The UK Retail Market – Remarkably resilient despite the Pandemic
When we last examined the UK retail market in November 2020, we were in the pre-vaccination phase of the Covid crisis and struggling through endless national, regional and local lockdowns. The retail sector had already been through a decade of change in just a few months, transforming itself to cope with the necessity of far higher online demand and all the delivery and operational challenges that involved.
The financial data available then was still entirely prepandemic with the exception of some of the major, listed retailers, which had published the very first information on the impact of Coronavirus. Because of the filing deadline regime at Companies House, the figures available in the public domain for the vast majority of retailers dated back to a very different world before everything changed.
Some fifteen months later, we can now at last see what has happened to retail finances and financial risk. It turns out to be a very surprising picture.
Last market study
In our last market study, we were focussed on the shift from bricks to clicks over the previous decade and its implications for those retailers with bloated property portfolios and below par online offerings. We looked at the issues with onerous, landlord-friendly property leases and the patently unfair Business Rates regime. We expressed our concern at the continued obsession of too many retail managers with top line performance, the toxic ‘busy fools’ syndrome.
Since then, the government’s focus on protecting commercial tenants from overzealous landlords has accelerated the trend towards both more flexible leases and rent bases, designed at last to reflect commercial reality rather than just protect property values. We are no nearer the root and branch reform of Business Rates that must come eventually, despite it still being kicked continuously down the road by a cash-strapped Treasury.
The pandemic launched a new phenomenon with big implications for physical retail – the move to WFH. The jury remains out as to whether this will reverse itself as we return to the new normal, or as many pundits believe, we have shifted permanently to a hybrid model, where people who can work from home only go into offices for part of the week. The effect on the viability of city and town centre shops has been and continues to be profound.
Coronavirus has also given a boost to high street and town centre regeneration and place making, finally ending the out-of-date idea that all mattered was retail. In turn this has been the catalyst for an unmistakable trend, in which the big retail chains have culled their portfolios and pulled out of many locations but are being replaced with a new generation of independent retailers. This is bringing a vibrancy to many places, alongside some extraordinary success in some locations at creating an experience-based environment, where footfall is no longer driven just by retail. Examples can be found in the latest Grimsey Review, We are still Open Against all Odds, which was published in June 2021 and can be accessed here.
Our latest research using analytics provided by financial health monitoring specialists, Company Watch shows the following overall financial characteristics:
- Total Assets Employed – £217bn (pre-pandemic £240bn)
- Total Debt – £73bn (pre-pandemic £70bn)
- Total Net Worth – £73bn (pre-pandemic £84bn)
We have used the Company Watch system to analyse the latest financial statements filed at Companies House by every company registered in the UK and operating in the retail sector. Our research covered a total of 128,909 companies.
This highlighted some still worrying statistics, but many where the risk profile has improved significantly since our last review. Company Watch uses complex analytics to generate a financial health score (H-Score®) for companies out of a maximum of 100. 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 over the next three years.
Out of our sample of 128,909 companies, 51,043 (40%) are in the Company Watch Warning Area with scores of 25 or less. In our November 2020 review this percentage was far higher at 50%. We broke our results down according to the size of each company. For businesses with total assets between £25k and £49k, 44% were in the warning area (November 2020 – 56%); for those with total assets below £25k, 56% are at serious financial risk (November 2020 – 63%). Major retailers with assets over £125k have a warning area rate of 26% (November 2020 – 34%). This confirms that while there are some much larger retailers with serious financial issues, the vast bulk of financial risk in the sector lies with smaller businesses.
We also identified any ‘zombie’ companies with negative balance sheets (by at least a de minimis figure of £10k). 22,031 (17%) were zombies with a combined excess of liabilities over their assets of £2.7bn. These figures are largely unchanged since November 2020.
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 assets (again by at least £10k). We found 22,464 (17%) such companies, which had a combined working capital deficit of £8bn. The percentage has fallen dramatically since November 2020 when it was 25%, but the overall deficit is broadly similar.
