The retailer Wilko collapsed into administration in August, leading to the closure of 400 stores and the loss of 12,000 jobs. As Lisa Wilkinson, the former Chair, argued during the Select Committee hearing, its demise had come on quickly. At the beginning of 2022, it had “no debt position at all” and it had for several years retained a strong cash position at each financial year end.
So, how did it all unravel so quickly? The Select Committee hearing gave us some insight into what went wrong.
What went wrong?
The Select Committee considered why Wilko had failed while similar retailers like B&M, The Range and Poundland have flourished in recent years.
Wilko’s failure was put down to:
- Sticking with the high street.
Wilko retained a large number of high street stores rather than expanding into out-of-town shopping parks, where B&M and The Range had found their success. The “death of the high street” has long been heralded, so some will argue that Wilko should have seen this coming. However, Poundland appears to have bucked this trend, retaining a significant high street presence. Ms Wilkinson noted that Wilko was tied into many long-term lease agreements, making it difficult to shed underperforming stores.
- A move away from a “value” offering?
The Select Committee debated whether Wilko had wrongly moved away from its core offering as a value retailer. Nadine Houghton of the GMB argued that Wilko had started moving away from its roots as a discount retailer in 2014-2015, and even tried to “move to almost a John Lewis-type model”. The GMB pointed to the opening of a High Street Kensington branch of Wilko as the nadir of this strategy.
Ms Wilkinson insisted that Wilko was a value retailer, but admitted that its proposition as against the discounters had become unclear.
- Lack of online presence.
As Ms Wilkinson admitted, Wilko was too slow to improve its online offering.
- Not furloughing staff during COVID.
Wilko’s former CEO, Mark Jackson, believed that Wilko made the wrong decision to keep stores open during the COVID pandemic. As an essential retailer, Wilko was allowed to stay open and decided not to use the funding available to subsidise its staff costs. Mr Jackson clearly believed that if Wilko had taken advantage of furlough, the costs saved could have helped to save the business.
- Supply issues.
Wilko suffered major supply issues which led to empty shelves and unattractive stores.
- Botched infrastructure investment.
Compounding the issue of empty shelves, in recent years, Wilko spent £60 million on warehouse modernisation which was – in the words of ex-CEO Mr Jackson – “nothing short of a disaster”. It led to even emptier shelves and wasted CapEx.
Restructuring attempts
Wilko’s directors tried to save Wilko – not only through operational changes, but also through restructuring options. Wilko’s directors considered a range of restructuring options from self-help measures to a CVA and a sale.
- Raising cash.
Former Chair, Ms Wilkinson set out how the first steps they were advised to take were to raise cash.
Initially, Wilko sought this through secured lending and then the sale and lease-back of its distribution centre. The sale in November 2022 raised £48m of cash, which was used to pay off Wilko’s RCF, and seems to have enabled the auditors to sign off Wilko as a going concern.
Wilko also looked to raise debt financing through secured lending, and ultimately Asset-Based Lending with Hilco.
- Reducing costs.
Wilko went through a major cost-reduction exercise in 2022-2023, to try to improve its cash position and show that it had a viable business.
- Company Voluntary Arrangement (CVA).
Ms Wilkinson recounted how in 2022, Teneo advised that Wilko should consider a CVA in early 2023 if trading continued to deteriorate. A CVA is a procedure under which a company can compromise its debts if it has the support of 75% of its creditors by value.
Wilko’s directors drew criticism from MPs for not implementing a CVA earlier than their attempted CVA in 2023. Interestingly, the directors revealed that a CVA was not viable in 2022 because the company was not considered to be insolvent or contingently insolvent at the time. This shows how quickly the business fell apart, and also the limitations of CVAs.
The CVA plan encountered several difficulties, the first of which was that Wilko had understood that its pension scheme alone would comprise 75% of its creditors – so, the directors believed they could push a CVA through simply by keeping the pension scheme happy (or happy enough). It appears to have transpired in early 2023 that the pension scheme’s share of Wilko’s debt had been overestimated, and the amount owed to other creditors underestimated. At a relatively late stage, Wilko was forced to go out to more creditors to get their support, including the very landlords whom they were seeking to compromise. This made negotiations much harder, and led to a delay beyond April 2023.
The second and terminal factor, according to Mr Jackson, was that news of the CVA leaked before it was ready to be launched, spooking suppliers:
“The biggest single factor in it not being delivered was news of the CVA leaking into the press, which made suppliers that we had got back on board very nervous again. Availability started to fall and then it became a vicious circle.”
The Select Committee hearing did not explore why other formal restructuring procedures were not used. The most obvious candidate would be a Part 26A Restructuring Plan, which allows for “cross-class cram down” – which means that creditors are out into “classes” and if a class does not meet the 75% voting threshold but the others do, then that entire class can be “crammed down” and the compromise pushed through, providing the Court considers the class will be no worse off if the plan is implemented. This could potentially have allowed Wilko to agree a compromise with other classes and to “cram down” the landlords.
The Part 26A Restructuring Plan also has a lower solvency threshold for when it can be used – requiring only that the company “has encountered, or is likely to encounter, financial difficulties that are affecting, or will or may affect, its ability to carry on business as a going concern”.
Clearly, Wilko will have had its reasons for not using a Part 26A Restructuring Plan; CVAs remain a flexible – and much less expensive – tool for restructuring debts. However, it was notable that the Business and Trade Committee did not ask about this new procedure, which was only introduced in 2020.
- Sale and other funding options.
Mr Jackson discussed the necessity of funding to get Wilko to the other side of a CVA. He referred to speaking to over 20 potential investors, from potential private equity buyers to debt investors. But ultimately, it was not possible to get enough investment. By Mr Jackson’s reckoning, even up to August 2023, Wilko could raise £15 million in unsecured finding and £45 million in secured lending, but the business needed another £15-30 million to see it through.
Lessons
Here are my key takeaways from Wilko’s collapse for businesses from all sectors:
- Listen to your advisers.
Ms Wilkinson commented that she “wished she took the advice of PwC earlier”. Directors of companies are rarely experts in restructuring and insolvency. It is vital to get expert advice from lawyers and insolvency practitioners, and to listen to it!
- Get the right team on board.
Ms Wilkinson also commented that she wished she had brought Mark Jackson in as CEO earlier. He began in December 2022. By August 2023, Wilko was insolvent. Make sure you have the right team to steer you through troubled waters.
- Keep restructuring plans under wraps.
Mark Jackson commented that Wilko’s nascent CVA was scuppered when it leaked to the press – suppliers stopped extending credit, leading to low availability in stores and a vicious cycle of declining cash. This is a common problem with large distressed businesses – once people lose confidence in the business, its demise becomes self-fulfilling.
It is vital that restructuring plans are kept within a small group of people before they are ready, so as not to spook investors, suppliers, creditors and customers.
- Ensure compromise voting figures are right.
This is one for the lawyers and insolvency practitioners, really! Until early 2023, Wilko had understood that it could get a CVA through with just the pension scheme’s votes – which turned out not to be the case, so more creditors had to be brought on board in order to secure the necessary 75%. If this had been appreciated earlier, then perhaps a CVA could have been implemented in time.
