EXECUTIVE SUMMARY
- The overall financial health rating of retailers has been steady at 37 out of a maximum of 100 since August 2023, but is well below the figure of 48 for the economy as a whole.
- Nearing half (44%) of retailers are at significant risk of failure – 62,102 businesses.
- One in seven retailers are ‘zombie’ companies with negative balance sheets. Their total shortfall is £2.6bn.
- One in six retailers have negative working capital.
- Borrowings have been falling significantly since August 2023, from £66bn then down to £45bn in May 2024 and now £28bn.
- The fall in debt is concentrated mainly in the largest retailers but can be seen in all size bands of companies.
Background
The Budget
Just as the vital peak festive season was getting into its stride, UK retailers were hit by a combination of Budget measures, which the British Retail Consortium predicts will add £7bn overall to their cost base before any mitigating action is taken. There have been extremely vocal industry-wide complaints, suggesting that existing jobs will be cut, hiring intentions reined back, less profitable stores closed and investment plans shelved as a result. The extent to which prices can be raised in response is a tricky call for many retailers.
M&S calculates that the employer’s NI hike, the rise in National Minimum Wage and business rate increases will cost it £60m in a full year from when they impact next April. Asda & Sainsbury will be hit by extra expenditure of £100m and £140m, respectively. Investment bank Peel Hunt thinks that pre tax profits will take a near 8% hit in an industry where many businesses struggle to make that level of profit margin.
Christmas 2024
With these extremely challenging issues in the near future, Christmas trading will be even more crucial than usual. The respected GfK consumer confidence index has reported an improvement from -21 to -18 in November as pre-Budget anxieties have eased with the confirmation that the inevitable tax rises would not fall on employees, at least not directly. It also showed a positive move from -21 to -16 on its major purchase intentions measure.
This good news contrasts with research published in mid-November by Go.Compare suggesting that 35% of people have taken the difficult decision to cut their Christmas spending budget this year. In monetary terms, respondents reported that their spending will be down by a third to an average of £434 each, compared to £658 in last year’s survey.
Black Monday
Black Monday will also be crucial. Trade has been slow in the run-up to this US-inspired promotional spree, which is a week later than last year, as shoppers have held off buying presents in the hope they might be able to find bargains.
Figures from the e-commerce trade body IMRG, which tracks the performance of more than 200 retailers who trade online, indicate that sales continued to fall in November after a disappointing October. They were down 11.7% for the week commencing 10 November, the worst weekly performance of 2024 so far.
The latest figures mean online sales are down 2.5% so far this year and doubts remain about any dramatic turnaround in the rest of the festive season. IMRG predicts that annual sales this year will be down at least 2%.
Challenges for 2025
Beyond the challenges posed by the Budget measures and by doubts over consumer spending and restricted disposable income, UK retailers face a worrying number of major issues in the year ahead. These include:
Global e-commerce platforms
International e-commerce giants like Amazon, Temu and Shein are likely to disrupt the UK retail scene even more than previously. These platforms are expected to claim a significant portion of the market in 2025, potentially reaching up to 10% of UK retail sales. Their ability to offer lower prices, faster shipping and a more extensive product range gives them a competitive edge that UK retailers will need to contend with.
To compete, UK retailers will need to embrace digital transformation, streamline their delivery services and explore exclusive products or services that set them apart from these international behemoths.
Price wars
As UK consumers become even more price-conscious, retailers will find themselves in an ongoing battle to offer the best deals. Discounts and promotional campaigns will have to become more aggressive, despite the pressure on businesses to raise prices to counter the additional costs imposed by the Budget.
The rise of pre-loved shopping
Few would have predicted that “second-hand” would become a major luxury retail strategy. In 2025, the resale market won’t be just for bargain hunters anymore. When giants like Ikea, Levi’s and Zara are launching their own resale platforms, it’s clear that the game has changed. Meanwhile, platforms like Vinted and Depop have transformed from quirky marketplaces into retail powerhouses.
Personalisation of shopping experiences
‘One-size-fits-all’ promotions are less and less meaningful to customers. More and more, AI systems are creating shopping experiences as unique as fingerprints. Examples are dynamic pricing that adapts to individual budgets, loyalty programs that actually know what the consumer values and product recommendations that feel like they’re coming from a friend who understands the shopper.
Supply chain resilience through technology
If recent years’ experience should have taught retailers anything, it’s that supply chains need to be efficient but they must be agile as well. Retailers need to deploy AI and machine learning not just to track inventory but also to predict and adapt to disruptions before they become crises. The trick is to build supply chains that swerve round obstacles rather than shatter on impact with them.
Trade wars and geopolitics
Recent years have brought gross disruption for retailers from the pandemic and then the Ukraine war and its inflationary consequences. The unpredictable outcomes from tensions in Europe and the Middle East are already part of global trading but may worsen. An outbreak of trade warfare following the election of Donald Trump poses real threats to the retail sector, which depends so heavily on the movement of goods across borders.
Market characteristics
Retail Economics have identified the following key data points for 2023:
- Total value of UK retail sales was £462bn (2022: £441bn)
- People employed in UK retail were 2.9m (2022: 3.0m)
- Proportion of consumer spending that goes through retail is 1/3 (same as for 2022)
- Percentage of retail sales made online was 26.6% (2022: 27%)
- Growth in UK retail sales value was 5.2% (2022: 4.7%)
- Total number of VAT-registered retailers in the UK was 217,000 (2022: 224,250)
- Total number of retail outlets in the UK was 306,340 (2022: 317,005)
- Retail generates 6% of total GDP (2022: 5%)
- Online retail sales rose by 5.1% in 2023, compared to growth between 2019 and 2022 of 73%
Our latest research using analytics provided by financial health monitoring specialists, Company Watch shows the following overall financial characteristics:
- Total Assets Employed – £214bn (pre-pandemic £240bn)
- Total Debt – £28bn (pre-pandemic £70bn)
- Total Net Worth – £77bn (pre-pandemic £84bn)
Financial risk
We have used the Company Watch financial health monitoring system to research the latest financial statements filed at Companies House for every company registered in the UK, which operates in the retail sector. Our research covered a total of 140,738 companies.
