Why Debenhams may be the 31st casualty of the high street

News at the weekend that Debenhams has called in KPMG restructuring specialists to consider a CVA, help negotiate reduced rents for its sites and close unprofitable shops has not been totally unexpected. The company has put out its third profit warning this year, its share price has plummeted, and in April it reported an 85% drop in pre-tax profits.

Debenhams, like other major retail chains on the high street is operating in one of the most challenging part of retail, as consumers increasingly shop online and spend more money on holidays and experiences. Like many other retailers, it has been squeezed by falling consumer confidence and footfall on one hand and increased costs on wages, rents, utility bills and business rates on the other.

The impact of the 2017 Rating Revaluation

Indeed, Debenhams experienced the negative impact of the 2017 Rating Revaluation, which we believe has substantially added to costs. Because rates are linked to rents, the Government’s decision to delay the 2015 revaluation to 2017, means some retailers are now experiencing the second year of massive business rate hikes (tied to seven-year rent rises between 2008 and 2015).

Analysing Debenhams’ 178 stores in the UK, we estimate the retailer has a total Rateable Value (RV) of around £150 million, which equates to an annual rates bill of over £76 million for 2018/19. Some stores saw big rises in Rateable Value of over 50%, or even 100%, following the revaluation in 2017 (Westfield +133% and Oxford Street +57%) and these rises are still filtering through, with inflation on top. The store in Westfield for example was paying a rates bill of £651,000 in 2016/17. This year the figure is now an eye watering £1.3 m (2018/19). On Oxford Street, the Debenhams rates bill was £3.4 million before the revaluation. It is £5.36 million this year and this will rise to £5.87million by 2020/21. These rises are largely unsustainable in the current market. 

Added to this, those stores, in other parts of the country that should have seen a decrease in their rate bills following the revaluation, are not helping much because of the policy of downward transition, which runs for four years. Such stores are paying much more on their rate bills than they should be. In Stockport, the Debenhams store saw a 50% reduction in its RV following the revaluation. But its rates bill only decreased from £340,445 to £330,253 in the first year and is now at £324,616 substantially higher than the £225,000 figure it should be but for the penal downward phasing charge. 

Debenhams is of course not alone – other retailers are showing similar difficulties. House of Fraser faced a business rates bill of around £38million in 2017/18, due to rise to £40.3 million in 2018/19, before it announced its CVA. M&S has a rates bill of £295 million or £315 million (including Scotland) and New Look is over £58 million. These are big bills on top of all the other costs retailers are facing. 

And the situation is not getting better: A company which saw a 125% rise on its RV following the revaluation would have seen a 42% rise in its actual bill in year one, a 32% additional increase in year two (2018/19), and a massive 49% increase on top of this next year (2019/20). And add inflation on top. For many, these increases are the tipping point.

Is it any wonder Debenhams is looking at shuttering some stores and is trying to reduce its rent bills and even cut its store sizes in some areas?

So, what can be done?

So far, the Government response has been derisory. Announcing three-year revaluations and linking business rate rises to CPI inflation figures is all very good but it’s not enough.

Everyone has a view: 'Bring in a land tax', say some. ''Replace business rates with a tax on internet sales,' say another. 'Abolish business rates in their entirety', claim others.

The issue to remember is that the current system provides funds of £26 billion net to the UK Government. It would be naïve to think it would abolish this well-needed funding without a proper replacement – and that will be hard to guarantee.

Colliers’ solution is two-fold: the immediate and the longer term. Our new Business Rates Manifesto calls for an immediate freeze on any new rates rises and the immediate removal of downward phasing which will enable struggling stores to pay their true rates bills now. Longer term, we want a total overhaul of the business rates system, so that we can reduce the multiplier (against which rates are set), a look at reliefs and a reform of the “not fit for purpose” appeals system.

Timing is crucial and could impact upon several decisions currently being made by retailers on whether to close or keep open stores in a number of regional high streets.

We have been following those sizeable retailers or restaurant chains who have announced CVA since the 2017 Revaluation and believe if Debenhams does go down that route it would take the number to 31. That’s 31 companies too many. Retail is the UK's biggest private sector employer. We need to defend it.

The Government really needs to stop fiddling on the margins and prioritise this issue higher up the agenda.