By Daniel Hunter
Following a prolonged period of distress on the high street and a spate of high profile insolvencies, lacking a relevant proposition to attract today’s consumer and onerous store portfolios have been pin-pointed as some of the key drivers that may lead to an increase in retail insolvencies in 2013, according to Ernst & Young.
In a recent survey, which canvassed the views of UK retail sector executives, nearly 60% of respondents said that retailers with a proposition which lacked relevance would be the main driver pushing up the number of retail insolvencies. A quarter of those surveyed pointed to operational issues, such as onerous store portfolios, as the underlying problem.
“It is clear when looking at the number of retailers’ which have reported strong performances and then at the number of administrations we have seen over recent weeks, that there is an increasing polarisation of the UK high street," Julie Carlyle, partner and head of UK retail at Ernst & Young, said.
“The gap between winners and losers has been especially stark in 2012. Those that are struggling have been unable to keep pace with rapid change of technology and consumer behaviour. The speed in which trends have changed has given retailers less time to adapt before their business becomes unviable — particularly if they are carrying heavy debt, lease burdens and onerous store portfolios.
“Retailers that lack a strong proposition, don’t have the right balance between clicks and bricks, or don’t tap into the desire for value or convenience could follow the growing list of retailers that have entered into administration.”
The survey also revealed that when asked where they saw the highest pressure on costs, nearly two thirds of respondents (60%) pointed towards property costs such as rent and rates, while 25% stated input prices, such as cost of raw materials
“Many retailers have large property portfolios with significant rental and rate obligations to meet and these are eating into margins. With online sales rising year on year and footfall declining for certain stores the need for expansive portfolios has declined," Carlyle added.
“However, slimming down store portfolios takes time and retailers will also have to contend with a further pressure on property costs with April’s planned increase in business rates.”
A recovery and improvement in the retail environment appears to be a long way off, with over half of those surveyed (53%) saying that they don’t expect an improvement until 2014 and 38% not predicting an improvement until 2015 or after.
“To compete in these difficult markets, retailers will need absolute focus on operational and financial efficiency, while also having the flexibility to adapt to changing and patterns in consumer behaviour," she went on.
“Some businesses will need radical restructuring of debts and store portfolios to remain viable, which is likely to generate further interest from distressed funds. Many of the retailers that have gone into administration still have a future in a slimmed down form — either online or with fewer stores and manageable levels of debt. The UK high street isn’t dying; it’s just being reshaped to meet the needs of a new generation of consumers — and for the foreseeable future distress will be the new normal.”
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