Why Retailers Are Going Bankrupt?
It’s been a tough year for every sector of the United Kingdom’s economy, but particularly so for the retail sector. The twin effects of Brexit and a worldwide pandemic have caused countless bankruptcies amongst even the most high profile retail giants.
Supposedly stalwart household names such as Debenhams, Top Shop, Burtons and Cath Kidston have entered into administration, been sold to the highest bidders, switched to online-only, or been liquidated for good.
But while short-term economic factors have been at play in the most recent spate of retail bankruptcies, it’s actually a long-term trend that has simply been accelerated by unpredictable circumstances. Retail bankruptcy is no new event, because Britain’s retail-focused high streets have been facing a slow decline for many years. Let’s take a look at why certain retailers are going bankrupt.
Who Is Competing with Traditional Retail Businesses?
Britain’s high street retailers were for many decades seen as a seemingly permanent fixture of towns and cities across the nation. But the latest round of closures and insolvencies highlights just how vulnerable traditional retail businesses have become in recent years.
COVID-19 lockdowns might seem like the primary cause in 2020 and 2021, but the reality is that coronavirus is a short-term problem that has simply highlighted the stark distinctions between traditional retail and the competitors that have been wearing away at their share of the market for several years.
High street retailers are facing fierce (and in many cases overwhelming) competition from predominantly online sources. Major online competitors began to emerge in the late 1990s with the advent of the internet age, and over the last two decades they’ve provided competition to the high street.
The biggest example of online competition is the mighty online retailer Amazon, which not only sells physical products to compete with the high street but also offers online streaming services to compete with cinemas, while launching grocery delivery services that could start to rival supermarkets.
The New York Times reports that Amazon’s profits increased globally by an exponential 220 per cent throughout the pandemic, while at the same time countless bricks-and-mortar businesses, both small and large, have become insolvent.
Amazon isn’t the only competition, either. Low-cost online travel booking portals compete with traditional high street travel agents, eBay has created not only a second-hand marketplace but a marketplace for small businesses to compete with larger businesses, while there are many more online retailers offering services and products to customers that would normally have headed out to their local high street.
Are There Economic Factors Involved?
Economic factors have undoubtedly been a major cause of the most recent bankruptcies in the retail sector, because the UK’s economy has seen a decrease in GDP of almost 10 per cent since the pandemic began.
With less cash to spend, non-essential retailers have seen a decrease in sales even if they had managed to switch their services to online or provide new ways to sell products when their shops were physically closed.
Essential retailers however have seen large increases in sales. Supermarket chains such as Tesco and Sainsbury’s, which are also considered retailers, all posted increased profits when the pandemic began, for example. However, these initial profits have since been cancelled out by higher costs incurred by these businesses while operating during the pandemic.
Before the pandemic, economic factors weren’t necessarily to blame for retail closures, however. At least, not since the financial crash of 2008 which saw large numbers of retailers going under. Since the crash, the economy had been improving year on year, and high street retailers were in many ways simply failing to compete as customers went elsewhere to spend their money.
Is Brexit Causing Bankruptcies in the Retail Sector?
The UK formally left the European Union in January 2020, but it took a whole year for the transition period to end while deals were furiously negotiated around the table.
The effects of Brexit are still largely unknown, but in the short term it is known that the retail sector will face staff shortages as the Retail Gazette estimates that up to 300,000 EU citizens were employed by high street retailers. This could affect the ability of retailers to grow and expand, while also ensuring that an experienced pool of retail talent and experience has been permanently lost.
Individual businesses that work closely with the EU, importing products and goods from European countries, have seen increased bureaucracy and higher costs as they adapt their business models. Brexit has also caused the UK’s economy to shrink further, but in the long term, it’s yet to be seen what the full effects of Brexit will be on the retail sector.
Is Retail Bankruptcy a Longstanding Trend?
Recent focus has of course fallen on the duel effects of COVID-19 and Brexit on the retail sector, which have in many cases been devastating. But while these two factors have caused massive numbers of bankruptcies across the nation, it would be wrong to see recent bankruptcies as simply a short-term trend.
In fact, retail bankruptcy is considered to be a longstanding trend, one that has been ongoing for many years. In this case, we should stress that by ‘retail bankruptcy’ we mean insolvencies amongst traditional high street retailers.
The death of the high street has been heralded by many for years, and the root of the decline can be traced back to the rising popularity of internet retailers. As online competitors improved their own business models and became more cost-effective for customers and more convenient too, the traditional high street began to see its decline.
The biggest hit came with the 2008 financial crash that threw the world’s economy into a downward spiral. Many retailers that were already struggling simply folded, while many popular high street brands and names were bought up by conglomerates.
Consumer spending took a deep dip as a result of the crisis, while retailers found it much more difficult to secure loans and finance to survive, let alone to expand their businesses. The UK high street emerged from the financial crisis in a precarious position and very much streamlined. The highest-profile loss was much-loved Woolworths, which was liquidated for good.
