6one5Retail Consulting founder Bill Rooney offers his opinion on The PAS Group administration.
There are lessons to learn from The PAS Group demise.
COVID-19 may be the reason for the appointment of PwC partners Stephen Longley, David McEvoy and Martin Ford as voluntary administrators of the group on May 29.
However, it has been a long time coming with deteriorating results over many years.
The cause of the administration is due to a number of moving parts in the industry, from soaring overhead costs to changes in wholesale, retail and eCommerce.
My research of the trading results of publicly listed Australian fashion companies over the last four years - representing 25% of the total industry - shows sales and margin decline after allowing for inflation of between 8.5% and 9.4%.
This decline plus COVID-19 will push many retailers into administration, including many privately owned retailers.
Here is my analysis of the business:
- The company has promoted a strategy of diversification. In other words “do not have all your eggs in one basket”. It operates 225 stores, a wholesale division, a licensed brands business and produces private label garments for a range of department stores. This diversification did not work, especially when some of its key brands were in decline. For example, average store sales for Review were $606,000 in 2019 which is 10% less than four years ago. The focus should have been on differentiation rather than diversification on brands with upside.
- Wages are a key consideration. Wholesale, head office and executive wages are estimated at $30m, which is excessive by about $10m to $15m in my opinion.
- Its Black Pepper brand is on the wrong side of demographic changes and should have been sold or downsized. With average store sales of $429,000 it’s hard to see this business being profitable based on cost of rent and wages.
The times have changed.
When retail executives ask me what has changed my answer is: “If I was starting a retail business today or if I had 100/200 stores and was wanting to transform my business into a digital retailer in Australia, it would be 40 stores (this is the number of A Class malls and precincts in Australia), a minimum 30% to 40% eCommerce and I would run the business very lean.”
So, what can we learn from The PAS Group that can be applied to the rest of the industry?
- The Board should have acted decisively to appoint executives with a strategy to transform the business. The dilemma for many retailers not publicly listed is that the owners are the executives in the business. So when the business is in decline, they find it hard to change and can be defensive when the traditional retail model that has generated past success is challenged.
- One of the biggest mistakes that are made by management teams and boards is to appoint executives and consultants on the basis of past successes in legacy retailers. This makes them feel comfortable, however they do not add a lot of value in transforming the business to digital. Transformation and new digital retail require a completely different skill set.
- Be decisive. The business had many options to transform itself. However, it rambled along tinkering at the edges with tactical initiatives that would never produce dramatic improvement. What it did produce was a level of comfort, complacency and the appearance of slow progress forward but little in the way of meaningful change or outcomes.
- Cut Costs. Whatever we say about the role of traditional retail and how it can survive and thrive in a post-digital world, so much comes down to fixed costs. Retailers must remember that staffing levels and budgets so often owe much more to the way that inflated revenues once made them affordable, rather than what is actually required. A case in point is the estimated $30m + in wages at The PAS Group head office. Digitising the workforce and processes has the benefit of improving productivity while cutting costs.
- Live by the numbers: Sales, Margin, Rent %, Wage %, eCommerce growth and %, Stock turns, Customer visits, conversion rates and so on. The PAS Group ignored the numbers and paid the price. Next year doesn’t cut it.
There is no going back to the old ways.
COVID-19 has burnt that bridge, the options are limited. Here are some decisions retailers are making:
▪ Transforming to a new digital retail structure, that’s an exciting prospect! But be careful. There are many traditional retailers which feel they are on this path and are not.
▪ Selling the business. You will be surprised how many traditional retailers have the feelers out to sell their business. There will be no joy there or goodwill for that matter, on my calculation. If you net 50% of the cost value of the stock after expenses, you will be doing well.
▪ Administration can seem an easy option, allowing you to negotiate with landlords and restructure. However, it comes with a hefty cost of redundancies, unpaid key suppliers, administrators costs and loss of control of the sales process. In the USA around 50% of retailers who go into Chapter 11 (our equivalent to administration) do not survive.
So how could The PAS Group have avoided administration?
▪ It could have moved early to change the leadership when they did not produce the results.
▪ It could have developed a new retail strategy (not a traditional legacy retail one) with experts that challenge the Board's views and be able to clearly communicate the future of retail.
▪ It could have taken risks. Small incremental change that gives the illusion of progress, however never produces results? Well, tinkering and not creating meaningful change served up an administration. The issues in the group were obvious Review and Black Pepper were in decline and the group was weighted down by an inflated head office cost structure.
▪ Living by the numbers – they don’t lie.
Ultimately the business failed many years ago, COVID-19 just pushed it “over the cliff”. In my opinion, with the right changes, it did not have to end this way.