Thursday, 19 January 2012

Peacocks in crisis : An opportunity for "new capitalism"

Peacocks faces an uncertain future, but could it be the
test bed for the UK Coalition's recent drive for a "new, responsible capitalism"?
(Pic : BBC)

In one of the biggest blows to the Welsh economy since the collapse of Hyder in 2001, clothing retailer Peacocks entered administration yesterday, threatening as many as 10,000 jobs across the UK and some 2,000 of those in Wales – not only the HQ in Cardiff but at major distribution centres at Nantgarw near Pontypridd and other sites in the Valleys. There'll be 249 immediate redundancies in Cardiff, though for the moment it's "business as usual" in the stores.

In the latest Top 300, Peacocks is listed as the 6th biggest company in Wales, with an end year turnover of £527m in 2010 and pre-tax profits of near £40m. All of this, however, is submerged in the company's debts. Estimates for the debt hover around the £600m mark with some £240million+ of that being loans at suicidally high rates of interest. Those debts were acquired as the result of a leveraged buy out when Peacocks delisted from the Stock Exchange in 2006 and was "taken private". Another company "enhanced" by private equity.

I'm clearly not an expert, but the underlying business doesn't seem too shabby at all. The Guardian says Peacocks Group had sales of £720m in 2010 and as mentioned the company is still "profitable". The company even reported a increase in like-for-like sales of 17% over Christmas, bucking the general trend. It's only when the company's debts are taken into account do the underlying cash flow problems become apparent – and the losses start to mount.

Royal Bank of Scotland has emerged as the "enemy" in all this, by withdrawing support for a debt restructuring deal (so are we expecting banks to prop up debt-laden businesses now?) However Barclays have said they are still "committed to Peacocks", even RBS are reported in the Western Mail as saying they hope a deal can be done.

Though clearly RBS withdrawing from negotiations was the "last straw" I don't think the banks aren't the "big bad" here. The blame, in my opinion, should fall on private equity and leveraged buy outs. The UK has come close to losing some of its biggest names in previous years - in particular football clubs - thanks to this form of finance. Sometimes it's done with the best of intentions like a management buy-out to save a company, other times for what seems like nothing other than vanity. Load a profitable company with debt then walk away while it burns and creditors sift through the wreckage looking for anything of value.

I'd be astonished if Peacocks went into liquidation, and I don't think anybody is predicting that. It'll still be a player on the High Street. I imagine a slimmed down Peacocks with fewer stores, fewer workers and many bruised egos is the likely outcome. Bad news, but not catastrophic. Of course it could be saved by another company or another buy out but that would likely means profits (and probably the HQ) exiting the Cardiff and Welsh economies.

We've heard a lot about "responsible capitalism" the last few weeks as well as the benefits of cooperatives (I'll be looking in depth at Prof. Kevin Morgan & Adam Price's "The Collective Entrepreneur - Social Enterprise and the Smart State" over the next few weeks).

Perhaps the "New Peacocks" can emerge as a test bed once stabilised– adopting a John Lewis model – to insure that in the future the company's workers benefit from any profit, not hedge funds, private equity firms or banks. Indeed Dr Jonathan Deacon of Newport Business School has suggested to Radio Wales that this could be one route the company could take.

Exactly how this can be done, while easing the debt burden, would be critical. For a back of a fag packet example - employees could "buy into" the company by purchasing a partnership/shares at a fixed price - for arguments sake £10 per share - and the money raised used to pay off a chunk of a renegotiated debt. After that a ring-fenced percentage of post-tax profits can be distributed back to "partners" as a John Lewis style "Annual Bonus" or a commission based on sales performance at individual stores. The running of the company could be democratised in a similar manner.


  1. When the government wanted to save the baking sector they nationalised the failing banks, paid off the debts with public money, cut out the unprofitable bits and kept them and then sold off the profitable parts to a new private owner as a bargain price (think Northern Rock / Virgin Bank).

    If they are really serious about rebalancing the economy and building a 'John Lewis Economy' then they should do the same with Peacocks, i.e. pay off the debts and sell the profitable business to its employees.

    It won't happen of course, the government will only 'interfere in the free market' in extreme and dire circumstance, for example when there is a risk that millionaire bankers will be unable to pay themselves bonuses.

  2. Sadly Welsh Agenda, I doubt Peacocks is going to be the last of it. This could only be the beginning of a banking sector confidence crisis in the High Street. I'd love to see the respective government's put their money where their mouths are and sort the problem out but I'm not holding my breath. The management and workers at Peacocks are almost certainly going to be left to sort this one out themselves.

    When the banking sector sneezes, the public catches pneumonic plague and the government collects the bodies.

  3. Just because a company becomes slimmed down, does not mean that it becomes a bad investment! A smaller company can become more focused then a larger one. For example, GM in America cut half of its brands, and while it is not perfect, it is much better then before and much more focused.