The Global Economic Impact of Private Equity Report 2008 - World ...

By the end of 2000, official figures indicated the Britisheconomy had been in the most sustained period of lowinflation since the Great Depression. For retailers, pricedeflation, especially in sectors such as shoes and clothes,had come at a time when UK retailers’ margins were alreadybeing squeezed. Globalization was the watchword forretailers, who, with saturated domestic markets and needfor growth, continued to globalize through mergers andacquisitions, franchising, and catalogue and the internet.Global shortages of real estate to build stores – especiallywith increasing restrictions in Western Europe – were alsothought to play a role in the retail sector’s increased mergeractivity. Catalogue and mail‐order shopping also continuedto grow, comprising 4% of total retail sales in 2000, makingthe UK the third‐largest catalogue market, behind theUS and Germany. 2Finally, brands had become an increasingly important aspectof the shopping experience. Research indicated that brandshad grown in importance in determining what people buy.Consumers were more likely to make purchases to satisfytheir “wants” as opposed to their “needs”. 3From 2000 to 2002 retail trends faced increasing pressurein the face of a global economic slowdown, fuelled by arecession, a bursting internet bubble and terrorist attacks.By 2002, most analysts worried consumers had snappedtheir wallets firmly shut throughout the Eurozone. Two slowChristmas seasons in a row continued to impact performanceand by 2003 retailers were regularly discounting clothing earlierin the season in the hopes of getting some lift in their sales.The economic slowdown throughout the retail sectorcontinued to put downward pressure on sales, and withinterest rates rising by late 2003, many predicted conditionsto get worse. Most warned that the UK’s protractedconsumer boom was coming to an end, and a rash ofmergers and acquisitions activity in the sector seemed toconfirm the market’s uncertainty. 4 Department storesSelfridges and Allders, as well as fashion retailer ArcadiaGroup, succumbed to takeover bids. 5History of a Fashion Retailer:New Look (1969–2003)In 1969, Tom Singh opened the first New Look store inTaunton, England. New Look was conceived as a “highstreet” retail store, offering fashion for less to young andadult women. Its product focus included clothing, lingerie,and shoes. New Look’s premise leveraged short supplychainlead times, proposing to bring new fashion lines fromthe drawing board to the racks in two weeks, refreshing styleranges regularly. Growth was limited to the UK in the earlyyears, but by 1988, New Look had gained a significant profilenationally and crossed the Channel, opening stores inFrance. By 1990, it had a total of 70 stores. By 1994, thathad increased to 200. In 1995 the company launchedstores in Scotland as well as their own in‐house brand 915,a casual girl’s wear line. 6Singh’s first attempt to take the company public, in 1994,failed. Concerns over having so much of his family’s wealthtied up in one business so closely linked to the cyclical andunpredictable nature of the fashion world prompted Singh todisperse his holdings: “I did not want to have all my eggs inone basket,” he recalled. In 1996, two private equityinvestors, Prudential Venture Managers and BZW PrivateEquity, acquired a 75% stake in New Look and two yearslater in 1998 New Look was listed on the London stockexchange. Pre‐tax profits in 1998 were £38.9 million(a 53‐week year), and the company had 409 storesacross the UK and 31 in continental Europe. 7From 1998 to 2001 the UK clothing market experienceda slowdown, and the chain’s share price hit a low of 50pin March 2001 (the June 1998 IPO price had been 168.5p;see Exhibit 1 and Exhibit 2 for New Look’s share pricedevelopment between 1998 and 2004). The clothing markethad witnessed an intensely competitive period during thistime. Analysts worried New Look had “drifted away” fromits staple customer – the fashion oriented 20 to 45‐year‐oldwoman, with about 50% of New Look’s customer base over25 – with its move towards a younger demographic:teenagers. Intended to expand the stores’ customer base,analysts felt this shift had in fact alienated the brand’s corecustomer base, which found it “hard to buy anything theywanted amid the confusion of the small cramped storesselling product ranging from lifestyle and homeware productto skimpy tops”. 8Stores were increasingly cramped, and in need ofrefurbishment. The company had extended into lifestyleproducts, such as candles and pillows, which some believedmade stores seem cluttered and distracted from the chain’score offering – clothing. Additionally, analysts pointed to thecompany’s poor merchandising offering limited choices, andoverstretched logistics function. The 480 stores nationwidewere still serviced by a distribution centre in Weymouth in thesouth of England, making timely and efficient delivery acrossthe chain’s network challenging.In 2001, much of the public market’s criticism focused onNew Look’s store size and its expansion into France. Over70% of the chain’s space was accounted for by stores under4,000 square feet and average store size was 2,000 square2Tim Dixon and Andrew Marston, “The unpace of e-commerce on retail real estate in the UK”, Journal of Real Estate Portfolio Magazine,1 May 2002, (2002), vol. 8, no 2, p153.3The authors cite Jones Lang LaSalle (2000), see Dixon and Marston (2002).4Laura Board, “New Look founder may exit,” Daily Deal, 14 July 2003.5Laura Board, “New Look founder may exit”, Daily Deal, 14 July 2003.6http://www.newlook.co.uk/, accessed 2 December 2007.7“Oh Lucky Jim – Growth still to come”, SG Equity Research, 13 November 1998.8Gillian Hilditch, Michael Morris, Matthew Sparkhall-Brown and Ed Steele, “New Look. Still in Fashion”, HSBC, 11 April 2002.104 Case studies: New LookThe Global Economic Impact of Private Equity Report 2008