Restructuring in the retail sector: what does the future hold?
Restructuring in the retail sector
How are these challenges affecting the wider industry?
What about the impact of Brexit and supply chain disruption?
Howcould changes in restructuring impact the sector?
In recent months, we’ve seen many major high street retailers focusing on cost savings, redundancies and strengthening their balance sheets. One of the biggest factors compounding the challenges of the pandemic has been poor-quality digital infrastructure. Many of the national retailers have decades-old digital payments and e-commerce systems embedded in their operations, and their outdated websites haven’t coped with the influx in customer demand – particularly during sales seasons. Despite this, almost a third of retailers admitted that fixing their payments infrastructure had become less of a priority during the pandemic, according to research by Checkout. com at the end of 2020* 2 . These retailers risk missing out as e-commerce continues to grow, with the sector predicted to account for 40 per cent of UK retail by 2030. With the uncertainty around when the lockdown measures will lift, non-essential retailers are facing a monumental liquidity challenge. Many will be paying back their debts for the festive period while attempting to manage cashflow and plan ahead for the Spring/Summer season, before they know when they will be able to open again. A number of clothing and home furnishing stores need to pre- order fabric and garments months in advance, creating considerable forecasting difficulties. Two other challenges for high street retail are rent values and business rates. Many retailers urgently need to address their rent bills and negotiate with landlords to reduce their rents, if they’re not already seeking to do so as part of a company voluntary arrangement (CVA) process. Retailers should prioritise turnover rents rather than fixed rents when negotiating and drawing up contracts. COVID clauses must also be embedded in any new lease deals, otherwise retailers will be faced with a fixed cost base which will be accrued regardless of whether they are open or closed. There is also the issue of business rates – retailers currently pay 25 per cent of UK business rates, despite only accounting for 5 per cent of the economy, and when the business rates holiday ends in March 2021 we’re likely to see further pressure placed on an already struggling sector. Then there’s the added challenge of pension schemes. Many older chains are facing significant pension challenges, with multimillion-pound deficits to plug. Pension schemes add another layer of complexity for struggling companies to navigate, particularly if a restructuring process is on the cards.
The inevitable post-Brexit changes to the UK’s global trading relationships will impact the entire sector. Added to this, shipping has become a major logistical challenge for the supply chain, with many ports closed for months. As a result, there’s little capacity for cargo to come from far east suppliers, such as China and Bangladesh, and the supply chain will likely face periods of disruption as lockdown measures continue. Post-Brexit trading difficulties have already begun to gather momentum. Northern Ireland is still in the EU’s single market, and goods being sold from Great Britain to Northern Ireland are now subject to numerous new checks and controls. Marks & Spencer has been the latest high street retailer to warn its products line could be hit with new import tariffs in Ireland, due to the “rules of origin” regulations set out in the Brexit trade deal. The rules dictate whether import taxes must be paid based on where a product’s ingredients come from and where it has been manufactured. In the case of Marks & Spencer, its Percy Pig line and 2,000 other products manufactured in Germany look set to face costly tariffs. Regional lockdowns have also had an impact on stock levels, and there’s now a backlog of unsold items in stores across the UK, posing a further logistical challenge for retailers struggling to shift it. Compounding the problem, a lot of stock must be ordered months in advance. With no definitive end-date for the current lockdown, and with no clarity around when non-essential retail will be given the go ahead to re-open or when we might be able to travel overseas – a key driver of Spring and Summer sales, retailers are simply unable to predict what products to buy and what consumers will be looking for when they do open their doors again. Suppliers of all sizes have also faced significant challenges in recent months. We have started to see cost cutting and cash preservation measures as well as a series of redundancy programmes across the industry, with companies focused on maintaining cashflow, reducing costs and bolstering liquidity. Businesses are already putting measures in place to address the issues they’re facing; be that looking at headcount or deferring capital expenditure. However, for some, the main concern will be about their ability to survive the uncertainty of the year ahead.
The impact of COVID-19 has prompted a number of developments in the UK’s restructuring industry. Reforms in the Corporate Insolvency and Governance Bill 2020 have provided new support – in particular a Restructuring Plan, which provides far greater scope than previous restructuring tools to compromise, liabilities and shareholders. Additionally, we have seen increased use of ‘light touch’ administrations, where administrators delegate certain responsibilities back to directors in order to achieve a more collaborative, effective and lower cost solution. Another significant measure introduced by the UK government during the pandemic has been the temporary suspension of wrongful trading provisions, effectively giving directors the green light to prioritise their business over the position of creditors while not being exposed to wrongful trading actions. The suspension doesn’t absolve directors of fraudulent trading, misfeasance and other insolvency provisions, and directors must continue to protect themselves from any future criticism, potential personal liability, or disqualification. Similarly, the government’s moratorium on commercial evictions is not a permanent fixture. Business leaders should not be prevented from heading to the negotiating table and addressing any unpaid rent burdens in good time. And while many industry leaders are lobbying for the government to extend rates relief, this measure will not continue indefinitely. Some business leaders may falsely believe they won’t be liable for any wrongful trading during this period, or that the rent moratorium will prevent landlords from going after them for their deferred rent payments, but this is a short-term, and risky viewpoint. The relaxation of wrongful trading rules, and the moratorium on rents has provided a temporary breather, but it’s imperative business leaders consider the long-term picture. These measures won’t be in place forever, and it’s important business leaders address any cashflow challenges at the earliest opportunity, communicate any challenges with their stakeholders and plan a way to get through. Directors must maintain good management practice, continue to act in good faith and have open dialogue with landlords and creditors to try and establish mutual consent for deferments and standstill agreements.
400
Billion pounds in revenue generated in 2019 by the UK’s retail industry 21 Percent increase in online purchases from 2019 to 2020 Percent of the retail sectorwill be e-commerce by 2030 40
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