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Sector update: have there been improvements in care home viability?

care home viabilityIt hardly seems any time since I last assessed the viability of the UK’s care home sector, but in the light of recent developments with one of the UK’s largest providers it’s time for an update.
The last blog in December 2018 focused on the implications of the collapse of Southern Cross in 2011. This time it has been prompted by reports this month that Four Seasons, Britain’s second-largest private care home provider with around 320 sites and 22,000 staff, has confirmed it has failed to pay rent on time. It is being seen as a negotiating tactic in order to cut bills, but is this really the case?
Its latest troubles began in 2017 when its owner Terra Firma was unable to pay interest on its debts, most of which are owned by private equity firm H/2 Capital Partners who took control and have overseen the group since then.
The business, which has more than £700 million in debts, appointed Alvarez & Marsal as administrators in April 2019. While the administrators have sought a buyer, it would seem most likely that H/2 will end up cherry picking the best homes and roll its debt into a new vehicle.
An estimated 70% of the care homes in England are small, mainly family-run businesses, while around 30% are owned by overseas investors, according to information published by the LSE in May this year.
In the LSE’s view many of the latter group of owners: “view them as assets for extracting large sums in the form of interest payments, rent and profit”.
In 2014 after the Southern Cross debacle the sector regulator CQC (Care Quality Commission) introduced a new requirement – a statement of financial viability, in a bid to ensure there were no repeats of the situation.
However, it clearly has not worked.
In August this year the insurance provider RMP published an assessment of the current state of care home viability, in which it quoted findings by Manchester University that “the financial models for nearly all the larger private equity-owned care home chains carry significant external debt and interest repayments”.
In addition, it said that spending by local authorities on social care had fallen while at the same time as costs have risen. This rise is attributed to a number of factors several of which are being related to Brexit: difficulties in staff recruitment and retention, restrictions on immigration numbers and, increases of the minimum wage.
Indeed, the GMB Union cites concern from the newly-published Operation Yellowhammer documents regarding the sector: “The adult social care market is already fragile due to declining financial viability of providers. An increase in inflation following EU exit would significantly impact adult social care providers due to increasing staff and support costs, and may lead to provider failure, with smaller providers impacted within 2 – 3 months and larger providers 4 – 6 months after exit”.
The Yellowhammer document, it says, therefore advises planning for potential closures and the handing back of contracts.
Despite these problems, demand outstrips supply in most local authorities, with an estimated current shortage of 65,000 care home beds, while a recent report by Newcastle University finds that an additional 71,000 care home spaces will be needed in the next eight years.
Clearly, funding the cost of care homes is itself in need of urgent attention and support. Call in the restructuring advisors?

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Banks, Lenders & Investors Business Development & Marketing Finance General Rescue, Restructuring & Recovery

July Key Indicator: this month we investigate the future of Retail

the future of retail on the High StreetFew people can be unaware that the future of retail on the High Street has been in peril for some time.
There has been a seemingly endless litany of “big name” closures or attempts to restructure, from BHS and Toys R Us to Carpetright, M & S and House of Fraser to Maplin and most recently Poundworld.
But the retail sector encompasses not only physical stores on the High Street and on edge of centre retail parks, it also includes online-only operations, such as Amazon, eBay and Etsy and those retailers that have both online and physical shops like John Lewis and Lewins the Shirtmakers.
Nor should the small, independent niche shops be forgotten in considering the future of retail.
Clearly the preferences and behaviour of consumers is a key factor, but it is not the whole story, as I shall outline in this analysis.

