Experts warn that 2016 could see a higher-than-usual rate of retail insolvencies, following a perfect storm of warm autumn weather and unprecedented discounting.
A slew of retail insolvencies post-Christmas is a fairly regular occurrence and already this year etailer Atterley and manufacturer Hawick Knitwear have entered administration. Blue Inc has appointed administrators to one of its subsidiaries to shed a third of its 232 stores and footwear chain Brantano UK hit the buffers putting 2,000 jobs, 140 stores and 60 concessions at risk.
According to Deloitte, 96 retailers fell into administration during 2015 in the UK and the accountancy firm believes there will be more retail failures this year.
The warning comes after warm autumn temperatures, deep discounting and a bigger-than-ever Black Friday and Cyber Monday culminated in what Asos.com chief executive Nick Beighton called the “most difficult [autumn season] on record”.
“Christmas is telling – there’s nowhere to hide if a retailer had a bad one and this year was worse than most,” says Julie Palmer, partner at insolvency specialist Begbies Traynor.
“The success of a year is made from October to December, with the final quarter making up 40% of annual sales in many cases. Retailers have to get the volumes right, they have to handle the supply chain and adapt to the weather, as well as sticking to a coherent discounting policy.”
Retailers are also increasingly competing with leisure activities for shoppers’ spend, as consumers splash discretionary income on holidays and meals out rather than new outfits. In-store spend slid 2.3% in the first 10 days of December, according to Barclaycard. However, figures increased 18% and 16.4% respectively in UK pubs and restaurants over the same period.
“Experience is more important to shoppers now. Retailers need to step up their game if they are to attract shoppers through the door,” says Professor Joshua Bamfield, director of the Centre for Retail Research. Oasis, for example, launched a Saucer & Spritz cafe and bar, as well as a Pin & Polish nail bar and hair studio, in its new Tottenham Court Road shop in London in the autumn.
Meanwhile, pressure from lenders – whether banks or investors – intensifies in January as they look to extract as much money as possible from troubled firms before they go under, thinking that tills may be full and that the retailer might not be in a better position again for the following 12 months.
Bamfield adds that looming rent dates at the end of March are also a major factor: “If a retailer manages to get over Christmas but has a bad start to the year in January and February – which is often the case – they can’t pay rent in March. With so many retailers having far too many stores on the high street, this can be the deciding factor.”
Retailers with large store estates, which haven’t developed a strong multichannel offer to service shoppers where, when and how they want, are particularly at risk to the unfavourable retail environment. Lee Manning, restructuring services partner at Deloitte, believes there will be more retail failures in 2016 than last year, as retailers look to consolidate store portfolios.
“It is all about customer convenience,” he says. “The better multichannel offer you have, the better equipped you are to deal with a turbulent market. If you don’t, you do it at your peril.
“It’s a hardcore problem and you have to think about rationalising the store portfolio. To do this you either have to pay off the landlords and staff of the underperforming stores or become insolvent and go through and administration or company voluntary arrangement [CVA].”
He adds the first step to recovery is to assess whether the reasons for underperformance are in the control of the business.
“Everyone can have a blip, if there is a freak burst of bad weather there’s nothing you can do and you just have to deal with that. However, if the problems are down to human error – if you bought too much, or the wrong style, or priced it badly – then this needs to be addressed.”
Businesses need to mitigate the negative impact of unseasonable weather – with temperatures having averaged 7.9C, 4.1C above average, in December – by tightening their buy and leaving more budget for open-to-buy stock, so that they can react in season.
Anthony Thompson, chief executive of Fat Face, which had its biggest-ever week of sales running up to Christmas, hitting £11.2m, previously told Drapers the business combated the issue by changing its buying pattern to ensure tighter stock levels, a strategy it will re-apply for coming seasons.
“Retailers have to buy less stock. Given the level of discounting on the high street, too many are buying too much. If you want to keep full price you have to reduce your buy – that’s what we have done and we had less stock in Sale on Boxing Day because we bought tighter.”
David Rubin, partner of insolvency practitioners David Rubin & Partners, adds that retailers need to move away from a short-term focus and prioritise “more comprehensive financial forecasting”, while also creating a unique proposition – like tie-ups with other retailers, such as Asda offering a collection point for etailer Missguided in its stores – to draw shoppers in.