Market focus: retail

With sales of £339bn in 2015 and a workforce of 2.8 million, retailers contribute hugely to the UK economy and, through digital technology, they are becoming ‘omni’-present in consumers’ lives. E-commerce spend (up 11% last year to £114bn) is booming and continues to perform strongly despite the EU referendum.

Meanwhile e-retailers are opening bricks-and-mortar stores, and brands are expanding globally.  

No surprise then that law firms are paying increasing attention to this rapidly evolving sector, with many marketing themselves as a ‘one-stop shop’ for retailers.

Regional firm Bond Dickinson started acting for the sector in 1969 when B&Q opened its first store in Southampton. The firm has since represented many other national and international retailers, including Kingfisher Group, Signet, Whitbread and Clarks. 

Gavin Matthews, partner and head of retail and consumer, says: ‘We have broad and deep expertise of advising retailers on all their legal needs.’ Nowadays, that means a plethora of services covering physical and, increasingly, digital retail. These range from employment and disputes, franchising, M&A, property and supply chain contracts, to e-commerce, IP and brand management, ‘omni-channel’ retailing and data privacy.

Anglo-American firm DLA Piper has a team of more than 200 retail specialists spanning an equally wide range of legal disciplines across the global business. Giangiacomo Olivi, global co-chair of the retail group, says: ‘We want to be trusted business advisers to our clients, hence our sector approach.’

Eversheds has a similar strategy. Susan Samuel, deputy global head of the firm’s retail division, says: ‘We talk to our retail clients about what their business needs are, rather than from any practice group’s perspective.’ Specsavers recently appointed Eversheds as its preferred supplier in UK litigation, employment law, commercial and corporate issues.

Big data is watching

Firms may provide the full gamut of legal retail services, but some areas are expanding faster than others.

Mark Abell, Bird & Bird’s global head of franchising, licensing and multi-channel strategies, says: ‘The areas where retailers need the most care and support, and real expert advice are in dealing with technology and their multi-channel strategy, particularly on the international side.’

Multi-channel (or ‘omni-channel’) retailing links together in-store, online and mobile channels with the aim of providing customers with a seamless experience.

‘We deliver very specific expertise in helping retailers to come up with an appropriate strategy for internationalisation,’ Abell adds. ‘It is all about how technology is impacting upon the strategy of these businesses and how the need for new markets is incorporated into that. So it tends to be digital platforms and opening stores in other markets.’ Abell says that ‘internationalisation’ is more than just setting up a subsidiary or finding a distributor or franchisee: it is increasingly about finding ‘innovative structures’ on the technology side. Hence retailers need advice on how to contract with the IT firms that provide such services as web design, electronic proof-of-delivery systems and flash sales.

Bird & Bird, for instance, has advised Neal’s Yard Remedies on its market entry and multi-channel strategy for Hong Kong and China, including standalone stores, concessions and e-commerce, with the assistance of the firm’s offices in the region. The firm is also advising the Mothercare group on international restructuring and e-commerce projects. ‘Much of the work we do is about re-engineering retail businesses so they are more appropriately geared up to the challenge of the modern market,’ Abell says.

Andrew Rosling, head of Addleshaw Goddard’s retail and consumer sector group, explains the online/offline conundrum facing the industry: ‘The real challenge for a retailer is that consumer behaviour is changing so fast. People don’t just go to a bricks-and-mortar retailer, browse and buy. They engage in a much more complicated and less loyal way.’

One well-known phenomenon is customers browsing in a shop then buying more cheaply online.

‘You have got to be an agile, multi-channel business to prosper,’ Rosling says. ‘You need to continue to run a [physical] retail portfolio, but you also need a very advanced digital strategy.’ Retail is ‘a very big sector’ for Addleshaw Goddard, whose clients include Dixons Carphone, Primark, Diageo and Hobbs. The firm assists retailers with setting up ‘complex IT platforms’, and dealing with ‘sensitivities around exploiting and monetising’ customers’ personal data. The UK’s Data Protection Act 1998 requires retailers to process it ‘fairly and lawfully’.

‘The GDPR [the EU’s General Data Protection Regulation] regime that is now coming in creates even more complexities, so data is a key area for retailers,’ Rosling adds.

At DLA Piper legal work from the retail sector has ‘dramatically increased’ over the past two years, Olivi says, ‘driven by the digital transformation and globalisation of most of our clients’.

