Carpetright put administrators on standby last week as it rushes to secure new investment and avoid insolvency.
The flooring specialist filed a notice of intention with London’s High Court on Friday just a day after it was reported the business had approached PwC to launch a formal sale process.
The retailer, which has suspended its online operations, said it was seeking a “period of protection” whilst it worked to finalise additional investment and that it would continue to trade as normal from its store estate.
It’s not the first time the retailer has found itself in troubled waters, with the business launching a company voluntary arrangement (CVA) in 2018 in an attempt to bring its losses under control.
Retail Gazette takes a look at how Carpetright found itself in a sticky situation once again.
The straw that broke the camel’s back
Alarm bells for the retailer sounded back in April when it drafted in restructuring experts at Teneo to help explore cost-saving measures.
At the time, Carpetright – which has 262 stores in the UK – said it was “not in planning” for another CVA – but that it did have a “number of advisers looking at how we improve our performance, as we do in the normal course of business”.
However, its efforts faltered when the company was hit by a software attack the same month, which left it unable to trade online or in-store for almost a week and its staff unable to access payroll information.
The disruption to trade placed further financial pressures on the business and in May, Carpetright informed staff that it was cutting 25% – or 70 employees – from its head office in a move that it estimated would cut £22m from its cost base.
The retailer admitted on Friday that the events in April had “subsequently impacted plans to restructure” and as such, it chose to seek a “period of protection whilst sale negotiations proceed”.
Kevin Barrett, CEO of Carpetright’s parent company Nestware Holdings, said: “We remain focussed on securing external investment to ensure as few customers and colleagues are impacted as possible.
“They are our main priority and we are taking all appropriate action to make sure they are informed and supported through this process.
“We have begun promising conversations with interested parties that are moving in the right direction, encouraging us that Carpetright has a viable future.”
Increased competition amid a ‘challenging’ backdrop
Carpetright’s challenges over the last several years has come from a mixture of a more subdued market for big-ticket items and steep competition from rival Tapi.
In its most recent results available on Companies House, Carpetright had narrowed its pre-tax losses to £23.1m in the 14 months to 1 January 2022, compared to the £64.3m for the 18 months to 31 October 2020.
While it had managed to reduce its losses, the retailer’s sales for the period had dropped 24% to £372.6m.
Meanwhile, rivals at Tapi – which was founded in 2014 by Martin Harris, the son of Carpetright founder Lord Harris of Peckham, who is also a shareholder – saw its sales jump 27% to £137.4m in the year to 31 December 2021, and another 15% to £158.3m in 2022.
The retailer, which has over 175 stores nationwide, has poached its competitors’ staff and opened many of its shops on the same retail parks as Carpetright and in some cases, right next door.
“Tapi’s growth has coincided with Carpetright’s decline,” says JDM Retail founder and chief executive Jonathan De Mello, mentioning the retailer’s cunning strategy of “deliberately choosing to locate near to the best performing Carpetright stores”, poaching its competitors’ best staff, as well as offering competitive pricing and ranges.
De Mello adds that the Harris’ have also been able to “learn from mistakes made at Carpetright” as they build up the business.
Its strategy saw Tapi gain 7.3 percentage points of UK market share between 2015 and 2021 to become the UK’s second largest flooring retailer, while Carpetright’s shares fell by 5.1 percentage points to 15.1% in the same period, according to research from GlobalData.
The pair’s long-standing rivalry saw Carpetright accuse Tapi of taking “a kamikaze strategy to try to take [it] down” back when it first found itself on the brink of collapse in 2018.
It comes as no surprise that the retailer’s biggest rival has already registered an initial interest with PwC about taking on some of its stores and suppliers.
However, one former Carpetright executive disagrees that its downfall lies completely with Tapi, arguing it was the company’s lack of entrepreneurship that has seen it flounder.
They point out that the retailer’s business model has remained fairly unchanged since it was founded in the late 1980s and that it has continued with a ‘one size fits all’ store approach, sticking to its “big out of town sheds” format, compared to other retailers that have since launched “smaller, nimbler outlets” to cater to different markets.
“Tapi has likely sped up the process of Carpetright’s failure but the failure would likely have happened without Tapi,” the former executive notes.
Similarly, Bayes Business School professor emeritus of human resource management Chris Rowley suggests fault also in part lies with the retailer’s “somewhat confusing […] over-diversification from not only flooring, but mattresses, curtains and blinds, garden furniture and artificial grass”.
“Becoming seen as a ‘jack of all trades and master of none’ comes at a cost, especially if trying to compete on price, which can drive a business in an unsustainable direction and ever more short-termism and cost cutting,” he says.
What’s next for Carpetright?
Carpetright’s struggles are nothing new as in 2018, it launched a CVA to close 81 stores and gain rent reductions across its 400+ estate to reduce its losses. It completed the process in October 2022.
De Mello says the CVA gave the retailer “a better foundation from a property cost perspective” and its balance sheet saw a small boost during the Covid-19 pandemic when many shoppers chose to upgrade their homes during lockdowns.
While the retailer said back in April that it was “not planning” another CVA, sources have since told The Times that it is on the table along with a possible pre-pack deal.
De Mello says that it’s likely Carpetright will pursue another CVA – “however whether it will be successful given their prior CVA in 2018 is another story”.
“Tenant demand for retail warehousing is relatively strong at present and vacancy rates are low – so landlords may choose not to agree to any rent reductions that would form part of a potential CVA,” he notes, adding that if the business was considering going down a similar route again, it is likely that conversations to sound out landlords have already begun.
GlobalData analyst Matt Walton agrees, anticipating that either outcome for Carpetright will likely result in a number of stores closing.
“Its bloated store portfolio has long been a problem for Carpetright, with it currently operating 262 stores in the UK. This is a reduction of 28 on April 2022, and yet is still more than its closest competitor Tapi’s 174 and Wickes’ 229.”
Walton adds: “Should the Carpetright brand survive, its new owner will need to develop its offer further, and pivot more towards hard flooring and design across its range, and be stricter with its costs to fully capitalise on these improved conditions.”
It is understood that the administrators are in talks with The Floor Room, which is also owned by Nestware Holdings, for a possible deal.
Regardless of the avenue Carpetright decides to take over the coming weeks, CEO Barrett is confident the chain has a “viable future” on the high street.
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