Is Retail in crisis?

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If you have watched the news this year, you will have noticed that the UK high street has had a significant number of failures, including House of Fraser, Maplin, Poundworld and Toys ‘R’ Us. But this isn’t the full list, as many more have entered into arrangements with creditors, including Mothercare, Carpetright and New Look. This is not the first time that there have been big failures, but 2018 has been different in the number of businesses that have needed to enter a process in order to solve their financial woes.

Background

Historically, the big names that have failed in retail have been those which have been affected by changing technologies, spending or just life in general. Woolworths was probably the biggest casualty back in 2008, when discount chains were starting to evolve, the online bargain sites were starting to get some traction and the demand that Woolworths had previously created was no longer there. The increase in supermarket buying power probably contributed to the demise of the local off licence, which culminated in 1,300 local stores closing in 2009 (including Threshers, Victoria Wine and Wine Rack). If you then think about the change in technology, this led to the collapse of retailers such as Game in 2012 and Blockbuster and HMV in 2013, as more and more people began to turn to their smartphones and tablets to purchase music and watch TV programmes.

Fast forward to 2018

This year has been slightly different from previous years in that the names mentioned in the introduction above cover a variety of retail sectors, whereas previously the main casualties have been in specific sectors (2008 saw a lot of clothing and footwear failures, 2012/13 saw a rise in the demise of retailers who dealt with entertainment and electricals, in line with the change in technology). There is no doubt that certain failures have arisen as a result of global economic pressures – Toys ‘R’ Us being a good example, where the US parent’s financial position had an adverse impact on its UK subsidiary, but the common factor amongst all of the names we mention above are the size of the businesses, in respect of the number of stores they have around the UK. According to the Centre for Retail Research, nearly 1,500 stores have been impacted by insolvency so far in 2018, and that does not include those where the businesses have entered arrangements with creditors in an attempt to rescue the business. Add in those businesses in the hospitality sector which have closed in 2018 and the doors closing on the high street becomes even higher.

Why now?

With so much uncertainty at the moment, business owners will be looking at managing down their exposure to risk prior to the inevitable Brexit, then it would make sense to do something to minimise the risks involved. Ultimately, however, we are living in a fast-paced, agile environment, and if your business is unable to adapt to the changing climate, then it will become vulnerable. Retail is no different - once upon a time, the big retailers probably thought that they were too big to fail, however the collapse of Carillion at the start of 2018 has proved that adage to be wrong; instead we are now in a position whereby the big retailers are finding that their size is now an issue, with them resorting to formal processes to restructure their businesses.

What does the future hold?

Whilst the retail sector has hit the headlines this year, it seems that the problems in the sector will not be restricted to the first few months of 2018; Debenhams have called in their advisors, John Lewis have issued a number of profit warnings, with their profits down 99% for the first half of their 2018 financial year and Marks & Spencer are also looking at their options, with over 100 store closures planned by 2022. This will undoubtedly be causing some anxiety amongst the landlords, as restructuring tends to result in a reduction in outlets, as retail businesses look to cut their loss-making stores adrift. Unfortunately, the impact is not just on the businesses themselves or the landlords – the supply chain is unlikely to avoid some share of the pain, whether that is in a loss in customers and/or an increase in bad debt, all of which are likely to impact on the cash position.

You can take steps to manage risk

If you are part of the retail supply chain, you need to be wary of potential future issues. For example, if you supply products, do you have a proper retention of title clause in your terms and conditions so that you can demand that any unsold product is returned to you in the event of non-payment? Is your credit control function working effectively – do you issue monthly statements or follow up any overdue payments in a timely manner? If you are having problems with certain customers paying you what you are owed, are you ceasing to supply them until your account is back on track? If your business is dependent on one or two major contracts, could your business continue if it was to lose one of those contracts? These types of questions are what you should be asking yourself if you want to future-proof your business as much as possible. If you think that you should be able to answer these questions but might need some assistance in doing so, please contact our Restructuring, Recovery and Insolvency team for advice.

And finally, is retail really in crisis?

Retail, like every other sector, is constantly changing and evolving. Ultimately, it is down to supply and demand. If you can ascertain what your customers want and need, then as a retailer you should be okay. From the supply chain perspective, like every other business, building resilience into your business model will help weather any storm that you may encounter. And is retail in crisis? Well, as consumers we will always need to buy things, it just may be that the manner in which we do that will change as technology advances. What we do know is that consumer spending patterns and habits are completely different in 2018 from what they were in 2008, so trying to predict what it will look like in 2028 is anyone’s guess!