Trade insurers have warned of an increased risk of retailers insolvency for high street retailers after a difficult run-up to Christmas and the continuing mild weather. The prognosis looks particularly bleak for the saturated female fashion sector.
The Christmas period is an extremely important one for retailers, with an estimated 40 percent of annual turnover generated between October and December. However, widespread discounting and the unseasonably warm weather have increased the pressure on the high street, potentially adding to the long list of retailers to enter administration before or after Christmas in the last few years.
For retailers that struggle over the festive period, the final nail in the coffin often comes in January, when significant quarterly rental payments need to be made by many. Many retailers face liquidation, or possibly a formal arrangement with creditors such as a company voluntary arrangement.
Problems in the retail sector
A number of the high street chains have been forced to discount the price of their products after the much anticipated Black Friday retail extravaganza failed to attract the same level of interest as it did last year. Reuters reports the clothing retailers are also suffering from the reduced demand for winter clothing as a result of the mild weather.
Consumer data suggests there has been a switch in the buying behaviours of British households, with more people choosing to spend their money on leisure activities or home improvements rather than clothing. As a result, DIY, electrical and furniture retailers have done well, while female clothing retailers in particular have struggled.
A tough final quarter for female fashion
Retailers in the extremely competitive womenswear sector are facing an increased risk of insolvencies in the coming year, with the final quarter of 2015 proving to be particularly challenging for a number of high street names.
The female fashion sector has become saturated in recent years, with many similar businesses now competing for the same pound. Those that cannot compete in terms of their operational efficiency or that fail to accurately gauge their customers’ tastes are inevitably starting to struggle.
The result is that 24,737 retailers across the industry are suffering from ‘significant financial distress’, up from 24,251 at the same time last year. This includes an 11 percent rise in the number of food retailers that are feeling the pinch, to 4,226, which is largely the result of the supermarket price war.
Retailers face a ‘perfect storm’
According to underwriters at Atradius, one of the world’s leading trade credit insurers, retailers are facing a ‘perfect storm’ that could lead to a glut of insolvencies in 2016 and a potentially disastrous start to the new year.
The warning from Atradius carries particular weight because of the significant part trade insurers play in the industry. If insurers fail to back the retailers, suppliers will struggle to insure their orders and could refuse to supply products to the retail outlets.
The biggest problems are expected to be felt by businesses that needed an exceptional seasonal sales period to return their balance sheets to some semblance of health. It is not unusual for retail operations to make a loss in the first quarter, relying on their fourth quarter sales figures to survive. Those that failed to perform as hoped could find themselves in trouble when their quarterly rent becomes due.
Retailers that failed to hit their ambitious fourth quarter targets are now flooding the market with cut-price deals to boost their sales. Unfortunately, with so many retailers in a similar position, the discounted deals are failing to have the desired effect. The result is that the levels of financial distress among retailers are even higher than they were last year.
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