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Why Did BHS Fail And What Can We Learn From It?

After the British Home Stores collapse people are looking for answers

29Jul

BHS (British Home Stores) is in the UK's media headlines. The 88-year-old department store chain collapsed due to poor management, an inability to drive further revenue or compete with other businesses. This case, however, is more than just a business mistake. The news turned into a scandal, and the public is eager to find out who is to blame.

BHS was founded in 1928, selling primarily clothing and household items but later expanded to furniture, electronics, groceries and beauty products. In 2000, the company was bought by Sir Philip Green, a British businessman and the chairman of the Arcadia Group, a company that coordinates multiple clothing brands. After 14 years of BHS run by Green, the company experienced difficulties, only a short-term rise in profits, and in the end, Green sold it to Dominic Chappell in March 2015 for £1. According to an MPs' report on the case, during the ownership, Sir Philip Green extracted large sums of money and left the business on 'life support'. There are also those who blame the new owner, Dominic Chappell, referring to his absence of the retail experience and the fact that he was declared bankrupt 3 times. But again, Green is involved, as he was the initiator of the deal with Chappell.

Aside from questionable actions in the sale, there were numerous strategic mistakes that held back the business. Firstly, the company was affected by the financial crisis due to having almost half of its assets invested in the stock market. Unsurprisingly, shares significantly dropped in price and the company lost huge amounts of money. Poor ROI resulted in insufficient funds to cover pension schemes of workers already on low wages. Before BHS was sold to Chappel, the company enjoyed a slight rise in sales, earning a 3.6% growth in 2014. However, the chain failed to compete with other businesses and was also affected by the decreasing interest in High Street stores compared to internet shopping. According to the FT, years before the deal with Chappell in 2015 happened, there was a long drought of investment which contributed to sales falling every quarter, resulting in continious losses.

Sir Philip Green is now under pressure and some MPs suggest his knighthood status should be removed. Green, on the other hand, claims his innocence saying: 'If you buy my house and it falls down, is it my fault?' The BHS collapse, however, is a much bigger issue than a metaphorical house. The chain is now closing all of its department stores across the country, with the overseas branch sold to Qatar's Al Mana Group. Despite the UK losing one of its oldest businesses to corporate governance failure, there will be a loss of 11,000 jobs once all stores are closed.

Thousands of workers are also at risk of not being covered by the pension scheme, despite contributing regularly. BHS itself has no funds to resolve the issue struggling with £1.3 billion of debt, so funds are likely to be sought from the Pension Protection Fund to which thousands of other pension schemes contribute, many of which are much smaller businesses than BHS. In their joint report, the Work and Pensions, and Business, and Innovation and Skills Committees concluded that Sir Philip Green was aware of the consequences, and rushed to sell the company to Dominic Chappell, a buyer he was aware was 'manifestly unsuitable'.

The BHS scandal raised concerns over the state of the UK's overall corporate governance. After joint inquiry performed by various committees, the UK Prime Minister Theresa May concluded that 'the country needs to tackle corporate irresponsibility and reform capitalism to make sure it works for everyone, not just the privileged few.' The Influential Institute of Directors (IoD) suggested Mrs May should launch a review into UK corporate governance, to prevent similar cases in the future, where the public sector suffers the most. However, even if those who generate wealth on employees' behalf face criminal charges, the bigger impact will still be on employees, further damaging public confidence.  

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