The pressures impacting on the future of retail

Most of the difficulties facing the physical retail sector are well rehearsed.
They include escalating labour costs including wages, staff administration and compliance and the Apprenticeship Levy imposed on larger businesses since last year. These, along with the 2017 business rate revaluation that came into force in April and ever-escalating rents have had a significant impact on overheads for High Street stores, whether they are large chains or small independent SMEs.
Indeed, it has been argued that the rate increases have weighed disproportionately on the smaller retailers and, as I reported in a blog in May, the FSB has argued that the Government’s new online appeals system seems to have been designed to be hostile to business, bureaucratic and beset by glitches, while offering no in-person support, no phoneline or live chat options and involving a time consuming and opaque process for uploading supporting material when making an appeal.
Then, there are the landlords, although in fairness this term should also cover the many institutional investors representing such organisations as pension funds, which, arguably, need to maximise their revenues to protect the people they represent.
An equally well-rehearsed explanation of the difficulties has been the competition from online retailers, who do not face the overheads that come with a physical store and can therefore offer substantial discounts to shoppers.
This brings us to another key factor that affects the future of retail – and that is consumer preferences and behaviour.
Here, the convenience of online shopping at any time of the day or night as well as price competitiveness has been identified as the key factor in the so-called “death of the High Street”. But there is more to it than that.
As the TUC General Secretary Frances O’Grady, said: “Retail depends on customers having money in their pockets. One reason why some shops are struggling is because wage growth has been very weak.”
Not only this but, as was reported yesterday, an estimated 50,000 retail staff have been made redundant or seen their role put under threat since the start of this year. It should be remembered that these people are also consumers who are now likely to have less money to spend. In this context the recent collapse of Poundworld could be seen as a worrying development.
Not much discussed, but also worth considering is the strategy of local authorities and the planning process in town centres over the last 20 or more years. While cash-strapped councils understandably wish to maximise their revenue from business rates and are therefore likely to have been attracted by flagship “name” stores to anchor their High Streets, the results arguably have been an unappealing sameness to town centres such that it is difficult to know whether you are in Sunderland, Colchester or any other town you care to name. Another bugbear for shoppers is the cost of parking, also a revenue stream for local authorities where the cost is discouraging shoppers who instead go to out of town retail parks.

Can the future of retail in the High Street be revitalised?

Let’s look at consumer behaviour first. Shopping has always been to some extent a social activity and there are already signs that those authorities that have paid some attention to the appearance and appeal of their town centres may be reaping the benefits as markets, small, specialist independents and pop-up shops, together with more places to eat, have a coffee and socialise, appear. Municipal flower beds and baskets even, make shoppers feel welcome.
Equally, many shoppers will say that while they appreciate the convenience and cost saving of online shopping, there is no substitute for being able to examine and try on purchases.  This is where some innovative retailers, such as Next, have provided opportunities with click and collect options that allow customers to try on orders and if not happy, the shop will organise the return of goods for them. It also means that the shop can operate from a smaller space to cut its overheads.
Another change in behaviour among shoppers is to buying fresh produce locally and doing bulk shopping online or by car at large out of town stores. This is helping promote specialist and artisan shops that are close to where people live or work. The large stores have also latched on to this by introducing local concessions into their stores.
Many of the larger retailers that have found themselves in difficulties have also offered online and click and collect services.  However, there has also been an increase in the numbers that have tried to restructure, using the option of a CVA (Company Voluntary Arrangement) to renegotiate deals with landlords and thereby reduce overheads. While there are signs of some landlords opposing the use of CVAs, or imposing strict conditions, if agreed they do at least guarantee some continued revenue, albeit reduced, rather than landlords being left with empty property on their books.

A number of developments that may also help the future of retail

Recently, a think tank, The Centre for Cities, has argued that city centres should be diversified to include more offices and housing arguing that they are currently too reliant on retail, but also that if retail is to survive it needs customers to sell to, such as those working and living nearby.
The UK Treasury is also working on a fairer tax system to help High Street retailers, based on scrapping business rates and replacing them with a “turnover” tax.
In the US, a Supreme Court ruling has allowed states to collect sales taxes from retailers that aren’t physically based in the state, meaning customers will likely have to start adding taxes to their online shopping bills, while on June 19 in Belgium the European Commission held a conference to examine the future of retail and what can be done to help with the current challenges.
It is too soon to say what impact any of these developments will have on physical and online retail but equally, it is too soon to write the obituary for physical retail.