House of Fraser takeover: How did struggling retailer get into this mess?

10 August 2018, 11:02

Mike Ashley's takeover of House of Fraser represents yet another change of ownership in this turbulent company's history.

The collapse that made Mr Ashley's takeover possible has been a long time coming.

First of all, it has faced the same headwinds all traditional retailers do, namely the relentless shift towards online shopping and competition from lower-cost retailers who are not burdened with high store rents and business rates.

Then there is the change in spending habits, particularly among millennial consumers, away from buying items like clothes and towards "experiences" such as eating out and leisure trips.

Department store chains, whose essential business model has remained unchanged in 150 years, have been particularly vulnerable to the shift online. Selling lots of different items, many of them brands made by third parties, is easily replicated by the internet.

That is why John Lewis, the undisputed king of the sector, is looking to sell more of its own brands and fewer than those of other people. It, like the number two player Debenhams, is also seeking to offer shoppers more "experiences" in-store - seeking to lure shoppers in by providing exclusive goods or services that cannot be obtained anywhere else.

House of Fraser, too, was seeking to go down that route.

However, as well as all the problems afflicting the high street in general and department stores in particular, House of Fraser has also been hobbled by some adverse conditions specific to it.

Chief among these is that it has changed hands on numerous occasions during the last few decades and, along the way, has been loaded up with debt and starved of investment by some decidedly poor owners.

Originally floated on the stock market as long ago as 1948, it was the subject of a fierce ownership battle between buccaneer adventurer "Tiny" Rowland and Mohammed Fayed for most of the early 1980s, eventually being bought by the latter in 1985.

Mr Fayed's uncompromising style meant few managers wanted to stay very long and the business was deprived of retailing talent. The Egyptian floated the business on the stock market again nine years later, minus Harrods, which had been its most valuable asset.

By the late 1990s, struggling to compete with the new out-of-town shopping outlets that had lured shoppers away from the traditional high street locations from which it traded, House of Fraser was labouring under heavy debts.

The solution of John Coleman, its chief executive at the time, was to strike a deal in July 1999 that saw the freeholds of 15 of the group's stores sold and then leased back.

This raised £147m to reduce debt and also freed up some cash for store refurbishments. It also flirted with the idea of buying its now-defunct rival department store operator Allders.

Unfortunately, a store freehold can only be sold once and the sale-and-leaseback agreement tied House of Fraser into some onerous rental agreements, some of which went out 40 years.

In the meantime, the group continued to be a consolidator in the sector, snapping up rivals such as Beatties, the Midlands department store operator and Jenners, based in Edinburgh.

Some, like Jenners and Dickins & Jones, have retained their names but, along the way, other famous old brands owned by House of Fraser have been replaced with the latter brand.

The last Army & Navy stores, for example, were rechristened House of Fraser in 2005; stores previously trading under the name Binns, largely in the North East of England, were nearly all rebranded by 2006 and DH Evans was rebranded as long ago as 2001. These rebrandings in many cases severed a link between the stores and communities in which they had traded for many years and confused older shoppers.

The next chapter came when, in 2006, House of Fraser was bought by the Icelandic group Baugur. The latter went bust three years later, in the wake of the financial crisis and the collapse of Iceland's economy, with Baugur's shares being scattered among a group of Icelandic banks.

By then House of Fraser was in the middle of a turnaround under John King, the former Matalan boss, who had joined in early 2007 and Don McCarthy, an experienced retailer who became chairman under Baugur.

But in 2013, the business changed hands again, being bought by the Chinese retailer Sanpower for a remarkable £480m. Mr McCarthy left almost immediately and the talented Mr King, who had been promised the chairmanship by the new owners, left at the beginning of 2015 when that pledge went unfulfilled.

The Chinese have proved to be as poor owners of House of Fraser as Mr Fayed was. Promised investment has never materialised, experienced managers have left the business and the group was left in no fit state to face either the hurricanes buffeting the high street or the intensification of competition as both John Lewis and Debenhams sought to respond to changing consumer tastes.

Mike Ashley's takeover represents the sixth change of ownership in just 33 years, during which time, House of Fraser has had even more chief executives and managing directors, with Brian Walsh, Robb Hampson, Andrew Jennings, John Coleman, Mr King, Nigel Oddy and the latest incumbent, Alex Williamson, among those to have steered the ship.

Shorn of some of its weaker stores and some onerous leases, it probably has a better chance under Mr Ashley than for many years, but no one should be under any illusions about the challenge it faces.