The Retail Crisis Catches Up with Debenhams

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Dr Amir Qamar
Department of Strategy & International Business


Debenhams was reportedly worth £900 million in 2016, but today the retail giant is only worth £20 million. Debenhams generates approximately 80% of its revenue in the UK, thus the firm is highly dependent on a single country. Considering that the British retail industry has been experiencing somewhat of a crisis, with firms including M&S, H&M, House of Fraser and John Lewis & Partners also reporting poor financial performance, it is no surprise Debenhams announced this week that control of the business would be handed over to its lenders, by entering into administration. Given that Debenhams is an iconic business within the UK retail market, and considering it once owned high-end department store Harvey Nichols, it is important to analyse what has caused the brand’s demise.

The media often cites Brexit as the cause of retail’s profitability decline. Although Brexit is undoubtedly leading to economic uncertainty and could result in more store closures or under-performance over the next coming months, there are another six drivers of the ‘retail crisis’ affecting our high streets:

  • A squeeze in incomes
  • The shift to online shopping
  • Changing consumer tastes
  • Rising overheads
  • High debt
  • Too many shops

Firstly, Debenhams has not successfully adapted its business model in line with market forces; more specifically, the firm has been slow to adapt its strategy to take full advantage of online consumers. Also, like M&S, although the Debenhams brand is well known, much of the organisation’s issues are attributable to the brand itself. Fundamentally, Debenhams has failed to establish a clear brand proposition for its customers. From a strategic perspective, like M&S, Debenhams has been struggling with strategic drift, which refers to the gradual deterioration of competitiveness due to failing to acknowledge and respond to the changes required in a business environment.

The next point to raise concerns its growth; in 2006 the firm pursued an aggressive growth strategy but this is quite a dangerous pursuit if the firm is unaware of changing consumer tastes and trends. Expansion comes with cost, and to cope with the investment in new stores, firms often reduce prices to entice customers and boost revenues. However, when firms do this repeatedly, it harms the longer-term prospects of the business as customers will snub ‘full price’ items and hold out for discounts or a sale. Overall, Debenhams’s expansion brought rising overheads and high levels of debt, which was compounded by the revaluation of business rates in 2017, which reportedly increased the average department store’s business rate to a huge £642,852.

After recently going into administration, Debenhams has already received some offers. Mr Ashley, who owns Sports Direct, put forward a £200 million rescue offer from Sports Direct, which was primarily rejected due to Mr Ashley’s demand to be installed as chief executive officer. While Debenhams would undoubtedly benefit from the injection of cash, it would also contribute to Mr Ashley’s dominance in the UK market, as only last year he conducted a £90 million buyout of House of Fraser. Regardless of who takes the helm at Debenhams, a cash injection is not enough. Rather the business model must adapt in order to address the industry challenges aforementioned in this blog.


This blog was originally posted on City REDI Blog

2 thoughts on “The Retail Crisis Catches Up with Debenhams”

  1. This article misses one of the most significant issues and route cause which was the leveraged buy out by private equity which loaded the company with the debt in the first place and forced cut backs on investments like store refurbishments to increase profits in short term to pay back dividends to the investors. TPG paid 1.8 billion in 2003 1.2 billion was debt they then sold off assets and slashed store refurbishments to increase short term profits. This is the common link with most large retail firms getting into trouble but seems to be missed in reporting of the demise of retail.

  2. You’ve missed out one of the key factors in the Debenham’s administration, and that’s the exorbitantly long leases the previous PE owners entered into. These locked them into 20 year plus leases, upwards only rent reviews, at rents that were well above current market rents. They entered into these leases because landlords gave them upfront cash incentives, which were pocketed long ago. Not owning stores means you cannot exit unprofitable stores without incurring huge expense.

    Of course, high interest payments compounds this problem, and left the firm struggling to pay all its fixed charges when profits declined. The icing on the cake of mismanagement is the huge pension deficit, which became yet another unwelcome drain on their declining cashflows.

    For a comparison about how a fellow struggling retailer / brand has been able to navigate the structural challenges in the industry with more agility because of their stronger financial position, look at Superdry. No debt (in fact they have net cash on the balance sheet), and shorter leases. Pretty much all their leases are in the 5-7 year range. They can exit unprofitable stores in the foreseeable future.

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