Why Company Voluntary Arrangements need to be reviewed

23 May 2018 Consultancy.uk 4 min. read
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High street retailers are facing growing pressure from changing consumer behaviour and the e-commerce boom, and as a result a growing number of retailers are falling into administration. Jeremy Smith, Managing Partner at procurement consultancy 4C Associates, shares his views about how Company Voluntary Arrangements (CVAs) have become the go to solution for a number of private equity firms in the retail sector and how this can unfairly affect suppliers. 

Many retailers are caught up in a perfect storm characterised by weak consumer spending, increased competition and the shift to online shopping. The latest figures from the British Retail Consortium and Springboard suggest that high street footfall is plummeting to levels below those seen during the peak of the recession in 2009. 

In this context, Company Voluntary Arrangements (CVAs) are hitting the headlines on a more frequent basis. The Times recently published an article reporting that of the 15 retailers who have either collapsed in 2018 or are considering their options, 7 used CVAs and the majority of the remainder were too far gone to try. If the turnaround is successful then the CVA has clearly been successful however in many circumstances the CVA has just prolonged the inevitable.

CVAs were designed to help businesses keep trading while balancing the need to repay creditors. However, they can and have been abused, typically to the detriment of suppliers. In some cases, private equity firms use CVAs as a means to restructure a business at the cost of someone else. 

Why Company Voluntary Arrangements need to be reviewed

“It’s like blackmail”

Back in March 2016, a supplier to BHS summed up the situation, when they told Drapers Online: “If we don’t support them, then they’ll go into administration. If we do then we’ll lose money. We have no option… it’s like blackmail.” Indeed. It is worth remembering what happened in the food industry back in 2013, when cost-pressure led to the introduction of horsemeat in the supply chain. It is easy to imagine parallels with the current situation, where a lack of security and trust combined with an obligation to slash costs, results in suppliers going out of business and being replaced with less scrupulous entities. 

The alternatives

CVAs should never be seen as a default option. There are many other methods and solutions, which can be applied to restructuring a business. Data analytics, for example, is a tried and tested means to reduce outgoings and impact the bottom line. 4C Associates has developed a suite of tools in this area that has delivered significant savings for businesses. Data is more readily available than ever before and accessing it is quick and cost effective. Insights can be used to collaborate with suppliers, or bring to attention areas where sales can be grown, costs can be sustainably reduced or margin enhanced through better pricing or promo decisions.

Time for change

The truth is that in many cases CVAs are used as a risk-free way to restructure a business, with little or no regard given to impacted suppliers. While not illegal, the option to implement a CVA can be viewed as a ‘get out jail free’ pass and a solution that encourages poor decision making. After all, if there is no risk, why bother investing time and energy in proper planning. For those retailers owned by private equity organisations concerned with ESG stakeholders must question whether there is a fit with social and corporate governance elements. The impacts of ignoring this could be reduced investments by LPs concerned by reputation, so looking at other options before considering CVAs is crucial.

The current situation is not sustainable and having suppliers bear the brunt of the risk for poorly executed business strategies, simply does not make sense. There are many ways to restructure businesses and these would be employed more frequently if the CVA option disappeared, or was only permitted in rare circumstances. The issue is not with the organisations using CVAs as a last resort, or the investors enabling it as an option, but more with the Government allowing them to be used without consequence. Hitting suppliers will only get you so far and will hurt the industry, as a whole, in the long-term. 

Related: Landlords could block KPMG's House of Fraser CVA.