Vol 7 (2010) - Issue 6

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The Economy, the Consumer and the Retailer … and Avoiding the Pre-Packaged Insolvency

Difficult economic conditions in recent years have seen a wave of retailers enter insolvency proceedings and, whilst some survived, often aided by the use of prepacks, others were unable to withstand the pressure.
Retail is an important driver of economic recovery. In recent weeks and months, we have seen many mixed messages around headline retail sales (the BRC tells us sales are increasing; the ONS tells us they are declining). What is clear is that retailers are not out of the woods yet, and many are watching nervously as they approach the critical season of Christmas trading and January sales.
This article outlines some of the key challenges currently facing retailers and points to some strategies for avoiding insolvency, which we argue is the last and never the best resort.

The economy remains depressed, and has been getting tougher over the last three years. With further cuts starting in October 2010, it is difficult to see the economy returning to pre-recession levels any time soon.
The start of the current global economic downturn started to materialise in mid 2007. This period also coincided with the peak of the private equity boom, which had seen leveraged buyouts of some major UK retailers. Additionally 2007 saw a peak in commercial property rental yields, which left many retailers facing high operational leverage. This fragility left many particularly vulnerable to the downturn which was about to take place.
Since then, the global economy has been on something of a roller coaster ride – up, down, rebounding, then back into recession. Sentiment in general is that we are not far from the end of the recession but analysis and data give mixed messages, and confidence is in short supply. In the background lurks the spectre of a double dip recession and this cannot be discounted.
The May general election and the emergency budget gave a foretaste of the austerity measures facing the UK and which are now in place across much of the Eurozone. The looming Comprehensive Spending Review, along with 750,000 expected public job cuts; higher taxes and VAT increases all take their toll on consumer confidence. With higher household bills driving disposable incomes down by 4% in 2010, it is almost inevitable that we will see further negative pressures on retail spending.
We have already witnessed the impact on the economies of Portugal, Ireland, Greece and Spain which have had their own more recent turmoil as a result of the withdrawal of stimulus measures and deep public spending cuts. The European economic policy of bailing and cost cutting can, whilst providing stability in the very short term, only exaggerate the government debt problems, employment and expenditure in the medium term.

Consumers feel the effects of a challenging economy, and are moving to a 'New Normal' in terms of spending patterns – shifting from 'wants' to 'needs' based purchases, and putting family ahead of personal consumption.
Ultimately, it will be the household consumer who will determine how fast the economy recovers, and in these times of reduced disposable incomes their spending will no longer be inflated by an ever increasing burden of personal and household debt.
The UK consumer is also becoming more aware of some looming clouds on the horizon, in the shape of potential wage freezes or even unemployment; a rising cost of living; and the prospect of increased interest rates which could threaten their ability to maintain mortgage payments. As the likelihood of such developments grows, it is unsurprising that consumer confidence is starting to feel shaky.
The bottom line is that households have less money to spend – it is estimated that UK households had 38.4% of gross income left over after paying all bills in 2009 and that by 2013 this will fall to 35.1%, according to Verdict Research/ONS.
Indeed, some households have already suffered an immediate impact of these conditions, and face particular challenges if they are burdened with large debts. Current mortgage debt in the UK runs at GBP 1.3 trillion, with a further GBP 200 billion in credit card debt – in total, household debt significantly exceeds GDP.