House of Fraser: Victim of the Retail Apocalypse?

The story which has dominated the business news headlines in the UK over the past week is the woes of House of Fraser, the department store chain.  The company has announced the closure of 31 stores as part of a CVA (a creditors’ voluntary arrangement) as it bids to stave off bankruptcy.  The closure announcement was an indication of quite how deep House of Fraser’s problems are as it is more than half their store portfolio.  The Midland is particularly badly hit by the closures and the firm are even closing their store in the centre of Birmingham.  This is a company in serious financial difficulty.

Talking heads discussing the story in the media have pointed to the closures as yet another example of e-commerce destroying the traditional retailing business model.  I have no doubt that the problems being faced by House of Fraser are impacted by internet shopping but e-commerce is only part of the story and there are a range of factors which have impacted Fraser’s.

One talking head even talked of the poor internet offer of House of Fraser.  Personally, I feel that this is nonsense.  I have used Fraser’s e-commerce site and it is comprehensive.  A far greater impact is the history of Fraser’s including the many ownership battles the company has faced in the last thirty years.

House of Fraser began its life in Glasgow during the 19th century.  the group expanded through the purchase of its competitors.  In the space a century, over seventy department store brands were purchased, from Binn’s and Arnott’s to Beattie’s and Jenner’s.

House of Fraser was at the forefront of the development of department store chains rather than towns and regions having its own department store brand.

As the concept of the department store became more popular with consumers, many of Fraser’s stores were extended or knocked through into neighbouring properties.  The firm’s last purchase, Jenner’s in Edinburgh is a fine example.

The Jenner’s store on Princes Street in Edinburgh consists of the original purpose-built 19th century store.  This was then extended with the addition of a second gallery.  Then it was knocked through into a post-WW2 extension and then a bridge was built across Rose Street Lane extending the store into a separate building.  A further extension was then added in a further building on Rose Street.  As a child, I spent many a happy hour playing hide and seek in Jenner’s and I suspect the Hide and Seek world championship is considering the building for its next tournament.

The state of the company’s product portfolio was directly referenced in the closure statement.  It stated that the maintenance and redevelopment costs of the company’s product portfolio was a significant element to the company’s debts.

It is also worth mentioning that the vast majority of House of Fraser’s stores are in town centres, not out-of-town malls. So consumers have to pay for parking and business rates tend to be higher.  Significant elements on both footfall and the company’s cost base.

House of Fraser operates on the basis of in store brand concessions.  The company does have its own brands, most notably Linea, but the vast majority of the goods sold instore are on space allocated/rented to brands such as Phase Eight and Henri Lloyd.

Whilst studying for my marketing diploma, I had to complete a case study on Ugg, the sheepskin boots brand.  One element of that study was a change to Ugg’s retail strategy.  Instead of selling via third-parties and in department stores, Ugg were developing their own brand stores and selling more of their products to consumers directly.

I feel this may have been a contributory factor to House of Fraser’s problems.  Some of the concessions in House of Fraser stores have struggled.  For example, East, the womenswear brand went bust.  If I walk in my local town centre I see brand stores for Phase Eight, Joules and Barbour right next to the existing House of Fraser store.  Why would a fashion brand with its own store on the high street want a separate concession in a neighbouring department store.

Fraser’s has been described as being ‘caught in the middle’.  At one end of its offer, the company is offering own brand products at prices to compete with discount brands such as Matalan; at the other end it offers high-end fashion brands such as Gucci and Ralph Lauren.  Fraser’s has products for pensioners as well as teenage fashion.  It is a company trying to be all things to all people.

As previously discussed in this blog, Michael Porter describes three generic marketing strategies; Niche, Cost Focus and Differentiation.  He also stated that companies trying to operate two or more of these strategies simultaneously enter a costly marketing ‘no man’s land’.  So Fraser’s was trying to compete on a cost focus basis with its own brand and teenage fashion lines but also trying to offer a differentiated strategy with offers to all sectors of the community.  This isn’t only a financially expensive approach, it means that there is no clear identity in the minds of consumers.

So Fraser’s were operating an expensive range of marketing mixes, on top of an ageing and costly property portfolio.  Then there was the company’s historic debts.

The House of Fraser is a brand which has long been fought over.  Since the 1980s it has been the subject of many hostile takeover bids from the likes of Tiny Rowland’s Lonrho, Mohammed Al Fayed and Tom Hunter.  The cost of defending these corporate raids has meant the firm building significant historic debts.

The result of these debts means that for many years, there was minimal investment in the group’s stores.  In recent years, Fraser’s has spent money revamping some of its stores, for example, the company spent £12 million redeveloping its Telford store, to create a more modern and consistent shopping experience.  It may be argued that this spending was too little too late.

Finally, there is the state of the UK economy.  British consumers have had nearly a decade of wage stagnation and public service austerity.  Productivity is low.  Years of below inflation pay awards has meant that consumer debt is rising and consumers are far more choosy about their purchases.  This is a very toxic environment for retailers who may be seen as operating a staid and old-fashioned retail model.

It must also be noted that a number of discount retailers, most recently Poundworld are struggling as the devalued pound makes it difficult to maintain slim margins.  A lot of House of Fraser’s products are made in the far east and imported.  Currency devaluation added to the flat economy means profit margins being stripped away and as a result a difficulty in maintaining debt repayments.

The term retail apocalypse is often used to describe the collapse of high street retailing in mature economies.  This term is usually applied to the impact of internet shopping on traditional retail models.  Some academics feel the term is over used and a better description is retail revolution.

In the 1990’s there was a big increase in the number of mall developments and existing retailers expanded into these new outlets.  It could be argued that there were too many retail outlets and what we are now seeing is firms which have over-extended their store presence reacting.

So who will survive on the high street?  I suspect, in the department store sector it will be company’s which target specific niche offers, e.g. Harvey Nichols high-end fashion, or those which develop distinct shopping experiences, such as Selfridge’s and Liberty.  Firms that are in danger are those that try to capture the whole market, which rely on traditional retail models and which try to capture all the consumers in the marketplace and not distinct demographic groups.