Overall financial health
There was a sharp deterioration in the financial health of retailers between October 2022 and August 2023 when the average rating (H-Score® – see below) dropped from 40 out of a maximum of 100 to only 37. Since then this rating has stabilised at that level. The average H-Score for the economy as a whole is around 48.
Looking at the different size ranges for retailers (as measured by total assets), the health rating for the larger retailers (those with assets of £1m+) has come down from 62 in August 2023 to 60 now. By contrast, there has been a marginal improvement in the rating for the very smallest micro-entity retailers with assets of less than £25k, which has risen from 28 in August 2023 to 29 now. These movements are small but significant given the challenges facing the sector as from next April after the recent Budget measures.
Failure Risk
Company Watch uses complex analytics to generate an H-Score for every company out of a maximum of 100. This is based on its latest published accounts and a number of key measures within those accounts. An H-Score of 25 or less indicates that the company concerned has a one in four risk of going through a formal insolvency process or a significant financial restructuring at some point during the next three years.
Out of our sample of 140,738 companies, 62,102 or 44% (August 2023: 43%) are in the Company Watch warning area with an H-Score of 25 or less. We broke our results down according to the size of each company. For businesses with:
- Total assets between £50k and £124k, 43% were in the warning area (40% in August 2023).
- Total assets between £25k and £49k, 49% were in the warning area (47% in August 2023)
- Total assets below £25k, 58% are at serious financial risk (unchanged from August 2023).
Even with major retailers there is a higher percentage at risk – 20% now vs. 18% in August 2023.
Across the whole economy, some 19% of all companies are in the Warning Area.
This confirms that while there are some large retailers with serious financial issues, the vast bulk of financial risk in the sector lies with the smaller, less well-capitalised businesses.
Zombie Companies
We also identified any ‘zombie’ companies with negative balance sheets (by at least a de minimis figure of £20k). 19,050 (14%) retailers were zombies with a combined excess of liabilities over their assets of £2.6bn. It remains worrying that one in seven retailers has filed a balance sheet, which is technically insolvent.
Negative Working Capital
We also looked at companies with negative working capital, where their liabilities falling due within a year were greater than their current ‘quick’ assets such as cash, inventory and receivables (again by at least £20k). We found there were 21,983 (16%) such companies. This too is a negative indicator for the financial health of the sector.
Debt
After debt levels had stabilised in August 2023, the significant reduction of 31% in borrowings noted in our previous report in May 2024 has been repeated in our latest research. Total debt has fallen by an even higher amount of 37% in less than a year, to just £28.3bn now. Looking at the sector according to size of company, this reduction is heavily focused among the largest retailers with assets of £1m of more, which have cut their borrowings by over £17bn.
A more detailed summary of our research can be found here.
Retail Insolvencies
Last year was a record year for corporate insolvencies, with a total of 26,766 for the UK as a whole, beating the previous high in 2009 at the height of the global financial crisis.
Retail failures are running at 8% of insolvencies, with 2,089 retail companies in England & Wales filing for insolvency in the twelve months to September 2024. This compares to 1,307 (7.6%) retail insolvencies in 2019 before the pandemic. It’s notable that the current failure rate is higher than the sector’s 6% share of GDP, confirming the higher risk factors for retailers.
Major retail failures
The Centre for Retail Research maintains statistics covering the failure of major retailers in the UK. These figures capture the number of companies affected, as well as the number of retail stores and retail jobs put at risk.
The outcome for 2023 was a record since the start of the collection of this data, at least in terms of the number of businesses affected (61), but nowhere near some other years looking at the number of stores affected (971) and jobs at risk (20,642). The clear conclusion is that it was the smaller major retailers getting into financial difficulty last year, compared to 2020 (which was mainly down to Covid disruption) or 2008 (which was heavily distorted by the Woolworths mega collapse).
2024 shows a different picture of fewer but larger retailers failing, notably the four particularly high profile failures of Homebase, Carpetright, Ted Baker and Body Shop all going into Administration. By mid-November 2024, there had been 27 major failures affecting 886 stores and putting 17,939 employees at risk.
These statistics do not include companies undergoing a Company Voluntary Arrangement (CVA) unless they subsequently go into Administration or Liquidation.
Conclusion
Retailing remains highly challenging, especially for smaller businesses having to service a higher debt burden than before the pandemic and with some paying higher interest costs. Fortunately, borrowings are falling substantially right across the retail spectrum.
The worst of the cost of living crisis may be easing, but retailers face ongoing issues both at the top line as some shoppers are still limiting their spending and at the bottom line as they struggle with rebuilding their profit margins after a period of restraint caused by public opinion wanting them to limit the amount of cost inflation they passed on to customers.
Retailers now face huge additional costs in April 2025 from a trio of measures announced in the Budget in October. The impact on their profitability and viability will depend on how they juggle the options for mitigating the damage. Will they cut staffing, reduce pay rates or increase prices? Most likely they will apply a mixture of some or all of these strategies.
One thing is for sure, the Budget will do nothing for investment in the retail industry, which bodes ill for a sector which needs constantly to update, upgrade and re-invent the customer experience, whether it is in store or online.
If you would like to discuss any of the points in the report or believe you have been affected by any of these issues, you can speak to one of our Partners who can discuss options with you.
We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.