The firm continues to advise clients such as Illamasqua, JD Sports, Levi Strauss and Puma on a ‘full-service’ basis, but ‘big data’ is generating new and different types of work, partner Matthew Duncombe explains: ‘It is definitely a growth area within the retail sector.’

DLA Piper acts for Certilogo, a tech supplier to high-profile fashion brands such as Cavalli, Versace, Diesel and Colmar, on implementing ‘innovative systems and anti-counterfeiting measures’ for designer brands, and also on the use of systems that gather, extrapolate and interpret data. That gives the retail client the ability to conduct ‘advanced CRM [customer relationship management]’ and better manage its business.

‘Retailers are becoming data managers,’ Olivi says. This is phase three in the rapid transformation that first saw retailers globalise, through ‘bricks-and-mortar expansion’, and then become ‘publishers’ of content through Facebook, Twitter, YouTube and other online channels to raise brand awareness.

As managers of data, retailers are not only using customers’ personal details for outward-facing activities such as marketing, but also to improve internal processes such as managing inventories and distribution, Olivi explains.

Duncombe notes: ‘Data is transforming the way we provide our legal services because we are effectively becoming more [like a] consultancy. We advise our clients on how they use data to drive their business. That is, not just in the traditional sense of drafting some terms and conditions; [our role] is becoming more advisory.’ Retail is ahead of other sectors in this respect, Duncome contends.  

There seems little doubt that data is the ‘new oil’ among retail lawyers. Aside from real estate and regulatory work, data has been driving Bond Dickinson’s activity in the sector over the past 18 months, says Matthews.

‘Retailers have historically been good at collecting data, but the best ones are those collecting rich data across all channels and finding the best ways to coordinate and utilise it,’ he says. The firm recently advised ‘a major multi-jurisdiction retailer’ on aspects of its online behavioural advertising (the collection of information from web browsers for online ads that are more relevant to the user). This includes the client’s use of cookies and personal data, abandoned basket emails (chasing customers who get to the online checkout but do not purchase) and programmatic advertising (the use of software to buy digital advertising). The firm’s advice extended to drafting, negotiating and advising on agreements with third-party service providers, including Akanoo, Yieldify, KBM, MEC /Xaxis and Google.

Modernisation is creating other challenges for retailers – and more work for lawyers. ‘Through digitisation, all of a sudden companies find themselves global players, even if they are only established within one jurisdiction,’ Duncombe notes. This brings risks, one example being a global e-commerce platform through which companies can be exposed to class actions in multiple countries.

‘The scenario is really wide in terms of the laws that we have to take into account,’ he adds, citing labelling and packaging legislation across multiple jurisdictions.

Furthermore, as Olivi says: ‘There are many loopholes and regulations that are not really up to standard from a technology perspective, considering how the retail world is evolving.’

Take ‘integrated commerce’, which blurs the boundaries between digital and bricks-and-mortar retail. What happens when customers get the look and feel of the product in the shop while orders are placed online for home delivery? The Consumer Rights Directive (implemented into UK law by the Consumer Contracts Regulations 2013) stipulates a 14-day ‘cooling off period’ for consumers to change their mind in distance and online selling. Yet that is on the assumption that customers have made a ‘less informed’ choice since they did not physically see or feel the product before they bought it, Olivi observes.

David Wyatt, who leads Clyde & Co’s retail and consumer sector, says: ‘New technology is having  an effect on shopping habits, but also on the forms of leases that people are getting.’ For example, the onset of click-and-collect and in-store tablet technology has meant that both landlords and tenants have had to rethink turnover rent leases, and what is and is not included in turnover. Wyatt adds: ‘With most retailers wanting online capability in-store, landlords may need to restrict the amount of Wi-Fi used in any centre or development, and tenants will obviously want to ensure they have sufficient capacity for their own needs.

‘We are also seeing increasing interest in digital marketing by landlords with a keen interest in access to a tenant’s database and online information.’

Cybercrime and regulation

The flip-side of retailers handling more personal data, including bank details and encrypted credit card data, is cybercrime: 94% of respondents to the British Retail Consortium’s 2015 Crime Survey reported that the number of cybersecurity breaches suffered by their business is either increasing or remaining the same.

‘Retailers are particularly prone to high-profile hacks,’ says Rosling, pointing to last year’s cyber-attacks on Carphone Warehouse and TalkTalk. The more they promote their products the more they come to hackers’ attention, he argues.

‘You live in this very exposed world where people are always trying to get into your IT fortress,’ Rosling says. ‘The consequences of being ill-prepared for that or managing the hack badly are very serious.’

