Insolvency in the Retail Sector

The retail sector is under unprecedented pressure to adapt to changing times. In 2018, 1,211 retailers collapsed – an insolvency increase of 9% year on year. Rising trends are emerging as more and more major retail companies – such as Toys R Us, Maplin, Kleeneze, Feather & Black and Palmer & Harvey – go into administration.

Insight into the driving consumer changes causing this increase in retail insolvency is desperately needed, along with potential adaptive solutions to minimise damage wherever possible.

Rise of the internet

With online shopping taking the world by storm in the last decade, retail spaces don’t serve the same consumer function they once did. Instead of a place to make purchases, shops are increasingly seen as showrooms for products that customers can later buy, at a discount, on the internet. Once solely retail, physical stores are now becoming pick-up points for parcels and cafes to generate additional revenue.

For retailers struggling to survive in this market, is the answer to go digital? Unfortunately, online platforms and sales come with their own set of challenges and require a large amount of upfront investment. Overheads aren’t always lower than their retail counterpart, with potentially higher demands on customer service and separate distribution models. Plus, for some retailers, the personalised service simply can’t be achieved by moving online and renders their business model useless.

The online retail revolution may seem to be all doom and gloom for the traditional high street store, but what do the statistics say? According to some estimates, online still only accounts for 7-8% of total retail in Australia and 10% in the US. The UK seems to be leading with online sales, taking up 16.9% of retail purchases.

Considering these figures, the rise of the internet in relation to retail isn’t the only factor to consider in the sector’s recent insolvency problems. What else is contributing to this?

Global socio-economic factors, technology and retail insolvency

The global financial crisis in 2008 was the catalyst for a seismic shift in consumer behaviour. Driven largely by technology, social media and data began to play a much larger part in retail strategy.

Brick and mortar retailers, particularly small-to-medium-sized business, have had a challenging time adapting to these technological changes. At the same time, they’ve also been hit by rising costs. The national minimum wage has increased, along with sterling’s decline in the past few years. This decline is most likely due to the uncertainty surrounding the UK’s decision to leave the EU.

High-profile bankruptcy

Rather than resisting these changes, many retailers have set out on a mission to adapt to the new generation of shoppers. Unfortunately, even for major retailers, this sometimes isn’t enough. Last year saw the fall of iconic stores like Sears, Mattress Firm, and Claire’s. The year before, it shocked customers and investors alike to see Toys R Us go under.

Toys R Us

By assets, Toys R Us is the third-largest retailer to claim bankruptcy ever, behind Kmart and Federated Department stores. It used to generate $11.5 billion in yearly sales, had hundreds of stores in around 35 countries, and was iconic across many parts of the world for toy sales. Yet the factors surrounding its demise overwhelmed the company and led to its inevitable bankruptcy.

By that time in 2017, it was drowning in $7.9 billion worth of debt. The entire process was handled poorly and led to complete customer dismay. Lenders forced Toys R Us to liquidate, which proved catastrophic. It opened major holes in the market in the U.S. and abroad, along with putting 30,000 employees out of jobs and putting its suppliers out hundreds of millions of dollars in trade credit.

Although eventually forcing liquidation, toy makers and other suppliers had been a huge help to the company up until breaking point. They supported the retailer by risking their own necks and shipping on credit. When the economic damage saw no signs of reversing and the company went into liquidation, it also collectively cost suppliers hundreds of millions of dollars. Suppliers around the world are still feeling the implications of this, with increasing distrust to the companies they supply for.

Ultimately, Toys R Us couldn’t keep up with pressure from low-priced retailers. In particular, Amazon’s online infrastructure dominated for market share. In the year Toys R Us went bust, they were generating $792 million annually. But the costs associated with brick and mortar stores made it impossible to compete with retail giants, such as Amazon. By the time the retailer finally decided to bolster their technological efforts, it was an uphill battle. They had 10 years of innovation to implement into their outdated infrastructure while drowning in debt.

Troubled times: Rise of the CVA

With struggling retailers facing increasing pressure from their creditors, more and more are turning to company voluntary arrangement (CVAs) proposals. Retailers are using these proposals as a form of protection and temporary way to get out of expensive leases and closing branches, along with securing substantial rent reductions.

When offering a CVA, a company must disclose what assets it has, and everything it owes to suppliers and lenders, but offer back a reduced and often delayed payment to creditors. This entire process is overseen by a licensed insolvency practitioner. It gives companies more time to attempt to resolve their financial problems before complete insolvency.

Creditors will receive this proposal and have the option of either accepting or rejecting it. Rejecting a CVA proposal isn’t a popular choice and the reason why so many struggling retailers are using them. This is because a rejection usually leads to closure and liquidation of the company, and creditors will receive a reduced payment of what they are actually owed.

Faced with limited options, creditors tend to accept these CVA proposals. However, they do have restricted power and the ability to implement some modifications to the proposal. Although, for these modifications to go through, company shareholders must agree to them.

With all factors and emerging trends that surround the retail sector, it is highly likely there will be further casualties on the high street. To defend themselves against liquidation, we will likely witness greater numbers of CVA proposals.

How will the retail sector adapt?

The biggest lesson from the fall of many iconic retailers in the last decade is that knowing your customer is key. Resisting change and failing to adapt to the next generation of customer desires has led to their downfall.

Introducing data and technology innovation into the core of retail operations is an absolute must to understand and predict future customer behaviour. It gives businesses the tools to adapt to ongoing retail disruption and explore new avenues of revenue and market dominance.

For individual retailers, at the earliest sign of financial trouble, get proactive and seek the advice of experienced professionals. It can save a great deal of money and stress, along with helping you plan for the worst-case scenario that generates the least collateral damage to customers, employees, and shareholders as possible.

We can help

Insolvency doesn’t have to be the end of your company. At Irwin Insolvency, we specialise in corporate recovery, helping businesses recover from insolvency or go through the liquidation process, rescue, and turnaround. With over 25 years’ experience, we have a notable record of helping businesses of all sizes, across industries, deal with their financial crisis. Our friendly service is so successful because our staff work closely with you to ensure we understand your unique situation. For more information, get in touch with Irwin Insolvency on 0800 009 3173.

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