While retailers faced severe challenges from high inflation, VAT increases, and weak consumer spending, some strategies were working well. Certain online retailers focusing on technological innovation, such as kiddicare.com, were experiencing major growth. Meanwhile, private equity money remained available for investment in the retail sector. However, economic conditions continued to hamper the recovery, with many retail respondents believing financing conditions would deteriorate or remain static over the next year.

1. Retail:
The finance flow
Will money start moving in 2011?

2. Foreword
The retail industry is central to the UK’s economy: it employs in the
region of 2.9 million people – 11% of the total UK workforce – and in
2010 UK retail sales stood at over £293 billion. Yet it is clearly facing
severe challenges at the moment.
Although the high street has been struggling for some time, the news keeps getting
worse, with many retailers recently reporting their worst months on record.
The pressures being created by high inflation - particularly in relation to commodity
prices - and the rise in VAT and National Insurance contributions have really come
through with full force during the spring of 2011, and have materially impacted upon
consumer spending, with retailers suffering as a result. According to the latest figures
from the British Retail Consortium, UK retail sales values for May 2011 were
2.1% down on a like-for-like basis compared with the same month a year earlier.
In particular, food sales slowed dramatically, though other areas such as clothing,
footwear and homewares also suffered.
Furthermore, it looks unlikely that conditions will improve quickly: the continuing
low interest rates and relative support from the banking sector are still masking a lot
of the fundamental structural issues retailers are facing, primarily the significant
over-capacity on the high street. As a result, banks will continue to be cautious when
it comes to providing funding, especially where new facilities and new relationships
are concerned.
But it is not all doom and gloom. Certain strategies, especially those focusing on
the online space and those where there are elements of technological innovation,
are working well, and the banks and specialised retail lenders, though cautious,
will back the businesses with the most robust propositions. There is also significant
private equity money available for investment in the sector.
Although there are certainly stormy times ahead for many in the retail space, strong
support from the advisory community and sensible strategic planning should help
retail businesses plot a course through the turbulence until calmer conditions prevail.
Barry Knight
Head of Retail
Grant Thornton UK LLP
2 Retail

3. About the survey
During the first quarter of 2011, Remark, the research and publications arm of the
Mergermarket Group, carried out a third major survey of mid-market opinion on
behalf of Grant Thornton. On this occasion, 200 CEOs and CFOs of UK businesses
with turnovers in the £25-250 million range were surveyed. All answers were treated
confidentially and have been reported in aggregate. The statistics relating to the retail
sector are drawn from a meaningful proportion of this national sample.
Contents
Foreword 2
Business outlook
Economic conditions hamper recovery 4
Some optimism 6
Funding and strategy
Poor access to capital 8
Specialist lending issues 10
Few big failures 12
Strategies to counter the downturn 14
Closing remarks
In it for the long haul 16
Contact us 17
Retail 3

4. Business outlook
Economic conditions
hamper recovery
Of all the respondents to the national survey of mid-market
businesses carried out during the first quarter of 2011, those
active in the retail sector clearly shared the most gloomy outlook
on the UK economy and the prevailing financing environment.
Overall, almost a quarter of the survey’s in generations had severely impacted
retail respondents believe that the upon trading during the sector’s most
financing environment will deteriorate important period of the year, and this
over the coming year, while a further contributed to the surprise contraction in
30% see no likely improvement (see the overall economic growth figures for
chart 1). What’s more, a full 50% of those the fourth quarter. If one adds to this the
that rated the market as static or declining cumulative effects of the VAT rise and
are not predicting an improvement in inflationary pressure brought about by
conditions until 2013 or beyond, by far the rising cost of fuel and many key
the most pessimistic forecast among all foodstuffs, it is understandable that
the sectors (see chart 2). retailers might not be as sanguine as
Among those retail areas feeling those in other industrial areas. The most
the worst of the effects are businesses recent consumer confidence figures
focusing on the sales of higher value certainly back up this bleak outlook,
items such as cars, furniture and with a sharp decline in the latest figures
carpets, and certain electrical goods. published at the end of May 2011 by the
In contrast, the retailers of essentials – Nielsen Company and the British Retail
ie supermarkets – have fared better, Consortium (BRC).
as have DIY chains.
In many respects this is understandable.
To begin with, immediately prior to the
survey being carried out the worst winter
4 Retail

