With the rise of company failures will pre-packs become the norm?

A pre-pack is a sale of a company's business and assets (often to existing management) that is negotiated prior to the formal appointment of an administrator with the intention that completion of the sale take place immediately following such appointment. Recent examples of pre-packs include Faith Shoes.

Creditors often feel hard done by in pre-packs as they feel they have been kept in the dark with the sale having taken place before they have even learnt of the company's insolvency or had the chance to exercise their contractual rights and that a better price could have been achieved by putting the business out to tender. Others would argue that pre-packs are a legitimate tool to preserve value in a company's business for the benefit of stakeholders generally leading to the preservation of jobs and a greater realisation of value than might otherwise be achieved. They point to the fact that they enable a company that would otherwise not have sufficient funds to be traded by an insolvency practitioner in administration, to effect a sale that would not otherwise be achieved and to the fact that it prevents the company's customers, third party suppliers, landlords and intellectual property licensors exercising any automatic termination rights on the commencement of an insolvency process, realising the value of assets that might otherwise be lost.

Fashionista thinks that there are circumstances where pre-packs may be appropriate but it is clearly not a one-size-fits-all approach. Finally, a word of warning if you are thinking of doing a pre-pack and you have leasehold properties, watch out for the landlords. They often don't take kindly to finding that they have a proposed new tenant for their shop or business premises with little or no notice. The potential purchaser would be wise to sound out a landlord immediately before the sale to avoid the risk that he withholds his consent to any assignment thereafter.

"The bag doesn't know it's a bag ..."

Canada's Eye Weekly carries a punchy piece, "The Louis Vuitton Con", by Rea McNamara, which discusses the ideas of Marcus Boon, an academic whose forthcoming book In Praise of Copying seems guaranteed to raise a storm. McNamara writes:

"Western society inherited from Plato the most popular concept of copying, that "everything is a copy" (also known as mimesis). Heidegger would later say that mimesis equals copying a presentation — “all copies are made and produced” quoted Boon — and the parodying of something in a manner. How’s a bag then the imitation of an idea?

Perhaps it has something to do with our concept of luxury. Boon showed an original 1927 Louis Vuitton ad with this delicious sales pitch: “The trunks that last a lifetime… is French but LOOKS French… not only IS the finest but APPEARS the finest.” The idea of an "essential" LV outward appearance is complicated, a sameness not easily differentiated between a real Canal Street stall with fake product and the faux Louis Vuitton stall (with real product) installed outside the Brooklyn Museum for their Takashi Murakami retrospective (the Japanese artist famously re-made the LV monogram in "super-flat" technicolour). Outsourced manufacturing muddies it further — is the Louis Vuitton bag really French? LV artistic director Marc Jacobs is American, after all".

The article continues in much the same vein, with lots of philosophical points to ponder. For example,

"Louis Vuitton would like you to believe in their version of a "projected" fixed original essence. But a bag isn’t really a living entity is it? It can’t do transcendence. The bag doesn’t know it’s a bag, and while Vuitton would lead you to believe that designation is key (neat seams, hologram authenticity cards, serial codes), it’s obviously unstable".

Fashionista awaits the publication of Professor Boon's book with interest and trusts that, in view of its title and its author's thesis, it will not be burdened by the presence of a copyright notice.

VAT down to 15%, but do retailers have to pass it on?

In the wake of the Government's pre-budget report announcing a reduction in the rate of VAT from 17.5 % down to 15%, Fashionista sets out below a practical guide for retailers about the impact of the VAT reduction, which will apply from 1 December 2008:

1) Is there any obligation to pass on the reduction to customers?

The short answer is NO. HMRC has issued guidance explicitly stating that, whilst businesses are strongly encouraged to pass on the reduction, there is no obligation to do so. This is consistent with raft of consumer law in this area.

2) What if the retailer DOESN'T pass on the reduction?

