Again, let's apply the 3 L's approach, with a quick visit to a PESTLE analysis, to a story involving a company falling into administration and a potential rescue attempt involving an acquisition.
Headline: Catching a Fallen Angel: M&S and Next eyeing up Victoria’s Secret UK arm.
Main sources: https://www.littlelaw.co.uk/2020/07/05/catching-a-fallen-angel-ms-and-next-eyeing-up-victorias-secret-uk-arm/ (dated 5th July 2020); https://www.littlelaw.co.uk/2020/06/29/shhthe-secret-is-out-victorias-secret-uk-arm-goes-into-administration/ (dated 29th June 2020)
Look out:
The UK arm of the American clothing, lingerie and beauty retailer Victoria's Secret (VS) fell into administration on 5th June 2020. The move has put hundreds of jobs at risk and has potentially jeopardised the long term position of its UK operation. The company has 25 stores in the UK in cities such as Birmingham, Manchester, Cardiff and 5 in London.
The COVID-19 pandemic has hit the UK retail industry hard! Retailers deemed "non-essential" by the UK government, such as VS, were forced to close during the lockdown period. As a result, many retailers are either going into administration, becoming insolvent, or posting worrying pictures of their current position in their market and in the industry as a whole. Though now that lockdown restrictions are starting to ease, these retailers are now allowed to reopen with social distancing measures in place for shopper safety.
Following VS falling into administration, Marks and Spencer (M&S) and Next are competing to take control of VS's UK operations.
The Competition and Markets Authority (CMA) is the non-ministerial government department tasked with strengthening business competition and preventing and reducing anti-competitive activities. It is likely that they will take an interest in this potential acquisition so as to ensure there will be healthy competition in the market.
Look in:
VS took advantage of the UK Coronavirus Job Retention Scheme (the furlough scheme) and placed hundreds of employees on furlough leave.
The company called in Deloitte as administrators to try and save the business. Deloitte is "reviewing a range of possible outcomes" with regards to the company's future.
Now that UK retailers are allowed to reopen with extra shopper safety measures in place (a limit on the number of shoppers in-store at one time, extra sanitation stations for shoppers, an increase in cleaning by staff, one way systems in some retailers), investment into high-profile brands such as VS can help to boost confidence in profitable markets and help to broaden consumer access to these brands that may otherwise have appeared to have been out of reach for some. VS looking for a buyer will mean its products and the brand can be seen as much more visible and accessible to even more consumers.
If M&S acquires VS, it can access a younger consumer base in line with its strategy of increasing sales through "complementary guest brands to broaden appeal and increase online growth". M&S clothing has tended to appeal to middle-aged and older shoppers (with The Guardian describing its clothing line as "frumpy") (1) so along with its move to shed that reputation by introducing athleisure wear, it can broaden its appeal across age demographics with this acquisition of a "trendy" brand such as VS.
If Next acquires VS, it will be able to add the products and assets to its already impressive catalogue of brands as part of its collection that appeals to younger demographics. These brands include Abercrombie & Fitch, Hugo Boss, Calvin Klein, Superdry, Lipsy, Hollister and many others. Next is in a very good position due to its success at selling these 3rd-party branded products with a wider consumer appeal.
Law firm involvement:
Here there is a potential acquisition being talked about with M&S and Next competing to acquire the UK arm of VS. The acquiring business would be taking on VS's assets, its brand and image, and quite possibly its existing and future obligations and liabilities (payments to its creditors and entities it owes money to or that it has entered into a contract with for any future purchases of stock or materials).
The administration is being described as "light touch" because VS can continue to trade whilst it finds a buyer or tried to renegotiate rents for its premises (2). The next step along this path, should continuing to trade not be viable any more, may involve a Company Voluntary Agreement (CVA). This will need to be discussed and put together with the input of an insolvency practitioner (this may be an insolvency firm, a lawyer working in the insolvency team of a firm, or an accountancy firm or individual accountant) and presented to creditors who would then sign off on it.
M&S commands 27% of the UK's lingerie market share, 36% of which is bras alone (3). If M&S were to win the race, there may be some competition issues arising due to its very favourable presence in the lingerie market. If it acquires VS, that share would increase even more so and potentially create a situation where, because of its large command of the market, competitior brands such as Ann Summers and Boux Avenue see their shares of the market fall in comparison. thereby creating a monopoly of the lingerie market. Competition lawyers would be involved here to advise M&S on potential issues that may arise if it does acquire VS.
If most of the share of the lingerie market is taken by M&S, then other competitors may be prevented from entering that market, and M&S is free to either set its own prices due to it having all but total control of the market, or price competitors out of the market due to it being able to buy huge amounts of inventory at a volume discount (economies of scale). Therefore the CMA will look to try and avoid any one company from monopolising the market so as to create healthy competition.
If the end result is that VS is to be acquired as a "going concern" (ie as a business that is still operating and making a profit), then following the required due diligence, the Mergers and Acquisitions (M&A), Intellectual Property (IP), finance, competition and tax departments of instructed law firms would get involved to see the acquisition of through, regardless of the successful buyer.
Employment lawyers will likely get involved too. The transfer of one business to another may raise TUPE issues, so lawyers will need to advise the acquiring business (either M&S or Next) regarding preserving the continuity of VS staff's employment, particularly as staff often need at least 2 years continuous service to be eligible for some specific employment rights, any redundancies that the acquiring business may look to make, and if the acquiring business wants to bring VS staff onto their own terms and conditions of employment (harmonisation).