5. Chart 1 – How do you see the
financing environment developing
in the next 12 months?
Improving
Static
Deteriorating
47%
23%
30%
50%
Chart 2 – If you
selected Static or
Deteriorating, when
do you believe the
environment will
31% become more
favourable?
H2 2011
H1 2012
H2 2012
19% 2013 or later
0%
Retail 5

6. Business outlook
Case study:
kiddicare.com
Today, Peterborough-based kiddicare.com is the UK’s leading specialist online retailer of baby products, though its
origins are firmly in traditional retail, having been founded in 1974 by Neville and Marilyn Wright. In 2000 the
company began its move to online by developing a proprietary technology platform from which to grow its business.
This strategy has led to major growth in recent years – the business has grown by 75% in the past three years alone
– and kiddicare.com now generates over 80% of its £37.5 million turnover online.
In late 2010, when kiddicare.com’s founders decided to seek a succession solution for the business, Grant Thornton’s
Corporate Finance team was mandated to run what became a highly successful and fiercely competitive sale process.
In February 2011, the company and the rights to its highly regarded technology platform were sold to Wm Morrison
Supermarkets plc for £70 million, representing a first step for Morrisons in developing its online business.
According to Tim Hansell, Corporate Finance Director at Grant Thornton: “kiddicare.com is a high quality business
which attracted significant interest from a broad range of strategic trade and private equity buyers, with around
20 indicative bids being received for the business.” Mike Hughes, Corporate Finance Director at Grant Thornton, adds:
“This process has provided further evidence that strategic trade buyers are very definitely back in the retail M&A market.
Businesses such as kiddicare.com, with a strong buyers’ brand name, a scalable technology platform and significant
operating capacity, can expect to continue to be top of buyers shopping lists in the months ahead.
Expert comment:
Stephen Robertson
Director General
British Retail Consortium
Households’ disposable incomes continue to be squeezed
by uncomfortably high inflation and low wage growth,
while uncertainty over the effects of government cuts is
hitting consumers’ sentiment about future finances.
The VAT rise since last year is flattering the sales
figures for most non-food goods, while renewed weakness
in the housing market made life particularly difficult for
retailers selling furniture and household goods. This new
evidence of weak spending shows how important it is to
support this soft patch in the recovery by keeping interest
rates low.
6 Retail

7. Some optimism
Case study:
Lookfantastic.com
Created in 1997 lookfantastic.com
specialises in the sale of salon hair
The statistics coming out of the survey do also show and high-end beauty products for both
men and women, stocking over
some cause for optimism. 12,000 lines in total. However, the
Sussex-based business is no ordinary
47% of respondents believe that the In addition, there was some relief for
e-commerce operation: it emerged
funding environment will improve over the sector during April 2011, when fine
out of the Crown’s Salon Group, a
the next 12 months, while 50% of those weather combined with multiple public
family-owned chain of franchised hair
that rate the short-term prospects as holidays and the ‘feel good factor’ created
salons, which since 1992 has also
static or deteriorating expect some by events such as the Royal wedding
operated a programme to train
improvement in conditions at some point combined to drive retail sales upward.
hairdressers to NVQ Levels 1–3.
during 2012. However, as the BRC has warned,
The programme has trained over
Certainly anecdotal reports suggest this is unlikely to be representative of
2,000 hair stylists to date.
that a number of areas within the retail retail growth trends in the short-term,
And these origins have played an
landscape are faring better than others. which are more likely to be driven by
important part in fuelling the
Online sales in particular are forecast to the negative reactions of consumers
company’s strong growth in the online
grow more significantly than those in the and retailers to developments in the
space. The network of salons across
high street. According to recent figures wider economy.
London, Sussex and Kent – as well
from the BRC, while online, mail-order
as the training programme with its
and phone sales slowed in May of this
strong social responsibility angle –
year, growth was still running 10.4%
had proved attractive to many
above the same month in 2010.
high-end salon and beauty brands and
Similarly, there have been some notable
enabled the business to build up the
success stories among retail businesses
highly-successful online side.
with a high IT element or other areas
In late 2010 the founders of
of innovation.
lookfantastic.com, advised by
Grant Thornton, sold the business to
the rapidly growing retail company
The Hut Group in a deal backed by its
existing private equity investor
Balderton. For the founders, the move
represented an important opportunity
to take lookfantastic.com into a new
phase of growth along as part of an
ambitious and rapidly expanding retail
group. For The Hut Group, the
acquisition dovetailed well with its aim
of penetrating the luxury goods and
health and beauty markets in general,
as well as consolidating its position in
the online retail space.
Retail 7

