More Financial Issues Facing the Retail Industry in 2018
The retail industry has experienced mass publicity over the last several weeks due to high profile closures. The news of the Toys R Us administration was swiftly followed with reports of Maplin also following suit. Other retail giants, such as New Look and Carpetright, have announced plans to close stores - with the former shutting more than 60 - and proposed company voluntary arrangements (CVA) to aid in business recovery. All of this comes as B&Q has announced a 9% drop in shares, and Claire’s Accessories files for bankruptcy in the US. The recent news spells trouble for the industry, with the 2017 insolvency statistics providing more information on the number of companies facing issues. Business Rescue Expert, leading insolvency practitioners, are discussing why they believe this change in the market has occurred, and what it may spell for the future.
The 2017 UK insolvency statistics are provided by the government, detailing the number of company insolvency, and individual insolvency procedures. Broadly speaking, there has been an increase in companies facing insolvency procedures across all four quarters, leading many to predict the fall of retail. While that suggestion is a little premature, the figures do suggest online stores are harming the longevity of those on the high street, leading many brands to make the decision of selling solely online. According to the reports, the three industries facing the most issues are administration, construction and retail. The past year saw an increase in the number of creditors voluntary liquidations, with the insolvency procedure accounting for 74.6% of (12,861) all insolvencies.
To put it into perspective for retail, Q3 - July to September - experienced 2,144 retail companies entering administration, an increase of 0.5% compared to Q2. Retail administration has been the hot topic in the media recently, with Toys R Us the most notable, along with the Carillion collapse. Originally, Toys R Us has successfully negotiated a CVA, allowing for more recovery options for the business. As an incentive for directors, you are allowed to keep control of the company during the process. You must comply with the legislation, but are still heavily involved in the day-to-day running. However, the store was unable to continue with those payments, leading them to announce closure earlier this year. Current issues facing retail There are a number of external factors that are said to affect the industry, with Brexit the most notable. Before Brexit, the free movement of goods in the EU provided cost-effective products for companies and, without, many companies are considering what it means for their future. The Chief Executive for Maplin even suggested that the changing climate due to Brexit paved the way for their path to administration.
The increase in online users has also had an impact on high street sales. For example, in early 2017, the number of staff working on shop floors within the UK had dropped by 2.4%, due to the lack of demand. The ability to shop on your phone or laptop has reduced the need to visit the high street and, as a direct result, companies are closing stores - New Look a prime example. To combat this issue, many retailers are adopting flexible opening hours to satisfy consumer demand, causing overstretched staff resources and finances.
Huge rental bills are also stirring up trouble for independent stores and even chain name. In January 2018, House of Fraser asked for reductions in rent for a number of stores, along with a £15 million contribution from their owner to provide ‘financial headroom’. At the time, House of Fraser was also suffering from Debenhams offering significant reductions over the holiday period to counteract the popularity of online shopping.
Unfortunately, weather can even affect a person’s choice to shop, a problem directly out of the control of your hands. Consumers are beginning to opt to shop from home, or at shopping centres with underground parking facilities. As larger, typically, chain stores offer this service, independent retailers are experiencing the decline in profits. Importance of negotiations Creditor negotiations are the only way forward for companies facing these issues. It’s mutually beneficial for your creditors to ensure your business survives, meaning there could be scope for an informal arrangement. An informal arrangement is not an insolvency procedure, so is not legally binding, but costs considerably less than an insolvency process. These tend to suit smaller businesses, generally lasting around the 24 month mark.
An alternative option for negotiations could be a time to pay arrangement (TTP). For those experiencing cash flow problems, you must demonstrate to HMRC your company is viable in the long-term. This procedure allows for payment instalments, but it is not a business recovery solution and only suitable if your company is solvent.
Many companies that are looking at insolvency have proposed CVAs to help their business, but a pre-pack sale could be an option. Pre-pack can be highly efficient - despite its negative connotations in the press - and provides a transfer of assets and employees. However, the most crucial aspect to take away from the news is to seek immediate advice if you begin to face financial difficulties. To survive in the market today, you need to act fast.