Due to a high-cost base and the shift in sales from the high street to the internet RPC say is a main reason that the retail sector continues to suffer. Additionally, struggling retailers have been hit by the withdrawal of credit insurance, which is often an indicator of financial distress, and can be a stage before a company enters insolvency.
According to RPC research sales from the UK’s Top 20 e-commerce only retailers jumped by 23% last year to £8.4billion, whereas the high street fell by 6% in March, the largest year on year decrease since 2010.
In the last 5 years, the RPC stated that in spite of the high level of insolvencies in the sector there has been a 55% decrease (33 to 15) in the use of Company Voluntary Arrangements (CVAs) in the retail sector.
The high profile CVAs, such as BHS and Austin Reed failures may have made both businesses and creditors more wary before entering into them.
CVAs allow a company to either decrease or rearrange the debts owed through negotiation with its creditors, avoiding a formal insolvency process, as well as a large-scale restructuring of the business.
Retailers to have either recently entered a CVA or reported to be negotiating one include:
· Toys R US – Toys R US had agreed a CVA two months prior to its administration
· Carpetright – The retailer announced the closing of 92 stores as part of a restructuring plan to avoid administration. It is currently proposing a CVA
· New Look – The women’s fashion retailer has proposed the closure of 60 stores in its CVA as well as 980 redundancies. Subsequently, HSBC has withdrawn credit insurance for a number of New Look’s key suppliers
· Mothercare is widely reported to be considering a CVA
Tim Moynihan, Restructuring and Insolvency Senior Associate at RPC, says that many high street retailers have a cost base that remains stubbornly high. “It is hard for retailers in the UK to shed expensive excess space as their lease agreements restrict that option. Increases in the minimum wage and a rising rates bill also make it very hard to cut overheads to make up for sales lost to the internet. For under pressure retailers, a CVA may represent a neat solution to its problems for a short period of time. However, the reality is if it doesn’t address the structural weaknesses in a particular business and if trading continues to decline it is only delaying administration or liquidation.”
“There is also a risk of CVAs being commoditised and turned into a product to be rolled out to retailers rather than each one being the bespoke and flexible solution that the legislation envisaged – and creditors consequently being less supportive of it as a process. Creditors are wary about agreeing to a CVA unless they think the business has a viable business plan for it to continue. Ultimately, it will be the creditors who lose out when the business fails.”
Karen Hendy, Corporate Partner at RPC, said “Structural changes in the retail sector and market conditions have created serious challenges for the traditional retailer. Some struggling retailers may be seen as attractive acquisition targets for large retail groups or private equity houses but to get those deals done sellers and creditors have to be realistic. Bidders only to have to point to weakening consumer confidence to emphasise the pressures on trading and deal pricing.”