8. Funding and strategy
Poor access
to capital
One issue that came through clearly from the survey is
that compared to their peers in other sectors, mid-market
retail businesses are facing especially tough conditions
when it comes to accessing bank funding.
In total, 60% of retail respondents rate The extent to which lenders will place
the banks as being more conservative high demands on retail businesses seeking
now than they have been over the past funding is graphically demonstrated by
12-18 months, and a further 13% see Chart 4. Questioned about the main
no change. By comparison, if all sectors focus of banks’ attention, cash flow
are taken into account, less than 40% of remained the key measure, as it had
respondents rate the banks as more across all sectors. However, for retail
conservative. In contrast, only 27% of respondents it is cited in almost every
respondents are seeing any improvement single instance, compared with 66% of
in banks’ appetite to lend (versus 38% responses across the whole sample.
of the whole sample). What is more, the differential between
the whole sample and retail respondents
is uniformly higher across the various
key metrics, from cash flow to business
plans and historical earnings, suggesting
that retail businesses looking to raise
capital are much more likely to have to
tick all the boxes for banks to take notice.
27% Chart 3 – Compared with
60%
the last 12-18 months how
would you describe banks’
current appetite for UK
mid-market lending?
Banks are more conservative
Banks are less conservative
No change
13%
8 Retail

9. Expert comment:
Charles Lamplugh
Lead Relationship Director – Retail
Lloyds Banking Group
Life as a lending banker is not easy at the moment. Trading is very
challenging and many retailers are behind budget. The key for both the
banker and the retailer is communication and, to use the trust that has been
built up through the relationship. We know that businesses will be behind
plan but together we need to work on a revised plan which, if it takes a few
weeks to put together so be it. We want it to be workable as we are all in
this for the long-term.
90%
66%
60%
57%
Chart 4 –
43% Based on your
39% experience over
38% 37% the past 12 months,
what are banks
looking for in
mid-market
businesses?
Retail
Overall
Strong cash flows Clear business plans Historical earnings Sector conditions
quality
Retail 9

10. Funding and strategy
Specialist lending issues
The fact that retail groups are finding the lending environment
difficult is not a new phenomenon – the banks have treated the
retail sector with considerable caution for some time now.
This is further reflected by the results of At one level, this indicates that it has financing tools that are employed within
the survey, which show that over 50% of been difficult for retail businesses to form the retail sector. To a significant extent
retail respondents have banked with the new banking relationships for a number this complexity centres around the fact
same lender for over five years (and of years. But it is also a reflection of the that much of the capital needed by retail
almost 90% for three years or more). often highly specialised nature of the borrowers is held off balance sheet
because of the nature of leasehold
arrangements. In addition, there are
other areas of lending tailored to the
sector such as foreign exchange facilities
Expert comment: and trade insurance.
Tim Hansell
Director, Corporate Finance
Grant Thornton UK LLP Chart 5 –
For how long has
Notwithstanding the current weakness in consumer confidence, your current debt
investor appetite still remains high to provide equity funding to support provider been
growth in certain niche fast-growing segments of the UK retail sector, providing you with
such as online retail. debt finance?
With the ongoing channel shift from the high street to online
Retail
continuing to build momentum, this is underpinning future growth
potential for a number of niche online retailers, notwithstanding the Overall
current economic backdrop.
However, lenders are still cautious about providing leverage to ‘new
to bank’ retail customers, and leverage multiples in retail/online
transactions continue to be conservative, particularly where the off
balance sheet rent roll is significant.
Funding for retail deals continues to be challenging, and presenting
well-thought-through business plans that will stand up to the rigours of
lender credit committees is more important than ever.
54%
35% 33%
28% 31%
7%
12%
0%
<1 year 1 to 3 years 3 to 5 years >5 years
10 Retail

