Debenhams Bankruptcy: Private Equity Ownership

How did the previous private equity owners of Debenhams run the business?

Part of the whole strategy of the private equity owners of Debenhams was to drive cash flow they renegotiated the payment days. The payment days in Debenhams at the high were 120 days but I think they're falling now. Clearly that's going to cost suppliers to finance and they then start to jack up their costs. You get into this vicious circle whereby your cost base is going up and you're starting to find that you're then putting pressure on your selling prices and you stop becoming competitive. That's part of the Debenhams problem. They start increasing selling prices and therefore they need to promote more to drive sell-through and you get into this really vicious circle of ever-increasing cost price, ever-increasing selling price, more promotion activity, more pressure on margin. That is quite typical. To them because they're very own-label focused business unlike House of Fraser, it's particularly exaggerated and the real problem for them. Yes, I think that that is one very good example of where there's been a focus on trying to drive down or look at cost. Your margin is forever on deterioration.

This all stemmed from the time of Debenham's under PE ownership?

Yes, it's coming from the PE time, and what you then found post private equity because there is relatively little money to invest there is still this desire to drive cash flow and to maybe try and do something better because you then got a need to become more sophisticated in things like Internet and omnichannel shopping. You're still in this world trying to drive cash flow plus all your like for like sales are built on the foundation of promotion activity. Unless you do something very different with product, the only lever you have got is promotion on price.

In that period then since the PE ownership as the days payables went from 30 to 120 days. Did we see a shift in the sourcing based at the Far East and did this not approve landed cost?

Yes, you did, you've seen a movement from, let's call it a supply base, China, Europe include the likes of Bangladesh, then you really are then competing with Primark and all the value players but it's absolutely a change in the sourcing

How did that impact the margin profile?

On apparel, if you move from China to Bangladesh you're going to get between 2 to 300 basis points improved into margin at a minimum.