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Is Mothercare on the verge of collapse?


  • History of Mothercare
  • What went wrong?
  • Company moved into administration

 

Mothercare, an iconic brand for babies, children and parents to be, went into administration recently in the month of November 2019. The company is about to close all of its 79 company owned stores in the UK after its restructuring plan, which was implemented last year, failed to provide any structural and sustainable changes in profitability and returns. The administration will not include its overseas operations which is still profitable. In 2018, Mothercare has entered a company voluntary arrangement (CVA) which allowed it to cut its UK store total from 134 to just 79 following a dramatic collapse in sales. It also sold its Early Learning Centre business to secure its survival but all of this wasn’t sufficient to revive plummeting sales and profits.

Established in 1961 with its first store in the UK, Mothercare deals in wide range of products for parents and chidren upto eight years of age with offerings such as maternity and children’s clothing, home furnishings, travel equipment and toys through its omni-channel business model. It owns 79 retail stores in the UK (Mothercare UK) while it also operates internationally through franchise operations in Europe, Asia, the Middle East and Latin America. This British baby product brand gained significant popularity among the consumers in UK and was amongst the leading UK retailers based on consumer score specifically focused on baby and kids products. The company also expanded its business internationally especially Asia and Middle East where it has been recognized as a popular maternity and babywear retail store.

What went wrong with the iconic British brand?

Mothercare’s revenue is on declining phase since 2012 wherein year 2019 was one of the worst for the company. Its revenue nosedived ~21.5% to GBP 514 million from GBP 655 million in 2018. Moreover, on the profitability side, the company didn’t achieve positive bottom line during the period between 2012 to 2019, except for 2016 and 2017 which was not enough to provide any significant room for survival. The company blamed this on rising operating costs at store level and started to close down some to manage ever increasing cost pressure. Finally, the company went into a restructuring plan in 2018 by entering a CVA and closed 55 stores in the UK along with sale of its ELC business to provide stable financial structure for its struggling business. 

Interestingly, the company continues to expand internationally under the franchise model which in turn upheld its iconic brand image, particulary in China, Indonesia, India and Russia. In 2012, the company had a  total of 877 stores comprising of 209 company owned stores located in UK and 668 stores spread across Asia, Middle East, Latin America and rest of Europe. While the company is left with just one third i.e. 79 company stores in UK after restructuring in 2018, it has expanded its presence to 1,227 locations internationally thereby making the total store count reach 1,306 in 2019.

It is right to say that the UK’s high street retailers are facing tough times amid a squeeze in consumers’ income coupled with a switch to buying online and rising costs of operating stores. Many big brands are tapering their stores including the main rival of Mothercare, “Mamas & Papas”, clothing retailer “Marks & Spencer”, “Boots”, “Bonmarche” while some have already shut down business or gone into administration like womenswear retailer “Select”, “Forever 21”, “Hardy Armies”, “Greenwoods” amongst others.

Mothercare couldn’t keep itself out from heatstroke blowing on the UK high street retailers. While its international business is comparatively doing well, its hometown stores business failed to immune itself from the challenging conditions in the UK retail sector.

Some of the key factors which affected Mothercare and traditional retailers in the UK are listed below:

Rising cost of operations - As discussed, Mothercare is not alone to get hit by the increasing cost pressures. High street retailers in the UK are spending 10.8% more on aspects such as business rates, increasing wages and rents now in 2019 as compared to five years back as per A&M and Retail Economics. With more firms collapsing, the number of empty shops in the UK reached to record levels during the middle of 2019: as per Springboard, the average vacancy rate in July 2019 was 10.3%. It also indicated that the top 150 UK retailers have ~20% more store space than they need or can afford to absorb rising fixed costs, especially rents. As vacancy rates increase, rents are likely to come down for future contracts, however, for players like Mothercare, damage is already done. As stated above, Mothercare reduced on its store portfolio from 206 to 79 stores over the last seven years, but it continues to struggle on paying its rental and rising staff costs.

Rising competition and changing consumer preferences - The baby product market in the UK has become increasingly competitive. Mothercare is facing stiff competition when it comes to kids apparel and accessories segment. Other fashion retailers like H&M and Primark have enhanced their babywear range while a number of supermarkets have introduced their own brand while offering the products at lower prices making it even more difficult for Mothercare. Furthermore, consumer spending pattern has also seen drastic change over the past few years making it increasingly more challenging for traditional retailers. Those who couldn’t catch-up with rapidly changing requirements from the consumers are facing issues to keep themselves up with the competition. Especially for Mothercare, consumers blame that the company has lost its touch in new product offerings over the last few years. 

Growth in E-commerce - Consumers are switching to online shopping because of the convenience offered and price discovery with availability of more options. Footfall on high street stores has seen a decline in numbers for the past few years. As per Springboard, footfall has declined around 1.9% YoY for Jul 2018 to Jul 2019 period, highest in last four years. Although Mothercare operates in Brick-Mortar style, its online business generate around 41% of entire UK sales. Its revenues still fell by ~8% despite decent discount offering in the previous year (particularly during the Christmas month). Mothercare has also continued with its legacy website and app, leaving it further behind in competition in terms of online shopping experience.  

Mothercare has worked upon different strategies over the past few years to revive its sales and improve profitability, however things have not gone as well as the company perceived. It also tried to sell its UK operations, though the same also went in vain. Finally, the company has gone into administration in November 2019. It is now closing all of its 79 UK stores along with its online business with the loss of around 2,800 jobs. Positively, international business will continue to run via franchise agreements. The company will pay off almost all of its existing GBP 24 million loan as it has lined up GBP 50 million additional funding along with GBP 5.5 million new loan and GBP 3.2 million from new equity from existing shareholders. The additional funds and sale proceeds from the UK stores will be provided to international business for smooth operations in the future as a solvent group. As the online shopping boom continues worldwide and retail industry continues to reel from a series of store closures with rising costs and slowdown in global economy, all eyes will be on companies like Mothercare to see how far they will go to sustain the competition in the long run.

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