House of Fraser has just announced the closure of Dickins and Jones. Lord Fraser had been among the first to see the potential gains from arbitrage between equity markets and property markets. But, as the story of House of Fraser also shows, you can only create enterprise value in the long run by better management of the operating business
House of Fraser has just announced the closure of Dickins & Jones, the department store that has occupied a prime position on Regent Street for more than a century.
This story seems to have been developing all my life. As a boy in Edinburgh, I was dragged by my mother around the department stores for which the city was renowned. On Princes Street were Binns, Smalls and Jenners; you turned the corner and found Patrick Thomsons and J. & R. Allan. One by one, these shops were bought by House of Fraser.
Customers were fiercely loyal to their favourite store. Old Edinburgh hands could tell a Smalls client from a J. & R. Allan shopper at a glance. But they would begin muttering that “Patrick Thomsons is not what it was”. Then the store would close. Only Binns, trading as Frasers, and Jenners, whose founding family was determined to keep it out of Fraser’s clutches, are left.
Even as a boy, I did not understand how acquisition followed by closure was a smart business strategy. Some people said that the era of the large department store was over, others that the wily Fraser was set on achieving a retail monopoly. But both accounts were refuted by the arrival of new retailers – Debenhams, John Lewis and Harvey Nichols – to fill the slots vacated when Fraser shops shut. Still, I was told, in the Scottish phrase, to haud my wheesh: Lord Fraser of Allander, as he became, was the greatest Scottish businessman of the age, the draper’s assistant who had risen to be proprietor of Harrods, the world’s most famous emporium.
The rags-to-riches account was exaggerated. Although Fraser had begun his working life behind the counter, his promotion at the age of 21 to managing director of a chain of stores owed less to his undoubted talents than to his father’s position as owner of the company. But Fraser had been among the first to see the potential gains from arbitrage between equity markets and property markets. He had used sale and leaseback deals to release cash for acquisitions, successively repeating the process until he reached central London.
But, as on the first day of Harrods’ sale, the bargains were snapped up. In some early transactions Fraser did acquire retail brands for less than the value of the underlying property assets – as Charles Clore would also do in London. But later deals involved substantial acquisition premiums. The goodwill thus purchased proved ephemeral when, as Fraser retreated from the business, the effectiveness of its management declined.
The attempt to add value to retailing through financial engineering gained sophistication. Lloyds Bank would show how raising the return on equity through sale and leaseback allowed you to use highly valued paper, rather than cash, as currency for acquisitions. Private equity firms would reduce the cost of capital by confusing investors with multiple layers of debt. Now they cluster round the retailing sector like, well, locusts.
But as the sad experience of Edinburgh’s House of Fraser stores demonstrated, you can only create enterprise value in the long run by better management of the operating business. And since all finance houses are drawing from the same limited pool of retailing expertise, there is simply not enough better management to go round. Too often, banks have been repaid from the proceeds of the closing down sale. Patrick Thomsons is not what it was; then Patrick Thomsons is no more. This happened equally at Whiteleys, Gamages and now Dickins & Jones.
The small boy who did not understand Fraser’s business strategy, the ladies who regretted the decline of their favourite store, were closer to the heart of the matter than the advisers who structured Fraser’s deals. But what goes around comes around. Even as House of Fraser announced the final markdowns at Dickins & Jones, the company achieved the prize that had eluded its founders. Jenners had failed to recognise that the daughters of ladies who had met there for morning coffee now worked in Edinburgh’s growing financial and government sectors, and shopped at lunchtime at Harvey Nichols. And so the most famous of Princes Street stores has just become part of House of Fraser.