A case study in administration – Mamas & Papas v Mothercare
After 55 branches were closed in 2019 under a Company Voluntary Arrangement (CVA) and rents reduced in others – their first quarter sales update in July was much anticipated. The results were disappointing to say the least.
Total UK sales declined by 23.2% and online revenue was down 12.1%.
Now Mothercare is in administration with all remaining 79 UK stores set to close along with the loss of 2,500 jobs, six weeks before Christmas.
Critics are now publicly questioning whether CVAs are just delaying the inevitable, citing recent examples such as Carpetright, House of Fraser and Toys R Us.
George Macdonald of Retail Week said that in the case of Mothercare, the CVA was never going to be a silver bullet.
He cited other factors at play including the failure to make up the loss of online sales, the incursion by other retailers into its core categories and ultimately, a failure to engage with its target customers who could turn to alternative sources for specialist advice and recommendations.
He continued: “Despite the poor track record of so many CVAs, landlords may still hesitate to swing the axe by not backing them because they won’t want to be blamed for job losses.
“If they’re unconvinced by turnaround plans, they’ll be increasingly ready to dismiss retailers’ pleas. The alternative of empty premises is what many landlords are being left with anyway.
“Landlords will still approve some CVAs but it will be on a case-by-case basis and only the most compelling will win support. It’s evident from the push-and-shove that accompanied Arcadia and Monsoon’s CVAs, and Mothercare’s inability to address its UK problems that will further undermine the process.
“While the latest CVA failure may not be enough to signal the death knell yet, in the future, a thumbs-down from landlords must be increasingly likely.”
Rivals Mamas & Papas are in the same position but are approaching it in a slightly different way.
After posting a £2.38m loss for the second consecutive year, the company has been sold to former owners Bluegem Capital in a pre-pack administration deal which sees six unprofitable stores close but allows the remaining stores to remain open and trade.
Riccardo Cincotta, Mamas & Papas executive chairman said: “These actions are always difficult but they are also necessary in a challenging market to ensure Mamas & Papas achieves its considerable future potential.
“We will continue to review our store portfolio in the light of customers’ changing behaviour and we remain fully committed to an omni-channel offering that reflects their evolving needs.”
Mamas & Papas went into a pre-pack administration which differs from a regular administration in several ways.
Pre-packing creates a seamless transfer of assets and employees. It reduces redundancy requirements because it allows continuity and keeps a higher value in the business as a result.
This will most likely generate a higher return to creditors than if the company was liquidated by continuing to trade as a going concern.
Chris Horner, Insolvency Director of Business Rescue Expert said: “Administration and insolvency are effective tools when used appropriately but the most important thing is to work with a professional insolvency practitioner to establish what would be the best solution for you and your company.
“The situation with Mothercare and Mamas & Papas is interesting because you have two similar companies operating in the same marketplace that have approached essentially the same problem in two different ways.
“Mothercare was able to use the CVA procedure to cut costs, but what it also required was a huge capital injection to update stores, and massively increase its online marketplace. Conversely, it is hoped that the new owners of Mamas and Papas recognise the gigantine task in front of them, and having shaved debt, will also provide the cash needed to modernise. Only time will tell”
Administration is probably one of the most widely misunderstood business terms being used today.
Contact us and arrange a convenient free initial consultation with one of our expert team of business rescue advisors