Risk of insolvency hangs over high street retailers after difficult run-up to Christmas
|
Version 0 of 1. A string of retailers could face insolvency in the new year with tough trading on the high street in the run-up to Christmas leaving businesses fighting for survival, two influential industry bodies have warned. Widespread discounting and warmer-than-average weather have cranked up the pressure on high street retailers over the festive period. In the last few years a number of high street retailers have called in administrations either just before or after Christmas, including Woolworths, HMV, Zavvi, and Jessops. Retailers generate roughly 40% of their annual profits between October and December, underlining the importance of the period. However, if a high street business struggles during the festive season then its death knell is typically the quarterly rental payment they have to make to landlords at the end of December. Atradius, one of the world’s largest trade credit insurers, has warned that retailers face a “perfect storm” that could lead to a bleak start to 2016 and a “fresh wave of insolvencies”. The comments from Atradius are significant because if a credit insurer refuses to back a retailer then suppliers will be unable to insure their orders with the business and could decide not to provide it with products. Owen Bassett, senior risk underwriter at Atradius, said: “Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. “Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.” Bassett warned that high street chains have been forced to cut the price of their products after Black Friday failed to attract the crowds that flocked to the sales last year. In addition, clothing retailers have had to contend with mild weather, which has dampened demand for winter clothing. Consumer data also suggests that households are choosing to spend their money on leisure activities or home improvement rather than on clothing. Bassett said: “Looking at the sector as a whole, while electrical, furniture and DIY retailers have performed well this year, clothing retailers – particularly female fashion – have struggled and that pattern continues. “The story for high street fashion is not so positive and despite continued demand, the outlook is mixed. “The female fashion sector is now saturated with many similar businesses competing for the same pound. Those that cannot compete in terms of operational efficiency or that don’t continue to appeal to consumers’ taste in fashion will find themselves in difficulty.” A number of clothing retailers, such as Bonmarché, have already warned of challenging conditions on the high street in December. According to Begbies Traynor, the insolvency firm, 24,737 retailers across the country are now suffering “significant” financial distress, up from 24,251 a year ago. This includes a 11% rise in the number of food retailers under pressure to 4,226 as the supermarket price war and changing shopping habits squeeze businesses. Julie Palmer, partner at Begbies Traynor, said: “This year there has been more discounting than ever before from retailers in the run-up to Christmas, as Black Friday deals extended into more severe festive promotions to try and boost lacklustre sales volumes. Related: Three City Link directors to face criminal charges over firm's collapse “Unfortunately the swaths of cut-price deals seem to have had little effect, with levels of financial distress among retailers even higher than last year’s shocking statistics.” Palmer said that retailers were now hoping for a last-minute rush to the shops before Christmas, as well as a boost from the Boxing Day and January sales. She added: “With most of the UK’s parcels carriers still working through backlogs from earlier in the month and many consumers still haunted by last year’s delivery disappointments following the administration of City Link on Christmas Eve, we expect to see a late surge of shoppers hitting the streets this week to get their hands on some last-minute bargains before the big day.” |