Retailers may not want to pass on the reduction (at least not immediately) for a number of reasons, including the logistical nightmare (and cost) of repricing goods and services, amending billing systems and changing advertising and marketing materials, particularly at such short notice.

Perhaps the main issue is one of potential negative publicity, and its impact on brand value and sales. However, retailers (particularly those who operate exclusively online) should also consider what their consumer terms & conditions say. Normally, where terms & conditions change (including prices), customers must be given notice of the change and, if the change disadvantages them, given a right to terminate. Depending on how a retailer's Ts&Cs are drafted, failure to pass on the VAT reduction could constitute a change in price which disadvantages customers, even though the headline figure doesn't change, because the amount of revenue retained by the client will increase. Under the Distance Selling Regs (which apply to any etailer or retailer selling through a catalogue), businesses must set out the price of goods or services including taxes. However, except in specific industries (such as insurance), there is no obligation to set out how much the tax element of the price is. Therefore, if the reduction is not passed on, clients are unlikely to have to reprint their price lists and other marketing material.

3) What if the retailer DOES pass on the reduction?

While this is the most desirable option from a PR perspective, it does pose significant practical problems. For most of the high street retailers, the task of re-pricing all stock is a logistical nightmare. As Drapers reported yesterday, while most of the UK's major retailers are intending to pass on the 2.5% reduction, many are planning to take off the discount at the till point rather than by re-ticketing stock.

From a legal perspective, this raises an interesting question about the application of the recent Consumer Protection from Unfair Trading Regulations 2008, which make it a criminal offence to give a misleading price indication. The Regulations provide that retailers are exposed to potential criminal liability if they mislead consumers as to price. When these Regulations came into force earlier in the year, BERR issued guidance which stated that, in the event of a change in the rate of VAT, businesses would have 14 days from the date of the change (i.e. from 1 December) in which they could merely use "a general notice or notices" to avoid giving misleading price indications to consumers. This could imply that all materials displaying incorrect prices should be replaced by 15 December to avoid the risk of prosecution.

Fashionista has learnt that one high street retailer intends to place signage at the till point informing consumers that the VAT reduction will be discounted at the till, so that the price as shown on the ticket includes VAT at the old 17.5% rate. On the basis that other retailers intending to take off the discount at the till will use similar signage, they should be able to escape criminal liability under the Regulations. This is because, to attract criminal liability, a retailer must:

(a) knowingly or recklessly engage in a commercial practice which contravenes the requirements of professional diligence, AND
(b) the practice materially distorts or is likely to materially distort the economic behaviour of the average consumer with regard to the product.

In this scenario outlined above, Fashionista doesn't think either limb is fulfilled. "Professional diligence" is a defined term which refers to the special skill and care reasonably expected of a trader, commensurate with honest market practice and the general principle of good faith. A retailer who is seeking to pass on the VAT saving and using signage at the point of sale to inform is customer is not acting in bad faith. Further, the second limb, would be fulfilled only if the consumer would not acted differently had he known the correct price. Fashionista can't imagine too many shoppers complaining that they have paid less than the ticketed price.

'Primark effect' raises parliamentary hackles

Today's Telegraph reports that British MPs are blaming throwaway fashion from shops such as Primark for an increase in the amount of clothes being dumped in landfill sites. The so-called 'Primark effect' arises when cheap garments, often made from manmade materials that cannot be recycled easily, are worn just a few times and then binned, according to Parliament's Environment, Food and Rural Affairs Committee.

Above left: whatever you think of Primark's fashions, the chain has proved more popular than most UK parliamentarians -- and now it seems its clothes are likely to outlast them too.

Fashionista says MPs may be wasting their wrath on the wrong target. If clothes are made of substances that can't be recycled, they're going to cause environmental problems however many times they're worn. And not all clothing is binned because it's cheap: some is jettisoned because it doesn't fit any more, or murdered by owners who can't follow the cleaning instructions.

