There is a UK high street retailer that is relishing the credit crunch and is positively thriving in economic uncertainty. Honest.
If you don’t believe us, ask Giles David, CFO of home furnishing and electrical rental business Brighthouse. Receiving TVs and washing machines on HP is booming and its story is in stark contrast to those of the long list of well-known businesses entering insolvency, most recently fashion shoe retailer Base.
While HP has proved controversial because of the perception that the less wealthy end up paying inflated prices in the long term for goods, it works because renting involves significantly less risk for the consumer in comparison to taking out a loan. Even professionals are taking advantage of the opportunity to rent the latest mega TVs.
Avoiding the debt trap
‘The core of the proposition is almost unique in the high street as the key for customers is the ability to return goods and not get into a debt trap. When they sign a contract with us they can at any stage return the product,’ says David.
On the issue of consumers paying hugely inflated fees for renting the goods and warranty services, David insists the retailer is competitive: ‘We protect their payments if they need to take a break from making payments essentially protecting the equity they’ve built up. We have a large element of second-hand products coming back into the company, which drives the cost up, but we look at our total pricing on a comparable basis to the rest of the high street so we look at our cash price to make sure it’s competitive, including APR, delivery charges, optional service cover, and we come out roughly at the same purchase cost.’
As David points out, the crucial difference is under standard credit terms you don’t have the opportunity to opt out. Far from being an objectionable model, the company relies on customer loyalty, and the managers across its 155 stores act as underwriters to the deals, getting to know all of their customers on a first-name basis. Customers that default on a payment, rather than taking a big monetary penalty, are instead charged a flat rate £2.70: ‘Customers build a relationship with staff and have the opportunity to build a credit record they wouldn’t necessarily be able to build elsewhere.’
Tough times make the rental model very appealing for customers and the influx of expensive TVs has also helped to revitalise the market, which almost became extinct as the Rumbelows and Radio Rentals brands disappeared from the high street due to falling TV prices and increased availability of credit.
So will a booming economy cause Brighthouse to suffer? It seems possible, as Brighthouse has performed well in the last couple of years, following a period where it struggled under previous management. Yearend 2006/ 2007 saw pre-tax profits leap to £12.5m from £7m a year earlier following a 10% growth in sales to £129m. But David disagrees, believing the market has plenty of room for growth and Brighthouse is far from nearing its peak.
‘We’re benefiting from more customers looking to buy via HP. There’s no doubt the credit crunch would almost certainly send us more customers than less, but I think it’s probably a small element in our performance compared to us just being competitive.’
Market penetration around Brighthouse stores is only at 10%, he believes, and the business could potentially push up to 400 stores in the future. While this suggests that the market is ripe for a new entrant, David says that a competitor would face big hurdles to a successful entry.
The main issue would be investment in products: ‘Customers walk in and take on a £1,000 TV, handing us just £20. It’s not easy to replicate our type of business, and requires a significant amount of investment. They would need a long term view and good quality staff who are more sophisticated than standard store managers.’
Another important part of Brighthouse’s model is servicing products in-house and reselling them when they have been handed back by customers: ‘You can’t underestimate the complexity of taking back products from customers. We have to either throw it away or refurbish.’ Brighthouse refurbishes 90% of the returned products in, as ‘very little is beyond economic repair’.
In at the deep end
David left O2 as UK head of finance to join the business in 2006 as part of a management spruce-up by its then owners Terra Firma. Within months, David, who had leant towards commercially-focused FD roles, was facing his first foray into a complete refinancing and sale of a business. As part of that process he took Treasury exams and then hired in due diligence expertise to run the rule over the business.
KPMG provided financial due diligence, legal by Slaughter & May and commercial by OC&C. A dualtrack process was implemented towards a float and a sale. Work started in December 2006 and Vision Capital bought the business without a float in July 2007. Refinancing was competed with Landsbanki, in which the timing of the deal was ‘impeccable’. While Brighthouse’s custom is boosted by the credit crunch, it could have proved disastrous for the business as the refinancing was completed weeks before the sub-prime lending collapse in the US emerged.
‘We got it away at the nick of time, I think.’
The new loan facility has headroom to help grow the business with 20 stores planned over the next year, and any sign of problems in the market can be offset by reining back on stock levels and relying on cash generation from the existing loan book. As store managers are responsible for the day-to-day business of handling customers, they also take responsibility for arrears management.
The finance function only steps in on rare occasions. One part supports retail while the other focuses on the buying and servicing parts of the business. Above these departments, which each has a finance boss, sits a financial controller, leaving David to ‘get out into the business’.
‘My role has changed more and more,’ he explains: ‘Those three individuals take responsibility for supporting their customers the directors and running the finance function day to day. My role is more to get out into the business and bring back insights and challenges.’
David says he is ‘not a great technical accountant’, but qualifying with CIMA was critical in helping him run a commercial business.
‘I think the auditing background and strength you get from chartered accountancy is very useful but in many ways you get that by hiring in. You can buy in that skill, so the critical thing was, can you run a commercial business? CIMA has an edge in that, I’d suggest.’
While pleased with his choice of qualification, things haven’t always gone smoothly. He admits he had ‘tough times’ at Marks & Spencer Direct, where there were concerns that the mail-order business could damage in-store sales. He also served as FD of Energis during its period in administration: ‘It’s when you learn the most,’ says a philosophical David.
Not so much regret, but more advice for budding finance professionals, David advises fearlessness when considering a move to a small business early on in a career: ‘I was in multi-billon pound businesses until the age of 38, but the quality of education and experience I’ve had in last two years as FD of a smaller business, well you learn a lot more much quickly.’
Credit crunch sufferers
The high street has suffered a series of retail failures in the past few years. From clothing chains to pubs, every type of merchant has taken a pasting, changing the shopping landscape forever.
Menswear business Base, originally founded in 1906, went into administration last week, putting 100 jobs and its 21 shops at risk. Pub chain SFI, which operated under Slug & Lettuce branding, collapsed. The 50-store clothing business Ciro Citterio closed down after years in and out of administration. Music retailers have also been hit hard from the internet music downloading phenomenon. Fopp, Music Zone and MVC have disappeared. Allders collapsed, leaving just its famous Croydon flagship store wearing the livery.
A benign economy has become more turbulent, and while insolvency figures show no increase in business insolvencies, experts believe that these numbers can only go up as the credit crunch bites.
‘The effects of the summer’s credit crunch are beginning to be felt by consumers as we are now seeing downward pressure on housing prices and tighter credit terms, leading to a reduction in discretionary spend,’ explains Lee Manning, reorganisation services partner at Deloitte.
‘We are entering a more demanding credit phase where the prospects of solvent rescue will be reduced.’