11. Few big failures
Despite the obvious problems retailers are having
securing funding, as well as the deteriorating consumer
confidence and pressure on disposable incomes,
there have actually been relatively few major failures.
Among the handful of high-profile Expert comment:
groups to have ceased trading in
recent years are music retailer Zavvi, Barry Knight
Whittard of Chelsea, the Officers Club,
Woolworths and MFI. But of course
Head of Retail
there are other potential candidates out Grant Thornton UK LLP
there: despite battling hard to fight the
conditions, retail groups such as HMV Conditions for many retail businesses have
undoubtedly been tough in recent years and look likely
are still facing real challenges to survive
to remain so for some time. However, there are
intact as high street sales of CDs,
several tools that, with the correct advice, can be
DVDs and games have lost ground to
employed to ease the pressure. To begin with,
online competitors. working capital constraints can be improved by the
better management of creditor payments, employing
‘creditor stretch’ tactics, while Time To Pay (TTP)
arrangements can be tailored by HMRC to suit the
ability of the retailer to pay its tax bills. Developments
in asset-based lending also mean that there may be a
viable alternative to traditional cash-flow-based lending
for some retail companies. Meanwhile, for businesses
already in difficulties, Company Voluntary Agreement
(CVAs) and debt for equity swaps can both be brought
into play as part of a rescue plan.
Retail 11

12. Funding and strategy
Strategies to counter
the downturn
According to the survey, the main strategic priorities
for retail respondents are largely in line with those of
their peers across other sectors, with a strong focus on
building earnings and growing market share.
One noticeable difference, though, the conditions for retail companies have
is in the responses surrounding cost been sub-optimal for some time now,
cutting strategies: as it is across the whole many of the ‘firefighting’ measures
sample, cost cutting is the third most have already been put in place and firms
important strategy for retail respondents. are already likely to be following
However, it is interesting to note that it sophisticated best practice models in
was flagged by a significantly smaller areas such as supply chain management.
percentage of retail respondents (33%)
than overall (49%). Underlying this is the
fact that, for many retail businesses, cost
cutting is not a realistic strategy: rent,
rates and staffing costs are typically the 60%
most significant outlays, and retailers are
restricted in the ways they can reduce
their spending in these areas (minimum
wage regulations, long-term lease
contracts, etc). Furthermore, given that Chart 6 – Do you
expect to complete
No
any significant
41
transactions over the
%
next 12 months?
Retail
Overall
Yes
59
%
40%
12 Retail

13. Expert comment:
Mike Hughes
Director, Corporate Finance
The survey also provided little evidence
Grant Thornton UK LLP
to suggest that retail businesses are likely In the last six months we have seen one or two ‘stand-out’ M&A
to try and acquire their way out of the transactions, such as Wm Morrison Supermarkets plc’s £70 million
downturn, with M&A ranking low on acquisition of kiddicare.com. This opportunity attracted a significant number
the list of priorities. In total, only 15% of of trade offers from both the UK and overseas, and also a high level of
retail respondents cited consolidation and interest from the private equity community. The final price and deal multiple
M&A as being a high priority, compared was driven by the quality of the opportunity and the strong strategic
with 22% of the overall sample. rationale for the buyer. Overall, in terms of M&A the online space with its
Nevertheless, some 40% of retail ability to scale quickly and capture market share from the high street
appears to have fared better than traditional retail businesses.
respondents expect to complete a
significant transaction over the next year,
suggesting that M&A activity might
come onto the radar on an opportunistic
basis for well-funded businesses.
Expert comment:
Stephen Baker
Partner, Corporate Finance
Grant Thornton UK LLP
Given that many retailers have already worked through cost cutting actions,
more dynamic strategies may be required to counter the continuing
downturn and drive growth. As well as driving online capability, options to
widen product offer or add selective contribution enhancing locations,
whether organically or via acquisition, should be considered, albeit financing
such actions will need compelling arguments and creative solutions.
Retail 13