How to improve your online look - seminar

Despite the credit crunch, the online retail sector continues to grow (albeit at a slightly slower rate than in previous months). Improving Your Online Look was a timely opportunity for the retail sector to gather and consider the future of e-tailing and how to maximise the time a customer spends online.
The seminar held at Olswang on 24 October kicked off with a fascinating talk from retail consultant, Tony Stockil from the Javelin Group, who took us on a whistle-stop tour of his view of how the online sector is likely to develop over the next 2 to 5 years.

Ashley Hurst, associate in the Media Litigation team at Olswang, discussed the issues surrounding adding social networking capability to retail websites. As well as using established social networking websites such as MySpace to generate publicity for their products and drive traffic to their websites, many retailers are now looking towards developing their own websites in order to build in elements of user-generated content to increase brand loyalty.

Ashley examined how, from a legal point of view, website operators can be held liable for user-generated content on their websites, risking being sued for libel, breach of privacy and intellectual property infringements in respect of material posted on their websites by customers or other interested internet users.

Online sales have been out-performing the high street for some time now. For many retailers, entering the online space can be a time consuming and costly exercise. Tom Torkar, associate in Olswang's Technology team, looked at sourcing some or all online retail processes from a third party service provider as an answer to these concerns. Typically outsourcing can result in lower costs, an improved customer service and it should involve a service provider who has a higher degree of expertise and resources than the retailer has. But, if not managed correctly, the process can lead to a loss of control and visibility of the sales processes and the customer experience. Tom went throught some of the contractual mechanisms that retailers can put into place to manage the service provider's performance and to reduce risks for a retailer.

Sarah Wright, partner in the Intellectual Property team at Olswang (and founding member of the Fashionista team), discussed the unique challenges faced by brand owners online as they try to police misuse of their brands. Sarah explained that while the domain name dispute processes offered by ICANN (the UDRP) and Nominet are quick and relatively inexpensive, a brand owner cannot recover its legal costs or get any damages. Filing a UDRP claim against a domainer therefore has little deterrent effect. By issuing Court proceedings for trade mark infringement, a brand owner hits the cybersquatter where it hurts: the pocket.

Another challenge for online retailers is the growing cost of paid-for searches and the fact that since May 2008, Google amended its Adwords policy making it possible for competitors to purchase keywords identical to someone else's brand to direct traffic to their website. Without a precedent in the UK confirming the legality (or not) of purchasing third party trade marks as keywords, retailers are faced with a stark choice of either joining in and bidding on others' brands or watching their online ad spend grow as they compete with rivals to purchase their own keywords.

The Winter of Discontent – the battle over monthly rents

10For those retail landlords who are feeling the winds of change as tenants dig in for the months ahead and bargain hard for letting concessions, talk of monthly – or even weekly – rents is not breaking news. Unsettling as the Hermes "revolution" may be, the principle of breaking with the tradition of quarterly advance payments to assist tenant cash flow is nothing new.

The latest debate - echoing calls for the same in the early nineties - relating to monthly rental payments has raged for the best part of a year. Whilst there are arguments for reforming the practice, landlords are faced with not only the threat of voids and devaluation of assets but also the reality of meeting quarterly/contemporaneous repayments to their lenders.

Common examples of other rental concessions being negotiated by tenants are additional break opportunities, extended rent free periods, turnover only deals and demands for landlord capital contributions. All bring with them their own problems as landlords look forward to reviews and ERVs (estimated retail values).

Buckling under the pressure from Sir Philip Green and Lord Harris, some major landlords have just announced that they will allow retailers with less than four stores to pay rents monthly, with no financial penaltyIt now seems certain that a return to the recession of the early nineties is on the cards and that for retail landlords there is still more to come as we head towards Christmas and reports of household name retailers facing administration become daily rather than monthly news.

Many landlords are taking advantage of this period of low activity in the investment market to review their portfolios and the projected ability of their covenants to perform. With Christmas approaching landlords must be just as pragmatic as tenants and start putting in place strategic plans to combat what could quite possibly be, "the coldest winter since records began….".