A cyber-attack on TalkTalk last October cost the company £42m and 100,000 customers. The telecoms firm was criticised for failing to encrypt some customer data and for its delay in notifying the Information Commissioner’s Office of the incident.

‘It is a massive, fast-moving risk,’ Rosling says, adding that cybercrime currently tops boardrooms’ ‘anxiety list’ ahead of other major risk areas for retailers such as product liability, health and safety, and labour issues.

Addleshaw Goddard assists clients by ensuring that they are ‘well-prepared’ in the event of a cyber-attack. ‘Our support is generally beforehand to test if they are ready for action,’ Rosling says. This means having in place: a procedure to mitigate any fallout from the security breach; the IT suppliers to carry out an analysis of problems; the defamation lawyers to minimise any reputational damage; and the privacy and data protection specialists to assess whether or not there has been a breach of data protection laws.

With big data centre stage, new EU data protection rules are adding to lawyers’ workload. The GDPR was published in May and will apply from 25 May 2018.

‘We are already assisting clients with compliance,’ says Melanie Benson, head of the retail and fashion group at Harbottle & Lewis. ‘We are expecting a steady flow of work from our retail clients over the next couple of years, in the same vein as the Consumer Rights Act drove a lot of new work.’

The GDPR unifies data protection rules across the EU. It introduces a statutory obligation for organisations to notify personal data breaches to the regulator within 72 hours, unless the breach is ‘unlikely to result in a risk for the rights and freedoms of individuals’. The new rules will apply not just to the data controller (the retailers which collect customer data) but also to the data processors (for example, their distributors and suppliers).

‘There will also be much bigger fines coming down road,’ Rosling notes, of up to €20m or 4% of annual global turnover.

All retailers that sell services and goods via the internet to EU residents will have to comply with the GDPR. ‘So it would still apply to the UK even if it exited the EU,’ Olivi observes.

‘Regulation is always a busy area because retail is a heavily regulated industry,’ Matthews says. Other major legislative changes include the Consumer Rights Act 2015, which came into force in October last year. This introduced changes to consumer rights and remedies when shopping both online and in-store.

‘[Recent changes in consumer law] have had a big impact on our business. We have had a lot of advice work coming from that,’ says Samuel, who also highlights the Consumer Contracts Regulations 2013, which took effect in June 2014.

Other reforms include the national living wage, introduced in April, that gives all workers aged 25 or over a legal right to at least £7.20 per hour. Matthews says this ‘major employment and welfare change in the UK has affected all our retail clients’. The recently enacted Modern Slavery Act 2015, meanwhile, requires businesses to report annually on the steps they have taken to ensure that slavery and human trafficking are not taking place in their supply chains.   

Given the sector’s large workforce, lawyers have been advising retailers on other employment issues such as the apprenticeship levy, which will be introduced in April next year, and controversial zero-hours contracts, where workers are not guaranteed hours, but only paid for work carried out. ‘They are very politicised, and there is [a lot happening] in that space that has required a lot of advice and guidance to clients,’ Rosling says.

New regulations introduced in May 2015 prevent employers from enforcing ‘exclusivity clauses’ in zero-hours contracts. Meanwhile retailers such as Sports Direct have come under severe criticism for employing nearly 90% of their staff on zero hours. Last year, Leigh Day launched a legal action against the company, following allegations that it had excluded nearly 300 workers from its bonus scheme because they were employed on this type of contract.

Earlier this month Sports Direct buckled to pressure and announced it was dropping zero-hours jobs.

Further afield, through its associated firms Clyde & Co has been advising clients on regulatory developments in India, where in June the government relaxed foreign direct investment thresholds in sectors including retail.

Major retail clients of Bird & Bird are now looking to enter the world’s second most populous country. Abell says: ‘India is a huge market, great for retailers by and large, and yet it has been out of the reach of many of them.’

Bricks-and-mortar and Brexit

Despite technology innovation, the traditional bricks-and-mortar side of retail has not slowed, keeping legal advisers occupied with real estate, M&As and other corporate and commercial deals.

Samuel says: ‘We have seen, in the last two years in particular, how important international expansion has been for UK and US retailers coming to us. They realise that in order to grow they have to look at other markets.’