14. Funding and strategy
Chart 6 – Have you explored
alternative sources of finance?
66%
No, but under certain circumstances we would
34%
Yes, but we decided against it
0%
Yes, and we now use alternative Interestingly, out of the survey sample, retail sector
sources of finance
companies are among the least likely to have explored the
potential for raising capital from alternative funding providers to
support their growth strategies. But opportunities do exist,
especially from within the ranks of private equity backers both
in the UK and further afield. Among this type of institution
there is a long track record of supporting the retail sector,
particularly in niche areas of the industry or where there is the
potential to generate scale in an otherwise fragmented market.
It is therefore likely that a good proportion of the M&A activity
within the UK retail area will be linked to or funded by private
equity backed businesses.
14 Retail

15. Expert comment:
Mo Merali
Head of Private Equity,
Grant Thornton UK LLP
Private equity has been a consistent supporter of the retail sector and has reaped
huge rewards from backing high quality businesses in the past. More recently,
however, the record has been somewhat mixed, with the double-whammy of the
consumer recession and over-leveraged businesses leading to some high-profile
failures. Notwithstanding this, we have seen significant private equity interest in
the sector-focused on businesses with robust propositions – typically those in a
unique market position such as HobbyCraft. The winners – both investors and
businesses will emerge from those who are willing to embrace innovation and
technology in their business model as well as their approach to the consumer.
Case study:
HobbyCraft
HobbyCraft, the UK’s leading art and craft retailer, was established in 1995 by Warren Haskins, who had recognised the
potential for launching an art and craft superstore in the UK after having investigated the well established hobbies and
crafts market in the US. By 2010 the company had built up a network of 47 out-of-town stores throughout the UK,
each of which carries over 35,000 products and caters for more than 250 different art and craft activities.
When the time came for the group’s management team to look at options to realise their investments in the business,
the potential upsides of a sale to private equity backers were clear: a well-funded financial backer with strong
international reach would offer not just the funding, but also the strategic expertise and contact network necessary to
take the company into its next phase of growth.
Grant Thornton worked closely with HobbyCraft throughout the disposal process, which was concluded in
April 2010 when funds advised by pan-European mid-cap specialist Bridgepoint Capital acquired the firm in a deal worth
over £100 million. Importantly, the founder and management team were given the opportunity to reinvest in the company
going forward.
Commenting on the deal, Paul Stout of Grant Thornton said: “HobbyCraft is a unique business which has gone from
strength to strength and has defined the market for arts and crafts in the UK. The success and size of the deal with
Bridgepoint Capital is testament to the entrepreneurship and drive of Warren Haskins and the management team,
and we have thoroughly enjoyed working with them throughout the process.”
Retail 15

16. Closing remarks
In it for the long haul
While there may be some bright spots in the retail market –
most notably in the online, non-store space – all the signs
suggest that most British retailers will have to dig in for
a long haul out of the current slump.
But many will not make it: the latest available on how to put the necessary
figures from the Insolvency Service on procedures in place, and how to access
the administration of wholesale and retail the alternative sources of capital, be it
companies in Q1 2011 show a 70% bank funding, asset-based lending or
increase over the previous quarter and an private equity.
11% rise over the same quarter of 2010.
However, there are options out there,
both in terms of strategy and funding, Barry Knight
and it is more important than ever that Head of Retail
retail businesses seek the best advice Grant Thornton UK LLP
16 Retail

17. Contact us
For further information on any of the issues explored in this report contact:
David Ascott Geoff Davies Barry Knight
T 020 7728 2315 T 01223 225630 T 020 7865 2150
E david.p.ascott@uk.gt.com E geoff.davies@uk.gt.com E barry.s.knight@uk.gt.com
Stephen Baker Tim Hansell Chantal Goodman
T 020 7728 3100 T 01223 225616 T 020 7728 3299
E stephen.baker@uk.gt.com E tim.l.hansell@uk.gt.com E chantal.goodman@uk.gt.com
For other queries please contact your local Grant Thornton office:
Belfast Kettering Northampton
T 028 9031 5500 T 01536 310000 T 01604 826650
Birmingham Leeds Norwich
T 0121 212 4000 T 0113 245 5514 T 01603 620481
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T 0117 305 7600 T 0116 247 1234 T 01865 799899
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Retail 17

18. Notes
18 Retail

20. © 2011 Grant Thornton UK LLP. All rights reserved.
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Grant Thornton UK LLP is a member firm within
Grant Thornton International Ltd (‘Grant Thornton International’).
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No responsibility can be accepted by us for loss occasioned
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