With Christmas fast approaching and black Friday/Cyber Monday having passed, retailers will be hoping for a big spike in sales this December to add some sparkle to another challenging year. The uncertain political environment both domestic and abroad has had a visible impact on consumer confidence and, coupled with rising prices and a weak pound, is adding to the costs of doing business for many UK retailers. Unfortunately, there is no end in sight to this continued strain on the retail trading environment. Many retailers increasingly rely on a seasonal increase in sales, particularly in the lead up to Christmas, as vital to balancing their books for the rest of the year. However, even increased Christmas sales may not be enough to save some retailers who are increasingly being met with flat or declining sales and higher costs, forcing some to plan or implement strategies to reduce their costly store networks. Traditional retailers who are trying to increase their omnichannel offering whilst simultaneously maintaining brick and mortar stores will continue to be hit hardest when competing against purely online retail giants.
Inflation highest for 6 years
Inflation rose to 3.1% in November and is the highest it has been in over 6 years. This will only compound an already tight squeeze on many retailers and might prove to be the straw that breaks the camel’s back. Whilst 3.1% may not seem that high when compared with previous years (it was 5.2% in 2011), it is coupled with a continued stagnation in wage rises. Increases in income have historically dovetailed with inflationary rises in the past, which served to counterbalance the impact of inflation on a household’s spending power. The result of rising inflation and stagnating wage rises is that households disposable income shrinks and forces choices to be made to purchase less expensive goods or in some cases, to cease purchasing certain items altogether. The impact of damaged consumer confidence and rising costs is being felt across the board by many companies stretching from high street retailers to large wholesalers such as Palmer & Harvey, which entered administration at the end of November.
In an article about November’s inflation rise published on the BBC website (http://www.bbc.co.uk/news/business-42320052), Richard Lim, chief executive at Retail Economics, said that the rise in inflation had come “at precisely the wrong time for retailers”. “In the run-up to Christmas, the cost of living, now rising at the fastest rate in five years, remains uncomfortably high for households”.
Some big names in the retail sector, including the UK operation of Toys’R’Us, have been making restructuring plans to ensure survival. However, even with the spike in sales that Christmas usually brings, it might not be enough to save some. Even the planned CVA being put forward by Toys’R’Us, which involves shutting down 26 (pre-dominantly large out-of-town sites) of its 100 stores in the UK, may be rejected by creditors and thereby leave the company in a parlous situation. Christmas 2018 may be a very different world for parents and children alike if the Toys’R’Us CVA does not succeed.
There is a sense that there will be increased recovery activity by lenders in 2018 and some key decisions made in relation to failing companies which may see more entities either attempting to execute solvent restructurings or enter into a formal insolvency process. This being the case, one can easily foresee that if a retailer does not have a good Christmas 2017 the ‘Sword of Damocles’ may very well be hovering over them in Q1 2018.
Modernising to survive the environment
In a very challenging retail environment there is a more pressing need for retailers to modernise their offering whilst radically reducing their cost. This increasingly involves a definitive step away from traditional brick and mortar sites to an effective and comprehensive online platform. However, to do so can in itself be prohibitively expensive as a result of the increased costs required to either improve an existing online retail system and delivery network or, in some cases, creating one from scratch. Doing this whilst simultaneously reducing the number of physical stores is not an easy feat – but in the face of continued stagnation, it will be vital for those wishing to survive. A comprehensive solvent or in some cases insolvent restructuring may be the difference between a company continuing or failing.
Another tough year has flown by for the retail sector which finds itself hurtling to its annual denouement. Christmas sales will once again prove to be not only increasingly vital to annual performance, but in some cases the only thing stopping many companies from going under. The doom and gloom is not expected to change anytime soon so retailers should strap themselves in for what looks to be a tough ride in 2018 – and prepare themselves for a more draconian approach being taken to company performance by both lenders and creditors.