The high street never really recovered from this, but that doesn’t mean retailers weren’t adapting. Online focused retailers and retailers that switched to online continued to grow, slowly chipping away at the high street year on year, so when the pandemic struck they were perfectly positioned to meet the unprecedented needs of customers during lockdown. The high street was another story, and its slow decline turned into free-fall.
Is Retail Bankruptcy Likely to Be Reversed?
Retail bankruptcies are likely to continue. In the short term, we’ve yet to see the full effects of Brexit and COVID-19; when government support packages drop off, more businesses are likely to go under.
Looking to the long term, the future of the high street certainly looks set to change. High street retailers are going to disappear, and that will inevitably mean bankruptcies and job losses. However, retail companies that adapt can avoid bankruptcy by pivoting to the online marketplace. The demand for many goods is still there, only the way customers purchase has changed.
Is the Retail Sector Adapting?
While there are high profile closures, the retail sector isn’t just lying down. Retail businesses are adapting, or at least attempting to adapt, and it’s likely that we’ll see many more innovations in the near future.
The biggest change has been in relation to online competition. Traditional high street retailers may be forced to close physical stores, but they can take things digital. Cath Kidston, the high street clothing and accessories retailer, closed all of their bricks-and-mortar locations, but they’ve created an online marketplace instead.
Other businesses, such as Waterstones the bookstore, have expanded their delivery services and offered click and collect options. Retailers are building apps, promoting their social media presence, and (whether they want to or not) adapting to the digital age.
How Many Retailers Are Going Bankrupt?
The Retail Gazette puts the number of retail stores closed across the United Kingdom since the pandemic began in March 2020 as 14,089. These are permanent closures, and there could be many more in the near future. The Retail Gazette estimates that at least 180,000 job losses are associated with these closures.
Intriguingly though, the number of retail stores closed in 2019 – the year before the pandemic began – is also cited as around 14,000 by the Retail Gazette. This goes some way to demonstrating that closures are a longstanding trend. The difference this year is that very few new stores would have been able to open to replace the gaps left by closures.
Many more businesses are still in limbo, supported by government-backed loans and furlough schemes, so it’s unlikely that we’ve seen the full impact of the lockdowns.
What Are Some of the Big Retail Businesses That Have Gone Bankrupt?
The UK high street has seen a steady stream of big-name losses since the ‘Retail Apocalypse’ – as some commentators have termed the downward trend of retail closures – really began to take hold in the wake of the 2008 financial crisis.
The biggest loss to the UK in 2008 was the Woolworths Group, but the casualties continued. Since then, the largest brand name losses includ the following, many of them much loved for decades by their customers:
- British Home Stores
- Thomas Cook
- Toys R Us
- Focus DIY
These losses represented the move to online business, as Thomas Cook was overtaken by online agents and Blockbuster superseded by streaming services. Since the pandemic hit at the start of 2020, the big-name losses have mounted further, including:
- Top Shop
- Harvey’s Furniture
- Edinburgh Woollen Mill
- DW Sports
- Cath Kidston
- Dorothy Perkins
- Miss Selfridge
- Go Outdoors
The list goes on and on. While some businesses (such as Go Outdoors) have been saved by new buyers, brands such as Edinburgh Woollen Mill and Debenhams have closed for good.
What Types of Retail Businesses Are Most Vulnerable?
As we’ve shown, recent bankruptcies have affected not only small to medium-sized businesses but massive household names too, proving that the retail market is seriously in flux and going through a time of rampant change.
The most vulnerable businesses aren’t necessarily the small independent businesses (although COVID has certainly put these at adverse risk), but those businesses that have failed to adapt, or haven’t had the funds or expertise to change their business models.
The biggest bankruptcies have affected huge retailers such as Debenhams and the wider Arcadia Group, which included such high street favourites as Top Shop and Burton. These were businesses that were predominantly ‘bricks and mortar’. They relied on heavy high street footfall, and as such had expensive leases on prime locations across the country.
Rising business rates and the cost of leases, combined with lower footfall and online competition, had started the process of decline for these vulnerable businesses years ago. The pandemic simply added fuel to the fire.
The most vulnerable retail businesses are those that rely on high street traffic and have failed to adapt adequately to compete online. For many smaller businesses, they just don’t have the capacity or skills to expand away from their stores on their own, so they need to look at outsourcing and gaining impartial, expert advice from businesses advisors in order to stay solvent and meet changing customer demands.
Contact Irwin Insolvency Today for Your Free Consultation
With decades of experience offering retail businesses across the United Kingdom expert financial and business advice, our team of licensed insolvency practitioners can offer impartial expertise that can help your retail business through tough times.
If your company is looking for expert advice, then don’t hesitate to contact Irwin Insolvency today for your free, no-obligation consultation, or call us directly on 0800 2545122 or send us an email at email@example.com.