Blog: There can still be life after insolvency for retail brands
Andrew Smith, corporate recovery analyst at Glasgow-based Metis Partners, considers the future of retail brands which collapse into insolvency
The downward trend in bricks-and-mortar retail has continued into 2019, most recently with the failure of Debenhams.
Its collapse into a pre-pack administration brings to 16 the high street’s high profile retail casualties of 2019 so far. These include, to name but three, Better Bathrooms, LK Bennett and Oddbins. Of equal concern is that major high street players such as Marks and Spencer and House of Fraser continue to battle challenging conditions.
There have been many well-aired explanations of this retail crisis: rising costs and the value of sterling following the Brexit vote are commonly cited. The bulk of the blame, however, seems to be attributed to online vendors who have steadily exerted increasing pressure upon traditional retailers.
Decline in the value of a brand is not the issue here. Even where a high street chain closes, the value in the brand will remain relatively unaffected. In recent years, brands formerly belonging to defunct retailers have been revived as online-only businesses after being bought out of insolvency by new owners keen to bring benefit to their own business from the accrued goodwill around these brands. The ongoing success of brands such as American Apparel and Polaroid demonstrates that significant value can, in many cases, reside within a brand, and upon the insolvency of the high street operation, can command a substantial return for creditors.
The power of a retail brand
Retailers often rely on a range of IP assets, formal and informal, which contribute to the overall operation of the business. They are likely to own IP rights in the form of trade marks, designs, customer databases, social media accounts and domain names. A retailer’s brand is often the most valuable IP asset it holds as it is tightly embedded within many aspects of a business such as customer relationships and the business’s public image.
The company’s brand is often conveyed to customers with a label or a symbol which can appeal to a consumer’s trust and empathy based on past experiences or what other consumers say about the brand. A strong brand is synonymous with quality and has the ability to entice consumers to pay a higher price for a product which they believe is superior to a competitor’s brand.
Some of the core value indicators for a brand will include: how long a brand name has been traded; the revenues associated with it; and how well it is protected by IP rights. Substantial value will therefore lie with heritage retail brands which have accrued years of customer recognition.
A recognisable brand which can command consumer trust takes a considerable amount of time and effort to develop and nurture. It is easy to see why buying a well-established brand out of insolvency may be attractive to a company’s competitors looking to increase their market share or to new entrants to the market who have not yet established goodwill in their own name.
For example, we sold the heritage British retail brand Horrockses out of insolvency. The sale attracted significant interest despite the garments under the original owners not having been manufactured since the mid-20th century. The iconic brand has now been revived and can be found online. Similar examples include the recognisable Maplin and Brantano brands, whose IP assets were both sold out of insolvency and have since returned to the market as online retailers. In each case, a substantial return was achieved for creditors and the brand of these iconic British retailers was preserved.
How to preserve brand value in distressed and insolvent scenarios
While retail brands tend to preserve their value despite difficulties surrounding the business itself, there are also steps which could be taken to preserve value in distressed or insolvent scenarios. It is important to be aware of the value of the corporate brand and reputation and consider how potential insolvency proceedings may affect that in order to ensure value preservation and, subsequently, maximum recovery.
Overall, if the brand has a strong public presence it is better not to tarnish it with a long insolvency process. During the early stages of a distressed or insolvency scenario, actions can be taken to preserve value. Planning how to manage customer communications can go a long way to preserve brand value since, following formal insolvency proceedings, the way the brand is portrayed in the media and online can adversely affect value.
In the later stages of an insolvency process, once an acquirer has been identified for the brand, timely completion of disposal is key in order to ensure minimal depreciation in value. The longer a brand lies dormant, the more the value depreciates. A quick sale also allows the purchaser to get the brand back to the market in a relatively uninterrupted fashion and maximise the goodwill around the asset.
How to protect the IP assets underpinning the brand
Typically, trademarks and domain names are the two core assets which underpin a brand, but it is also worth considering assets such as social media accounts, customer databases and design rights. All brand-related assets should remain together so that they can be packaged and sold in order to maximise the brand value.
The importance of establishing ownership
It is crucial to establish where ownership and possession lies in relation to the company’s IP rights such as trade marks, designs, domain names and social media accounts. For example, a domain name which is registered to an employee makes it practically, if not legally, his or her property. While many employees may simply agree to update the register and assign the rights to their employer, it is possible that ownership of the domain may be used as a “ransom strip“, particularly following a company’s insolvency. Similar situations can occur where other formal IP rights lie with directors or other employees.
The dangers of infringement
Where a company is insolvent, infringement risks can arise where a competing third-party misleadingly registers the firm’s name or brand as a trade mark under the belief that insolvency has resulted in the brand becoming available to register. Therefore, it is important to consider whether the registration of some unregistered trade marks may be of value.
Keep up with renewals
It is important to be vigilant in keeping track of a company’s domain re-registration requirements as the domain could be purchased by another party upon its expiration. Similarly, trade mark and design right renewals should be kept up to date so that these formal rights do not lapse.
Retail brands invest significant time and resources into building goodwill and reputation in a brand. This type of value may not be recorded in a company’s balance sheet but, for some retail companies, it can prove to be one of their most valuable assets. Brands and their underpinning IP assets can command a significant return for creditors and should not be overlooked in insolvent and distressed scenarios.