Debenhams administration puts Centrale store under threat

Another day, another body blow to the prospects of Croydon’s town centre getting the retail regeneration that has been promised for the past seven years or more.

Debenhams in Centrale: potentially another body blow to Croydon as a retail centre

Today’s latest nail in the coffin for high street retailing is the news that Debenhams has gone into an administration process. Dozens of stores are under threat of closure.

Debenhams is one of the larger stores in Centrale in Croydon’s North End.

The mall is owned by Hammerson, half of the Croydon Partners. With Westfield they are supposed to be redeveloping the Whitgift Centre and Centrale. The pair of shopping centre operators have postponed demolition work that was due to begin this autumn, while they undertake a “review” of their Croydon scheme. That review’s outlook will have just got even gloomier with the Debenhams announcement.

Control of Debenhams has fallen into the hands of its lenders, who include high street banks and American hedge funds, after it rejected overtures from one of its major shareholders, Mike Ashley, the owner of Sports Direct. Ashley’s 30 per cent stake in the company, acquired for £150million, looks likely to be wiped out completely.

Debenhams employs about 25,000 people and the company has 166 stores, which will initially continue to trade. The location of the 50 already earmarked for closure is not known.

Ouch: Mike Ashley could lose all his £150m investment in Debenhams

Last year Debenhams posted a pre-tax loss of £491.5million.

It has also been renegotiating rents with landlords – such as Hammerson – to tackle its funding problems. According to business analysts, Debenhams stores have an average lease term of 18 years, and the department store currently has £4.3billion of minimum lease payments over the next 20 years.

When other businesses have gone through similar troubles recently, such as with another Centrale store, House of Fraser, Hammerson has tended to go along with the company voluntary arrangement (CVA), which allowed for rent reductions. But Hammerson is a company not without business problems of its own, and declining rents due to CVAs is not something which will resolve those issues.

Today, Debenhams explained that its restructuring plans would continue and that, if approved, they would “result in a significant overall reduction in the group’s rent burden and underpin a sustainable future”.

The fundamental problem faced by the retailing business won’t go away, though.

Last year’s losses have put Debenhams under severe pressure

Debenhams floated on the stock market in May 2006 at a share price of £1.95, valuing the company at £1.7billion. The share price peaked at £2.07 one day later, on May 10, 2006. It’s been downhill all the way since then.

In 2006, Debenhams had 120 stores in the UK and planned to expand to 240. The following year, Apple launched the iPhone. Our shopping habits were about to change forever.

Laith Khalaf, a senior analyst with City firm Hargreaves Lansdown, said this morning: “Despite the rise in digital retailing, headline sales at Debenhams haven’t plummeted in the way you might expect. Margins at the high street chain have borne the brunt of the pain, as Debenhams has resorted to cutting prices to lure customers into making purchases.

How Debenhams’ discounting policy has reduced its profit margins over time – meanwhile, its costs and overheads have continued to rise

“The blue cross sale and similar promotions might have boosted sales, but at the expense of profits. The problem with regular discounting is it becomes a self-propagating strategy; if customers are used to getting goods at a knockdown price, they hold off buying until there’s a sale on. A weakening pound in the wake of the EU referendum also didn’t help matters, increasing the cost of stocking the shelves with overseas goods.

“The strategy since float was out of kilter with the changing habits of consumers… Hindsight is a wonderful thing, but the road to Debenhams’ ruin has been paved with poor decisions, as well as a dramatic shift towards digital shopping.”

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