Arcadia faces more than just 'hard work' in turning round its brands: it's in a strategic vice
Arcadia - retail tycoon Sir Philip Green's fashion group - yesterday won its battle to persuade its landlords to accept the company voluntary arrangements (CVA) to allow it to close some stores and reduce the rents on others. The hope is that with this agreement in place, plus an injection of £135m of investment over three years, Arcadia's fortunes can be turned round and its brands, including flagship Topshop/Topman, as well as Miss Selfridge, Evans, Wallis, Dorothy Perkins and Burton, can be brought back to health and profitability.
"The hard work starts now," said Sir Philip in the wake of the deal. The trouble is, given the state of the emerging competition and the young women's fashion market, it really should have started five years ago or more.
The under-30s - the main customer of flagship brand Topshop - have been under huge pressure from rising living costs and stagnant wages for most of the last decade. According to ConsumerCast's estimates, the amount they pay in rent alone has jumped by 37% from £15bn to £21bn in the last five years. It is little wonder then that with a new breed of online pureplay operators offering cheap ranges with fantastic delivery services and the latest trends, young fashion customers have ditched even slightly pricier high-street operators in huge numbers.
The level of investment planned, although significant, is not likely to be sufficient to keep pace with Arcadia's rivals. Online giant ASOS plans capital expenditure of up to £250m in the year to August, on top of £242m spent the previous year. Admittedly most will be spent in developing overseas markets, but still its pace of investment and development as a business is breathtaking. And it is not the only one driving growth with big sums of money. Boohoo.com, for example, spent £47m last year alone.
While it is difficult to assess real levels of spending by fashion consumers by asking them directly what they actually splash out - statistically speaking there are an awful lot of shopping bags hidden under the nation's beds - ConsumerCast estimates womenswear spend by 18-29 year olds is around £3.3bn, down from a peak of £3.5bn in 2015. In a stagnant or contracting young womenswear market, the last three years have seen massive growth of both online giant ASOS and smaller fast-fashion rival Boohoo.com. This has had a huge impact on established high street operators, above all Topshop and New Look. It has also blunted the appeal of Primark, despite its massive appeal to budget fashion shoppers.
The result can be seen below in terms of estimated market shares of this market, with Topshop and New Look both slumping, while ASOS and Boohoo.com tear away upwards. Strategically this is the main challenge Arcadia faces, on top of the existing one from Primark: how to compete with these and other fantastically successful pureplay operators in a stagnant or declining market. For the moment, Topshop has chosen "co-opetition", selling its ranges through ASOS from this summer. This, however, is not a long term solution. A radical shakeup is needed across Arcadia's brands, led by Topshop, to cut its dependence on high street stores, make sure its delivery and returns match the best on offer by its competitors and that its ranges are just as fast-moving and on-trend as its pureplay rivals. All that is going to require deep pockets and a serious faith in the brands themselves. The question is whether, given the risks, Sir Philip is really ready for this particular challenge.