The Latest Update on Insolvencies Within the Retail Sector
In October, more retailers recorded a drop in sales than at any point since the financial crisis as consumers cut back on spending in supermarkets, department stores and furniture stores, according to research. A survey of 49 major retailers indicated that 50% of retailers had experienced a drop in sales in October whilst 35% of respondents had maintained steady business levels.
Without a doubt, consumer demand has softened as household incomes are squeezed by mounting personal debt and slowing wage growth failing to keep up with inflation, which rose to 3% in September, its highest level in five years.
Retailers are also feeling the pinch as the impact of the post-Brexit fall in the value of sterling and the rising cost of imports, as well as the new National Living Wage and business rate rises, have placed significant pressure on already thin margins.
Retail sales are unlikely to pick up anytime soon, say analysts, with Christmas and Black Friday shopping unlikely to provide the sector with the shot in the arm it needs to counteract the ongoing issues that are being seen right across the sector in both smaller and larger retail businesses.
A Challenging Environment for the Retail Sector
Last year, medium and large retail insolvencies affected four times as many employees and twice as many locations as insolvencies in the previous year says the Centre for Retail Research. Figures for 2016 show that 1,504 stores closed, which was more than double the 728 recorded in the previous year. The number of employees affected by retail insolvencies quadrupled from 6,845 to 26,110, compared with the previous year, driven higher by the 11,000 staff employed by BHS before its collapse.
Some of the problems experienced in the retail trade
- Sterling’s weakness and rising inflation are putting pressure on retailers to discount prices continually to stay competitive and encourage reluctant consumers to spend.
- Retailers with stores located on the high street and out of town, frequently have large property portfolios and hefty rent bills to match. Rent is typically payable quarterly in advance, leaving struggling retailers with tough decisions to make as to whether the company is in a position to pay the rent and its trading prospects for the following quarter.
- Supermarkets have made it tough for independent stores to survive as consumers opt for the convenience of one-stop shopping, rather than to support small, local businesses in their community.
- Some businesses are opening for longer hours to provide more flexibility for consumers. However, this can overstretch finances and cause them to collapse into insolvency.
- Having to comply with auto-enrolment and minimum wage increases when working capital is already stretched.
- Inclement weather also drives customers to out-of-town shopping centres with free parking facilities or to shop from the comfort of their own armchairs.
- Developing online retail requires major investment in secure payment systems to control fraud and prevent losses.
With these factors in mind, the potential for more casualties on the high street is significant and struggling retailers will face a number of formal insolvency procedures.
Formal Insolvency Solutions
Numerous retailers have turned to formal insolvency procedures as a way of trimming lease portfolios and restructuring their businesses. Company Voluntary Arrangements (CVAs) and Pre-Pack Administrations are regularly used to reshape retail businesses, specifically when the underlying business is thought to be sound.
- CVAs allow directors to retain control of the business by helping them to trade out of their financial difficulties. It is the most appropriate route for companies that are struggling to keep their creditors at bay, but have a viable business. This type of insolvency tool has to be approved by the majority of creditors, that is, greater than 75% of those voting. The deal with the creditors typically involves repayment of an agreed percentage of its debts over a fixed period of time, frequently through monthly or quarterly contributions.
- Pre-pack administrations are well suited to the retail sector as they are useful tools where brands and key staff are crucial to the business and speed is essential to keep the business going. Put simply, more jobs are likely to be saved via a pre-pack sale. The alternative to this formal procedure is the closure of the business and the liquidation of the business assets, which is likely to produce a poor return for creditors.
High Profile Insolvencies in 2017
Just for Pets
In September, Just for Pets, a specialist pet food and pet care retailer, went into administration as result of weak sales and a severe drop in profits. The business, which was part of Wynnstay Group Plc, operates the majority of its 25 pet stores across the Midlands.
Pedigree Wholesale bought the business for an undisclosed sum in October in a deal that saved 18 of the 25 stores from closure and secured 180 jobs from both stores and head office. Pedigree Wholesale have stated that the addition to the business of Just for Pets creates the opportunity to develop the product range and increase economy of scale and buying power that would enable them to achieve cost savings which they believed would also benefit all wholesale customers.
Store Twenty One
Store Twenty One has had a chequered financial past and its struggles with competitors, such as retail chain Primark are well documented. In July 2016, its creditors approved a CVA that resulted in nearly 80 store closures. Following the CVA, where almost 90% of creditors voted in favour of the proposals, directors failed to secure fresh investment and breached the terms of its CVA, which led to the retailer being served a winding up petition by the taxman.
In April, the budget fashion and homewares retailer, filed a notice to appoint administrators, but the application was withdrawn and a second was made a couple of months later in June and again withdrawn, prior to the Court finally issuing an order to wind up the company, resulting in 122 store closures and around 900 job losses.
Seek Professional Help
As a director of a business operating within the retail sector, it’s crucial to seek professional advice at the first sign of financial distress as this will give you more options and the best chance of survival. For free and confidential advice from one of our professional advisers, please call 08000 746 757 or email email@example.com.