Amid the general improvement in the overall finances of the sector since our last review, one deeply worrying deterioration is obvious. Across all retailers, borrowings are only up 5%, but for smaller companies the picture is far worse. In businesses with assets between £25k and £124k, debt levels have tripled. For the smallest entities with assets under £25k, it has doubled. This reflects the easy access to loans under the various Coronavirus Support loan schemes, especially Bounce Back Loans.
The ability of these fragile, small enterprises to service and repay such huge debts must be in considerable doubt. The distortion to their balance sheets will also make it difficult, if not impossible for suppliers to obtain trade insurance, without which many will not continue to trade with them.
Cause of improved financial profile
Such a marked uptick in the sector’s financial profile in such troubled and disrupted times seems most likely to reflect the success of the government’s various support measures, notably the furlough scheme and Business Rates holiday. Some businesses will have benefited from using ‘soft’ government-backed loans to repay more expensive borrowing, thereby reducing their interest costs. Another counter-intuitive factor for the grocery sub-sector will have been the switch to home dining during the extended periods when restaurants were closed or their capacity restricted.
Insolvency & business failure issues
Figures from the Insolvency Service show that 7% of corporate insolvencies in the UK occur in the retail sector, with between 1,300 and 1,600 companies a year undergoing a formal insolvency procedure between 2015 and 2019. This has fallen to fewer than 1,000 during the pandemic because some of the government’s coronavirus support schemes and measures have greatly reduced the number of insolvencies across the whole economy since March 2020. Never the less, even in 2020 and 2021, 7% of all insolvencies are retailers despite the sector only providing 5% of GDP.
The major retail failures
The Centre for Retail Research maintains statistics regarding 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.
Their analysis confirms that 2020 was the worst year for these collapses since their records began, surpassing even the previous records set in 2008 at the start of the global financial crisis when the statistics were distorted by the collapse of Woolworths. In 2020, 54 major retailers failed, putting 5,214 stores and 109,407 jobs at risk. Major insolvencies included Arcadia, Debenhams, Oasis & Warehouse.
After the major cull in 2020, the figures for 2021 were the lowest for many years with only 19 major companies filing for insolvency, affecting 1,758 stores but as many as 26,274 jobs.
These statistics do not include companies undergoing a Company Voluntary Arrangement (CVA) unless they subsequently went into Administration or Liquidation.
Fuller details of this analysis can be found here.
There is much justified irritation among retailers at the media’s continued focus on empty and boarded up premises, which completely fails to reflect what is actually happening in many locations. The Local Data Company (LDC) has just published data for 2021, which shows that the vacancy rate by the second half of 2021 was 14.4%, up 2% on the previous year but marginally lower than in H1 2021.
At the same time, LDC confirmed that independent retailers had grown by 2,157 in 2021, the first annual increase since 2016. This supports the trend for independents to pick up units vacated by chains as they slim their portfolios. An astonishing 10,059 units were closed my multiple chains in 2021. In any event, the sector was widely acknowledged to have anything up to 30% too many physical store capacity even before the pandemic and the spurt in online sales that has caused. As such, there is no reason to be concerned at the vacancy rate, provided that the regeneration boom is successful in re-purposing redundant shop units.
Retailing remains hugely challenging, especially for smaller operators now struggling under a far higher debt burden than before the pandemic. The build up of unpaid rent arrears is another major concern, with an estimated £8.5bn outstanding across the whole economy just as the longstanding prohibition on landlord enforcement ends on 25 March 2022.
There are still too many physical outlets, the future of many of them plagued by uncertainty about what the final outcome of the WFH trend will be. Business Rates remain a grossly unfair differentiator between pure play online retailers such as Amazon and Asos as opposed to more traditional bricks and mortar-orientated businesses, as well as between different parts of the UK.
Rampant inflation, prompted first by supply chain bottlenecks, labour shortages and rising energy costs and now made much worse by events in Ukraine will eat away at profit margins and at the ability of consumers to stretch falling disposable incomes across heating, eating and shopping.
The greatest financial risks are focused among smaller retail businesses, but there will be further failures among high profile brands. Flexibility, funding, good management and a sound business model are the keys to not just surviving, but thriving.
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 book a confidential chat without charge or obligation: