The Chinese company behind House of Fraser will inject £15m into the department store chain this week as part of a plan to allay concerns about the 169-year-old firm’s financial health.
The retailer, which employs 6,000, has been under the spotlight over fears it could become the next victim of torrid trading conditions for the UK retail sector that have already claimed well-known high street names such as Toys R Us and Maplins this year.
It is trying to slash the floorspace of its 59-strong store chain by 30% and reduce its rent bill after dismal Christmas trading figures, while its bank lenders have hired accountancy EY to review the firm’s finances. The chain has also held talks with Alteri – a turnaround firm that specialises in struggling retailers – fuelling speculation that is looking to refinance its £400m debts.
House of Fraser has since protested that it only agreed to a meeting at Alteri’s request and could not have sought fresh finance in any case, given the terms of its existing loans.
Next chief calls 2017 ‘toughest in 25 years’ as profits slide by 8%
The picture has been further complicated by suggestions that China’s Sanpower, which owns 89% of the company, is seeking to offload the majority of its stake to fellow Chinese leisure firm Wuji Wenhua.
But the Guardian understands that Sanpower, which bought House of Fraser in 2014 in a deal worth £450m, will reaffirm its commitment to the business, starting with a £15m cash injection as soon as this week.
The Sanpower chairman, Yuan Yafei, reassured the trade minister, Dr Liam Fox, that he wants to own House of Fraser for the long term, in a discussion last Friday at Hong Kong’s Great Festival of Innovation.
The entrepreneur, who started his business in 1993 with $2,000 (£1,415) and is now worth an estimated $12bn, is thought to have promised further investment, coupled with a wider overhaul and modernisation of the company and House of Fraser brand.
A spokesperson for Sanpower confirmed that Yafei will inject more money into House of Fraser via Nanjing Cenbest, Sanpower’s Shanghai-listed subsidiary.
“We at Sanpower continue to support House of Fraser as it embarks on a year of significant transformation in 2018,” he said. “Sanpower, through the listed company, has invested £45m in House of Fraser and plans to inject further capital.”
With the money on its way, the chief executive, Alex Williamson, wrote to House of Fraser’s suppliers on Monday to say that the company was continuing with business as usual.
The long-term puzzle for Sanpower is that business as usual is not exactly a high bar, at least not lately. After buying House of Fraser four years ago, Yafei laid out ambitious plansto create an international retailer with 50 Chinese stores.
Today it has just two Chinese outlets, while its main UK operation is feeling the pinch from flagging revenues and cripplingly high costs.
“They’ve got too much space, inflexible leases, upward-only rent reviews and are also facing pressure from the national living wage,” said Richard Lim, the chief executive of Retail Economics.
“It’s all putting significant cost pressures on operating their stores, so operating costs are up 3% year on year, which outstrips the sales rise.”
Lim said rising costs had been accompanied by weak consumer spending as real wages have stagnated or fallen, due to the rise in inflation sparked by the fall in the value of the pound after the Brexit vote.
“One of the biggest issues around inflation is that it’s mainly coming from food, transport and housing costs,” he said.
“If you take those three components, that takes up about 50% of the least affluent households’ expenditure and it’s non-discretionary.
“People are worried about Brexit, about personal finances, about job security, so they’re holding back on purchasing non-essential items.”
One way retailers have stripped out costs is to migrate sales to the web, where overheads are far lower.
But House of Fraser has struggled to wean itself off traditional bricks-and-mortar stores, largely because it is saddled with expensive and lengthy leases signed decades ago, when it seemed large retailers could never have too much floorspace.
The business is now asking its landlords for help to reduce its £140m-a-year rent bill.
David Fox, the head of retail agency at real estate group Colliers, said: “When you have surplus space that still costs you money it’s just a drain on resources.
“I’m guessing they’ll be exploring options to release space and come up with an economic answer.”
He said House of Fraser could look to bring in other businesses to help share the cost of floorspace, pointing to steps taken by struggling rival Debenhams, which has rented space to gyms and a hot-desking firm.
But Fox warned that if landlords could not find tenants willing to match the generous rents House of Fraser is paying, the chain will have to make up the difference.
Lim pointed to House of Fraser’s difficulties in relaunching its website as another factor in its recent poor performance. He said the issues were behind poor Christmas sales figures, when store sales were down 2.9% but online revenues plunged 7.5%.
“We estimate online is about 18% of total retail spending and they’ve had quite a lot of difficulty in implementing a new online platform last year. They invested a lot of money but it didn’t go very well and there were lots of problems with it.”
House of Fraser’s website woes are thought to have been ironed out now but pressure on margins remains, prompting the company to sell £30m of brands, identify £16m in cost savings and invest £10m in more up-to-date warehouse technology.