Amazon isn't to blame for the fall of the House of Fraser in an omni-channel retail age

Profile picture for user slauchlan By Stuart Lauchlan June 6, 2018
Summary:
With nearly 170 years of history, House of Fraser is a UK retail icon, but one that's in a lot of trouble.

house of fraser
The news that UK retail institution House of Fraser plans to shutter more than half of its stores, including its flagship in Oxford Street in London, is yet another indicator of the upheaval in the retail sector.

The group announced this morning that like-for-like sales had fallen by 7.4% in the 13 weeks to 28 April, driven by “lower consumer confidence, channel shift online and unusually cold weather”.

House of Fraser’s retail empire grew from a shop in the centre of Glasgow which opened 170 years ago to have more than 100 department stores at one point, including Harrods which it acquired in 1959. There are currently 59 stores around the UK.

But the firm now regards its offline property estate is unsustainable in its current form. As such, it has selected 31 stores for closure in early 2019 and hopes to negotiate rent reductions of 25% on 10 of the 28 stores it is keeping open. And of the 31 stores it wants to shut, it’s asking for a 70% rent reduction for seven months, after which the stores will close.

Some 6000 jobs are at stake - 2,000 House of Fraser jobs and 4,000 brand and concession roles. The firm employs approximately 5,000 people directly and has 12,500 concession staff.

Frank Slevin, Chairman of House of Fraser, said there were macro-pressures at play:

The retail industry is undergoing fundamental change and House of Fraser urgently needs to adapt to this fast-changing landscape in order to give it a future and allow it to thrive. Our legacy store estate has created an unsustainable cost base, which without restructuring, presents an existential threat to the business.

Too late?

Will the store closures be enough to stave off further problems? Some analysts reckon so, such as Victor Garcia Capdevila of credit rating agency Moody’s who argues:

Store closures will allow House of Fraser to reduce its rent bill and exit long-dated lease agreements in unprofitable locations. This should facilitate and accelerate the transformation of the company into a more effective multi-channel retailer.

Richard Lim, Chief Executive at Retail Economics, sees the closure decision as a huge statement of intent” by House of Fraser’s management:

Department stores are incredibly expensive to operate and the last few years have seen costs spiralling upwards from business rates, rents and National Living Wage. These traditional retail business models that hold huge fixed costs are simply becoming unsustainable for some retailers.

The announcement to close such a significant number of stores highlights the unyielding shift towards online shopping and the overcapacity concerns faced by a significant proportion of the market. The retailer will need to push forward right-sizing initiatives and utilise any excess space to sweat assets more effectively in a move become fit-for-purpose in today’s digital age.

House of Fraser has actually made some sound early investments in digital, with its first e-commerce site launched in 2007. But that early investment wasn’t followed up as enthusiastically as it should have been with a major £25 million platform upgrade, badly needed to take on the threat from pureplays such as ASOS, not coming until 2017

That said, the firm currently does around 20% of its sales via online and omni-channel thinking is still prevalent, with Slevin recently talking about:

the rapidly changing behaviours of a customer base which increasingly shops channel-agnostically.

But is it too late?

My take

House of Fraser is an iconic retail brand - and I can’t remember the last time I set in foot in one of its stores. It was certainly many years ago. While the firm recognised the emergence of the omni-channel world early on and made savvy investments in digital to arm itself, it failed to address the ‘drag’ of its legacy real estate until too late in the day.

It’s an ongoing issue. According to research from peer-to-peer secured lending platform provider Lendy, the number of large department stores in England - defined as multi-level stores that have distinct “departments” and often in-store franchised retailers - has fallen by 25% in less than a decade from 250 to 180 today. Liam Brooke, co-founder of Lendy, says:

The falling number of department stores shows they have borne much of the brunt of the shift towards internet shopping.

But it’s too easy to say ‘Amazon victim’ as many headline writers in the mainstream media have said today. What’s crucial is getting the right omni-channel mix, with an appropriately-sized physical world presence married to a mirroring digital one. When I think about House of Fraser, I think of a grand ‘Are You Being Served?’ style of old world department store, with customer service as its primary value. That’s what needs to be built upon online and supported by the offline retail environment.

What happens next is far from certain. Stripping out stores will inevitably mean more focus on the online shopping experience. House of Fraser won’t be following in the footsteps of British Home Stores, which shuttered all its stores and tried to keep going as a web-only presence. That’s not proved a viable strategy and BHS.com will shut down at the end of this month, a combo of poor online shopping experience and, crucially, a damaged-beyond-repair brand.

It is to be hoped that House of Fraser hasn't reached that point just yet.