Who will buy Howards Storage World?
The space saving and storage chain was placed in voluntary administration on December 9 last year and has been advertised for sale.
Deloitte, the insolvency firm appointed as administrators of the franchise system and 29 company stores, has indicated there has been a high degree of interest in the chain, despite the difficult timing of the administration.
It is understood that franchisees have been discussing the purchase of the franchisor company to secure their rights to use the brand and to secure supplier agreements.
The administrators have not disclosed what is owed to around 200 creditors by Howards Storage, but have indicated that the chain’s international growth strategy had been dragging down the core business.
The administrators said the business had also been hit by financial and challenging market conditions in which the 29 corporate stores had been underperforming.
Howards Storage had also been unable to digest the conversion of underperforming franchise stores that had been surrendered by franchisees.
Vaughan Strawbridge, one of the appointed administrators, advised the first creditors meeting convened on 20 December that the business model needed to be re-assessed and the supplier base required rationalisation.
The pre-Christmas collapse of the franchise system followed the failure of Payless Shoes and Pumpkin Patch in late 2016 and cautions from Adairs, Shaver Shop and Godfreys about underwhelming Christmas sales.
The Howards Storage administration involves four entities in the group which operated 29 company-owned retail outlets in New South Wales, Queensland, South Australia and Victoria and supported a franchise network of a further 29 stores.
Howards Storage had also granted master franchise rights for Ireland, Spain, India, the Philippines and Canada and had been trying to expand further internationally into the United Kingdom, New Zealand, Germany, France , the Middle East, China and Japan.
The administrators were keen to continue trading through the Christmas and New Year sales period but have planned the closure of a number of the unprofitable corporate stores.
Where it went wrong
The Howards Storage chain started as a single store called Stack and Store in the Sydney suburb of Northbridge in the early 1970s.
The founders, Les and Edda Howard, formed a partnership with Dirk Spence in 1997 after determining a market opportunity for the storage concept and developing a franchise program that commenced a year later.
The concept of a specialist outlet selling space saving, storage and organisational products for the home was sound and the chain developed a range of exclusive products under its own brand.
The store design is more utility than fashion, but does carry a wide range of functional products that are suited to apartment lifestyles as well as the home.
While store locations might also have missed key market opportunities, particularly with apartment owners, Howards Storage has been squeezed by expansion into the storage and space saving categories by many retailers, including Kmart, Target, Big W, Bunnings Warehouse and The Reject Shop.
Howards Storage arguably sells better quality products than most of its competitors, but it has faced fierce price competition and no doubt is one of the retail chains that was damaged by the stock liquidation of the Woolworths Masters Home Improvement chain.
However, the financial problems of the group appear to run deeper and, interestingly, the expectation that master franchise agreements overseas would add to revenues and earnings have actually resulted in higher costs and losses.
The failure of Howards Storage adds another chain to a long list of retail franchise systems that have collapsed, in many cases because there is no longer sufficient margin in a retail business to pay franchise and marketing levies and provide a return to the franchisee.
The falling value of the Australian dollar is also problem for retail franchise systems which rely heavily on imported products.
The ability of a franchisor of general merchandise products to augment income on supply deals is impacted by the reduced buying power of a lower Australian dollar.
The future of specialty retail
The failure of Howards Storage, a chain with what is arguably a great contemporary retail concept, and the difficulties that have confronted the Godfreys vacuum cleaner chain and, to a lesser degree, The Shaver Shop, begs the question of not just the viability of retail franchise systems, but also the prospects of specialty retailers.
Howards Storage is a privately-owned company while The Shaver Shop and Godfreys have recently floated on the ASX with plans to expand their store networks.
Godfreys initially planned to buy back its franchise stores but has now reversed that strategy intending now to expand under a beefed up franchise program.
The Shaver Shop has an aggressive store development plan that includes the buyback of its franchise stores.
The problem for chains such as Godfreys and The Shaver Shop is the reduced flexibility they have available as ASX-listed companies and the costs associated with being a listed entity, compared with the scale of their business.
A few irons in the fire
While the number of genuine interested buyers in Howard Storage is not known at this point, the chain probably has more prospect of a sale than either Payless Shoes or Pumpkin Patch.
While Beacon Lighting might have no interest in acquiring Howards Storage, especially given that it has also adopted a corporate store model since listing on the ASX, an acquisition would be a reasonable fit in concept terms.
Beacon Lighting is one of the best managed specialty retail chains and has arguably benefited from a location strategy that has avoided shopping centres in favour of freestanding and homemaker sites.
Beacon Lighting has been one of the best performed lower capitalised retail chains on the ASX and does have further opportunities to expand its store network.
The chain hasn’t indicated any ambition to acquire other bolt-on businesses, but the home storage and space saver category would arguably complement the lighting, solar products and fans sold by Beacon Lighting.
Howards Storage would also potentially be a viable fit with Godfreys or even The Shaver Shop.
The Shaver Shop option would simply be about scale for the listed company and diversification of retail categories that would potentially provide some cover from blips in the retail market, similar to the problems that The Shaver Shop experienced in December when a core product category missed sales targets.
For Godfreys, an acquisition of Howards Storage would again add the scale that is important for a public company, but would also fit with its renewed enthusiasm to operate as a franchise system and with its home products positioning.
IRW doesn’t suggest that Beacon Lighting, The Shaver Shop or Godfreys have lodged an expression of interest with Deloitte for the Howards Storage chain.
The point is simply that these retailers would all seem to benefit from increased operational scale, particularly Godfreys with its strategy to expand by franchising.
As a public company, the Retail Food Group has demonstrated the value of a multi-brand approach to ensure the success of a franchise model for shopping centre locations.
Specialty retail in general merchandise is a tougher proposition than food for franchising, in part, because of the inventory management demands and the cost of goods but also because of competition from larger retail chains cutting prices.
Godfreys has been trying to retrieve the strong market position it held before it was sold by its private owners to Pacific Equity Partners and CCMP Capital Asia in 2012.
The original owners of Godfreys bought back the chain after a dismal period under private equity control and floated it as a public company in December 2014.
The problem for the vacuum cleaning chain is an increased level of competition from department stores, discount department stores, Harvey Norman and other electrical appliance retailers as well as online retailers.
Where specialty retailers like Godfreys have had a strong foothold in the retail market with their expertise, product range options and customer service, the internet has armed customers with what is often greater product knowledge than retail sales staff, price options and an ability to shop around retailers without leaving home.
The challenge to differentiate and to secure a destination of choice in a category has become much more difficult for specialty retailers in many retail categories and even with a good and contemporary concept, scale will be increasingly critical for many chains and particularly those that list on the ASX.
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