Continental Europe continues to be a popular destination through different market entry models such as standalone/owned stores, acquisitions, franchises and joint ventures. But retail brands are also expanding further afield, including into China, north Africa and the Middle East, where consumer spending is increasing rapidly. Reflecting demand, Eversheds has published interactive guides to international and European expansion for retail clients, with practical steps and issues to consider when launching a business abroad.

Retailers are also changing their domestic footprint. Eversheds has advised supermarket chain Morrisons on the £25m sale of 140 of its M Local convenience stores to investment firm Greybull Capital.

‘Before Brexit, shopping centres were swapping hands regularly and we have done a lot of shopping centre deals,’ says Pinsent Masons’ head of retail and consumer Tom Leman. Over the past 18 months, the City firm has advised pan-European private equity firm Tristan Capital Partners on real estate deals worth more than £150m involving the acquisition of shopping malls in Northern Ireland and Scotland.

Harbottle & Lewis’ fashion and retail team advises high-end brands such as Victoria Beckham, Roland Mouret, Wolford London and St John Knits on their British-based operations. Benson, a property lawyer, says: ‘We are still seeing a lot of the bricks-and-mortar work, so clients are still expanding and acquiring stores. Location is key for these clients, who are looking for unique and unusual properties.’ Benson has been advising ‘one of the biggest names in the high street’ on store acquisitions.

Wyatt, whose practice focuses on UK retail property, notes an increase in real estate transactions over the past two years, including portfolio management and store acquisitions by new market entrants. Clyde & Co has advised Australian stationery brand Smiggle and US apparel group J Crew on their initial entry and subsequent store rollout, including J Crew’s flagship store on London’s Regent Street.

With web-based retailers such as Amazon opening physical stores, and Ikea entering the high street, there is little sign of this trend reversing.

There have also been many corporate and M&A deals in the sector. Pinsent Masons acted for Sofa.com and the Rug Company on its sale to UK private equity firms; and advised British brands such as Sweaty Betty on ‘a significant growth investment’ by private equity firm Catterton.

Addleshaw Goddard represented Muller Dairy (UK) Ltd on its acquisition of Dairy Crest’s entire milk operations for £80m; and Sainsbury’s on its £25m ‘strategic joint venture’ with Denmark’s Dansk Supermarked to create the new Netto grocery chain in the UK (Sainsbury’s terminated the joint venture in July to focus on its £1.4bn takeover of Argos-owner Home Retail Group). ‘It is a very fast-moving market,’ says Rosling. ‘Every retailer needs to try new things because if they just stand still everyone else will sweep past them.’

So what impact is Brexit having on law firm retail practices?

‘It has not affected UK-centric deals,’ Duncombe says, but he adds: ‘On the investment side [into and out of the UK] there has been a slowdown.’

‘Cross-border M&A deals are still carrying on, but quite a few are being restructured,’ Leman says. ‘Prices are being reviewed [and there are] different forms of consideration’ [shares instead of all cash, for instance].

Some speculate there may be an uptick in inbound M&A. Businesses in the UK are now 10% cheaper than they used to be for investors in Asia and the US because of the currency change, Leman told the Gazette in July. ‘Prices were very high before Brexit. If you are a deal-doer and you are good at assessing risk, this is your opportunity to find the business which you can buy at a good value price,’ he says.

‘Looking inward to GB, a lot of people who have US dollars in their pockets will think we are quite cheap,’ says Rosling, noting that even after the Brexit vote corporate activity continued. Amazon announced it was creating 1,000 new jobs across the UK while South Africa’s Steinhoff said it was buying Poundland for £597m. ‘I am very reluctant to add to the general doom-mongering,’ he says.

At any rate, the referendum outcome has created enough uncertainty in the industry to keep retail lawyers busy with ‘strategic advice’ on the different Brexit scenarios across a wide range of practices, including employment and HR, regulation, supply chains and intellectual property.

‘Some of our partners and senior associates are going on secondments to retail clients to help them formulate strategies,’ Samuel says.

‘The labour force in retail will be greatly affected by a change in migration rules,’ says Rosling, noting that retail is the biggest employer of people under 30, many of them from overseas.

Abell observes that most British retailers have EU-wide trademark registration, which protects them in all 28 member countries. ‘If we pull out of the [Union], EU trademarks won’t be relevant anymore,’ says Abell, who has advised retail clients on these and other strategic issues.

‘[Brexit] has shaken things up a bit and retailers are going to have to think about the shape and structure of their business, and these are undoubtedly going to change,’ Leman says. ‘And any change normally involves legal work.’

Marialuisa Taddia is a freelance journalist