retailers have responded to what the economist Joseph Schumpeter once called gales of creative destruction. They have provided a digital offering to a new breed of more discerning consumers, who demand speed, ease of purchase, range and competitive prices. Next has responded to the existential threat posed by companies such as Asos and Boohoo, and is making money.

For some retailers, 2020 has been a good year because consumers have diverted money they would have spent on eating out or going on holiday into buying things for the home or to keep them amused during lockdown. The official measure of retail sales for October showed volumes 8% above February’s pre-pandemic levels, but it is the breakdown that matters. Online sales are up 53%, while in-store spending is down by 3%.

The crisis in retailing is exposing how the alleged strengths of Britain’s economic model are in fact weaknesses. A flexible labour market is supposed to ensure that workers made redundant by one firm quickly find employment elsewhere, but it is not immediately obvious how the 25,000 workers whose jobs are at risk at Arcadia and Debenhams will easily get other jobs in retailing or in the other sector of the economy that traditionally employs large numbers of low-paid workers: hospitality.

High streets and city centres will need to change because there are too many retailers chasing a dwindling amount of consumer spending. As was the case until relatively recently, they need to become places where people live and work as well as places where they shop.

But all this requires some serious investment in skills, physical infrastructure and innovation, rather than a “pile ’em high, sell ’em cheap, make a quick buck” approach. That model is bankrupt.

• Larry Elliott is the Guardian’s economics editor



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