The falling Comet – Was 2012 the real beginning of the end of the world for physical retailers?

Posted: December 9, 2012 in Uncategorized
Tags: , , , , , , , , , , ,

Print

Comet has collapsed into administration and is unlikely to be trading beyond the 2012 Christmas period.  This article explores some of the reasons why the once-mighty electrical retailer failed.

I have fond memories of Comet.  My parents bought me and my little brother’s Super Nintendo from the long-gone Slough High Street store.  My first generation, black-and-white, Nintendo GameBoy was even bought from the same store a year earlier.  When I was a teenager and a young adult, I even worked for several of Comet’s competitors, Dixons and Southern Electric’s Powerhouse, Vodafone and Amazon.

During smoking and lunch breaks when working for Powerhouse, we used to share war stories (about rude customers, sales which feel through and dropping TVs and other merchandise) food, cigarettes and, more often than not, incredibly shocking personal insults with the Comet staff next door to us in the Bath Road Retail Park in Slough (which is owned by Her Majesty, the Queen… something I learnt researching this article).

Strangely enough, in what was probably my last-ever visit to my former rival’s old store was to look for the very laptop I wrote this piece on.  I joined all the other bargain-hunting vultures picking at the carcass of the now eerily-cavernous warehouse which 15 years previously was thronging with shoppers and the latest electrical goods.  In the end, I pre-ordered a new laptop on a rival’s website using my smartphone as I walked out of Comet, and picked it up from their store a short drive down the road.

The first warnings – the ‘Credit Crunch’ and a failing economy

Signs that all was far from well with the retailer could be traced back to 2008, when Comet’s pre-tax profits more than halved, falling from over £55m in 2007 to £25m.  Comet then posted losses of £8m (2009), £3m (2010) and finally losing £39m in 2011.  By the beginning of November 2012, with Comet having reportedly already lost around £40 million already, Deloitte, the business advisory firm, were appointed Joint Administrators to Comet, taking over the running of the retailer’s operations and trying to find a new buyer to save the business.

Comet (headquartered in Rickmansworth, Hertfordshire), operated 236 stores across the UK, and employed over 6,600 people – the equivalent of a full-time workforce of over 4,600 employees.  It has now closed many of its stores and made thousands of staff redundant.  The chances of Deloitte being able to sell Comet off as a complete and functioning business are all but gone, with individual stores being closed when a buyer is found.  Those still open are receiving no new stock deliveries, are giving no refunds and are cutting prices on what is left to sell it off quickly to pay off the company’s debts.

Like many other retailers, Comet has been hit hard by the uncertain economic environment.  Slow consumer spending and a distinct lack of consumer confidence have plagued the world economy since 2008’s credit crunch, already claiming several high-profile victims over the past four years. The electrical retail sector has been particularly badly affected, with fewer people buying big-ticket items (fridges, freezers, fridge-freezers, washing machines, dryers, washer-dryers or TVs, Blu-Ray and computers) and fewer first-time property buyers looking to fit out their new homes, partly because of restrictions to mortgage-lending and young people either renting accommodation or living with parents for longer.  This had been a group who were, historically a very important market for Comet.

 Not keeping up with Internet Jones and the Temple of Dot-com

Another problem was Comet, like many other traditional consumer electronics, IT and mobile retailers, did not move with the times and adapt to how the internet was changing. Walking around Comet’s Slough store and those of competitors like Currys, PC World and the already defunct Best Buy UK really brought this to life.

Comet was caught out by lower-priced web rivals, and did not have sufficient pull in-store or on its website (lower prices, bigger product ranges, level of convenience) to lure customers away from online competitors, like Amazon, Play and eBay, and the ‘big four’ supermarkets, including Asda and Tesco, which have far lower overhead costs and can offer cheaper products and were able to offer bigger discounts on products, or as loss-leaders to bring people into their stores.

On top of this, Comet’s customer service levels dropped dramatically (trying to get staff’s attention on recent visits was a nightmare) and consumers started to stay away – or worse, got street-savvy and avoided the dogged selling of extended and expensive warranties – just one or two big blows can be severely damaging, more so when there is added pressure to reduce costs by re-structuring stores and laying off members of staff.

Comet’s “additional” income from its financial services (hire purchase and buy now pay later agreements), extended warranty commissions and rents receivable (and these are calculated separately to direct sales) declined massively from a peak of £54m in 2008 down to a measly £185,000 in April 2011 – small wonder Comet was struggling so badly in recent years.

Comet’s former parent company, Kesa, had made efforts to turn business around by making a significant investment in the business, refurbishing, improving and redesigning stores, cutting headcount and adding new marketing concepts.  These included a deal with Cashstar, the launch of the eGift card programme and an interactive app developed by Grapple Mobile to “enhance” the consumer shopping experience.  However, this was not enough to turn Comet’s fortunes around, and in some cases, similar or better versions were already being offered by other retailers.

Suppliers and financiers start to close the taps

Against this backdrop of continuing weak sales, and with speculation that Comet was being approached by prospective buyers or was about to be broken up, suppliers of goods and services and sources of finance have been reluctant to provide credit terms because of the risk of not being paid back.

This had an extremely negative effect on Comet’s cash flow. The inability to obtain supplier and trade credit for the up-coming peak Christmas trading period (if it survives that long), means that the retailer had no realistic prospect of raising further capital to build up sufficient stock to allow it to continue trading.

While some credit insurance and supplier credit was still being provided at lower levels, most probably because of securities and guarantees from parent company, Kesa.  However, once it became clear Kesa (they sold Comet to the private equity firm, OpCapita in November 2011 for £2),  intended to sell the business, suppliers and insurers changed their position and both insurance cover and levels of credit given to Comet may have been cut to a degree.

When Kesa did finally sell – in November 2011 – the cover was pulled totally, understandably so.  This may also have been because real stakeholders like landlords who were being asked to cut or defer lease payments on property and equipment used by Comet, as well as insurers and suppliers, complained of not being provided with updated financial information or revised business plans on how to move the troubled retailer forward by OpCapita, Comet’s new buyers. In the end, support evaporated as these stakeholders clearly judged that OpCapita had no real sustainable business plan and withdrew their support.

As a consequence of all these factors, the directors of Comet had no choice but to seek Administration.  Neville Kahn, Joint Administrator and restructuring services partner at Deloitte, commented: “Comet has been battling the changing landscape of the electrical retail sector for many years. It has become increasingly difficult for it to compete with online retailers which don’t face the same overheads such as store rents and business rates”, or as we have read recently, in the cases of Google and Amazon, obligations to paying their taxes.

Woolworths, Zavvi, JJB Sports, Game, Best Buy UK and a whole host of household retailers have all disappeared already from high streets and retail parks.  After Comet, who will be next?


Sources:

  • Comet collapse: Deloitte blames internet and lack of first-time home buyers via @Telegraph http://soc.li/KjRrS7Y

About these ads

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s