Member Article

Quarter of North East retailers 'at risk' of failure

A quarter of retailers in the North East are at a higher than normal risk of insolvency in the next year, suggests research from insolvency trade body R3.

As the latest Rent Quarter Day looms over the sector R3’s research, using Bureau van Dijk’s ‘Fame’ database of company information, found that 25% of regional retail businesses could potentially enter into an insolvency procedure in the next 12 months.

Three per cent of the regional total face a ‘high’ risk of failure and may have difficulties in continuing to trade unless significant remedial action is taken.

However, while the situation for retailers is difficult in the North East, the R3 research found that the regional sector is actually faring better than the rest of England and Wales.

Steve Ross, chair of R3 in the north east and a partner in the Restructuring department of the Sunderland office of accountancy firm RSM Tenon, says: “High Street retailers have had a tougher time of it than other sectors in the past few years, and after dealing with recession, a sluggish recovery, and changing consumer habits, traditional retailers will now be put under more pressure as they are exposed to the stresses of expansion as economic recovery picks up.

“However, insolvency isn’t necessarily the end of the road for a retailer - it can be an opportunity to restructure and rethink the business model, and many retailers have come out of administration and gone from strength to strength.”

Across the UK, almost a third of retail businesses (31%) have a higher than normal risk of insolvency in the next year, while the figures for the neighbouring North West (31%) and Yorkshire & Humberside (29%) areas are appreciably higher than those in the North East.

London has the highest proportion of retail businesses (33%) that are facing a higher than normal risk of insolvency in the year to come.

Traditional Rent Quarter Days, which see retailers pay three months’ rent in advance to their landlords, often see a resulting spike in retail insolvencies shortly afterwards because of the squeeze on cash flow and complex rules on ‘administration costs’.

As well as the added pressure of a large rent payment, Rent Quarter Days often see a spike in retail insolvencies because retailers will delay insolvency procedures until after rent is due, thanks to the complex rules on ‘administration costs’ that have developed in recent years.

Steve Ross continues: “As a result of a series of court decisions, there are certain costs that have to be paid by businesses in administration before money can be given back to creditors, with rent being one of these payments.

“By delaying administration until after rent is due, unpaid rent becomes just another debt to be repaid to creditors, with no special priority.

“This could see a retailer rescued rather than dissolved, but, as a whole, the rules are a mess - they are a bad deal for landlords, retailers, and employees, and clarification from government is needed.”

This was posted in Bdaily's Members' News section by Steve Ross .