Britain is historically (and according to Napoleon) known as a nation of shopkeepers.
However, since 2008, we have seen several well-known high street stores disappear from the high street, following an insolvency process. The number of retail businesses entering into either Administration or a Company Voluntary Arrangement has increased, and data between 2017/2018 suggests that the number of large retailers that operate ten or more sites and that have entered into Administration rose from 17 to 26. Data from the ‘Centre For Retail Research’ suggests that this year already 36 companies have failed, affecting 1,630 stores and 42,105 jobs.
This year alone, we have seen a raft of insolvencies affecting well known high street brands such as Thomas Cook, Bon Marche, Karen Millen and its subsidiary Coast, Bath Store and Debenhams, with the latest being Mothercare.
Unfortunately, retailers on the high street are facing a number of issues:
- Restrictions on parking and the rising charges;
- Brexit has placed an unprecedented uncertainty onto businesses, and the consumer is, therefore, warier;
- The ongoing costs in relation to minimum wage, rates, etc.
Historically, large retailers were keen to enter into long leases with landlords and would spend considerable amounts of money on fit-outs. Now, many of those retailers are beholden to long contracts and regular rent reviews, while footfall has reduced, therefore leaving them in a weak financial position.
Companies have also had to face rising costs, particularly with business rates and staff costs and pension contributions. And as a consequence, profit margins have been depleted.
Consumers now spend in excess of £1 out of every £5 online and therefore, very few businesses can sustain a 20% reduction in sales while fixed costs rise and profit margins reduce.
According to the British Retail Consortium, 106,000 jobs were lost in the retail sector from March 2016 to 2019.
In order for a turnaround process to be successful, it has been necessary, particularly in a Company Voluntary Arrangement, to re-negotiate leases, future rents and service charges. Landlords have over the last two years worked with insolvency practitioners and companies to assist with the turnaround process. But I believe that the scope for ongoing reductions in rent cannot last, as landlords themselves will have their own financial position to consider, particularly with banks who themselves will be reluctant to finance commercial landlords if the yield is reduced. A number of the larger outlets have pension companies supporting them, and they too are unlikely to continue to accept a reduction in rent which will have an adverse effect on pension returns.
As an Insolvency Practitioner, I have some concerns about retail companies that are historically profitable being placed at a disadvantage when a competitor occupying a similar size unit goes through a CVA process and sees their rent and rates reduced considerably — therefore making the company that historically has been profitable less competitive in the market place.
It is crucial for the retail sector to adapt, just like John Lewis, Tesco and of course Amazon who have expended considerable sums in the online portal and are seeing increased sales with their online divisions. Other retailers are behind the curve and will have to invest heavily in this market if they are to succeed going forward. The consumer loves to utilise the internet when purchasing goods as not only can they receive goods at the front door, but it enables them to purchase items at competitive prices as they can compare prices from a wide host of retailers instantly. Those retailers that are utilising digital processes have a much-reduced cost-base and therefore are far more competitive than the historical retail outlet and shop on the high street who, frankly, cannot compete.
The high street is clearly changing, and there has been a substantial net decline of chain stores on the British high streets although gyms, vape shops and takeaways are seeing an increase in shop openings.
We are entering the busiest time on the retail calendar, but even now concerns are being raised about the level of sales that are anticipated over the festive period. Unfortunately, there may be a further raft of insolvencies in the retail sector in the first three months of 2020.
Stephen Wainwright – Partner