If the end result is that VS is able to renegotiate its rents, then the real estate and corporate departments will get involved. This transactional work will involve all parties coming together to recognise and understand positions and work to create a longer-term plan for VS to continue in their current premises. I think this would depend on their behaviour as a tenant pre-pandemic, as well as agreeing what risk and reward can be shared and recognising the value that the brand brings to the high street as a whole. Transactional lawyers being very entrepreneurial by nature might also be able to suggest a different plan altogether, such as offering a share in the business to landlords instead of repayment of rents in the short term whilst we navigate our way through this pandemic and economic downturn?
From VS's perspective, their main goal is to create a desirable long-term image. VS has drawn criticism that the image was outdated, sexist and lacked diversity. This was evident after the cancellation of its annual fashion show in 2019. It was then that its parent company L Brands said it was important to evolve its marketing strategy at the time.
Following this, let's do a quick PESTLE analysis?
POLITICAL
The UK went into lockdown in mid-March 2020, and the government mandated all non-essential stores to close.
Lockdown restrictions are now easing and stores are able to open up again but with added safety measures in place including social distancing, the advice to wear masks in enclosed spaces, limiting the number of shoppers inside, more cleaning in-store.
The UK Chancellor of the Exchequer Rishi Sunak is deciding whether to go ahead with a voucher scheme to reignite the economic recovery from the pandemic. It is proposed this money is to be used at hospitality outlets and on the high street, where VS is positioned.
ECONOMIC
Economic activity in the UK retail industry decreased by 90% in April at the height of the pandemic and many businesses have only just been allowed to reopen
Shares in VS's parent company L Brands decreased significantly in value as a result of the stay at home order in many states in the US. In the UK the share price has fluctuated wildly since March as a result of the UK wide lockdown.
The above is going to affect clients' faith in the business, which in turn will affect revenue.
SOCIO-CULTURAL
VS has long been perceived by consumers as a premium clothing and lingerie company. When we think of the company name we immediately think of highly revealing and provocative underwear sets and clothing showcased by modelesque women.
However in recent years due to increased activism and a demand for greater diversity in fashion and beauty, the brand image has become outdated and jaded and seen as sexist and lacking in diversity. This is in comparison to the competing brand Savage X Fenty, the lingerie line by singer, songwriter, actress and businesswoman Rihanna, which champions diversity in race, gender identity and body type/size.
The cultural shift in demand to bring renowned brands up to date to reflect the values of gender equality, sustainability and diversity that appeal to today's shoppers means VS will need to overhaul its marketing strategy and brand so that it can appeal to a much wider consumer base and therefore be saved. More and more brands are recognising this and adapting to the change in culture and demand bought on by the millennial and Gen Z generations, who are now VS's main target customers (4).
TECHNOLOGICAL
VS sells its products online as well as in-store, but if it is acquired by either M&S or Next then any continuing traffic that looks to visit the .com/gb page will likely be either redirected to the brand page on the M&S or Next website automatically, or signposted there with a notice on the still-existent .com/gb page.
The acquiring company will need to ensure there is enough virtual storage for the visual content that it will need to store in order to showcase the VS branded products on its own site. Image files, ie jpg, png files, require more storage space than simple text files.
It makes sense to ensure that the stock image files are included in the assets acquired from VS should the business indeed be acquired.
LEGAL
In a transfer of business, there will be staff transferred as well. So the acquiring company must ensure it complies with the TUPE Regulations or both companies will incur penalties owed to the affected employees.
If assets are acquired by either M&S or Next, would they also acquire VS's liabilities? This will depend on what is in the contracts that VS has with its creditors, suppliers, couriers etc
If VS does ultimately become insolvent and a CVA is agreed to, then compliance with Insolvency Act 1986 is necessary
ENVIRONMENTAL
Earlier this year, hundreds of VS bras were reportedly found discarded in a bin close to a recently closed store in Colorado (5). This comes at a time when the fashion industry as a whole is under fire for the amount of waste it produces.
A study in 2018 showed that VS is "not doing enough" to be a truly ethical company for the planet and for its people (6)
M&S champions its Plan A campaign for "building a sustainable future by being a business that enables our customers to have a positive impact on wellbeing, communities and the planet through all that we do" - 2020 progress can be viewed online (7). This is a big part of M&S's brand as it moves into the future and establishes its place as an environmentally-and community-friendly British retailer.
Next is also working towards its sustainability and environmental targets, though does not appear to be promoting this as much as M&S who have created an entire campaign on the goal.
In the UK, a business can claim capital allowances when it buys energy-efficient, or low or zero-carbon technology for the business, thereby reducing the amount of tax payable.
Added learning:
Furlough leave means an employee is put onto a temporary leave of absence because the business is not able to operate at the same capacity due to dire economic conditions (ie the COVID-19 pandemic). It differs from redundancy because a) employees are kept on the company's payroll and will still receive some payment subsidised by the UK government (80% of their monthly paycheck), and b) because there is the notion that there will be a job to come back to after the economic conditions improve.
Whilst an employee is on furlough, they are not allowed to do work for their employer or another company without the prior express (usually written) permission of their employer. Though if the employee wants to do voluntary work, for example as an NHS volunteer responder, then this would typically be permitted without the need for employer permission as you would not be providing services to your employer or making your employer any profit.
The new "flexible furlough scheme" started on 1st July 2020. Under this scheme, employers can bring employees back to work on a part-time basis, whilst the UK government will continue to pay 80% of salaries for the hours that those employees do not work.
Be safe and be well! :)
P
Credit: Cover image photo by Markus Spiske on Unsplash
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