industry watch: retail sector...retail and the severe knock-on effect on the retail property sector...

Industry Watch: Retail Sector

The content of this document is: Commercial in Confidence © Company Watch Limited 2019Company Watch, Centurion House, 37 Jewry Street, London, EC3N 2ER - +44 (0)20 7043 3300 - [email protected] – www.companywatch.net

Industry Watch: Retail Sector


Organisations around the world rely on Company Watch’s industry leading financial analytics, such as the H-Score® and TextScore®, to drive their credit and procurement risk processes.

Our scores are trusted by banks, corporates, investment houses and public sector bodies to manage their exposures: by providing a transparent drill-down to the factors driving our analysis, and the tools to stress-test our scores, we enable our clients to take evidenced-based decisions and justify these to key stakeholders within their organisations.

With the H-Score® and TextScore® predicting over 92% of global quoted company insolvencies in advance, it is the risk management tool of choice, providing actionable intelligence in an uncertain world.

As part of our ongoing analysis of the market place, we monitor the performance of industry sectors within the economy and model the impact of internal and external events on various sectors. These results are included within our Industry Watch updates.

Our latest Industry Watch looks at the Retail Industry and how it is struggling with the many issues it faces today.

If you would like to find out how the Company Watch platform and analytics can support your credit and procurement processes then please contact us.

Regards,

Jo KettnerCEO, Company Watch October 2019

Analysis of the Retail Sector


Retail’s overall contribution to the UK economy is illustrated by data published for 2018 by Retail Economics. It shows that the retail sector as a whole contributed 5% of UK economic output (Gross Value Added), employed 2.9 million people and consisted of some 300,000 retail outlets run by 200,000 VAT registered traders.

The latest Company Watch research conducted this month showed there are 86,694 companies registered at Companies House that claim to be in the retail trade. Between them they employ assets totalling £194bn, borrow over £40bn and have a combined net worth of £77bn.

Most worryingly, the average overall average H-Score® in the retail sector is only 36, far below most other sectors in the economy. If you break this down by size of retailer, the financial strain this sector is under becomes even more obvious. For retailers with total assets of £100k or more, the average H-Score® is a more respectable 45. But for those with total assets between £25k and £99k the average is 31 and for those with total assets under £25k, it’s a deeply worrying 27.

Insolvencies are on the rise again in retail, after declining each year between 2014 and 2016 and rising slightly in 2017. In 2018, there were 1,561 failures, a rise of 11%. The first half of 2019 has seen a further 824 failures, suggesting that the figure for the whole year could well show another significant rise.

A further indication of rising insolvency trends comes from statistics for major retail failures compiled by the Centre for Retail Research. Their focus is not just on the number of major failures, but also their impact on stores and employees. Looking once more at the five year period up to 2012, the data showed that there were 202 major failures, affecting 19,693 stores and 184,324 employees.

In the next five year period from 2013 to 2017, the number of major failures was broadly similar at 191. However only 7,429 stores and 82,655 employees have been affected, meaning that since the initial post-recession clear out of outmoded high street giants; there was a culling of still well known, but smaller national and regional brands.


“Most worryingly the overall average H-Score® in the retail sector is only 36 , far below most other sectors in the economy”.



There is evidence that the financial pain for retailers intensified sharply in 2018 and that the latest crop of collapses is once more affecting larger chains. In the 21 months since the start of 2018, there have already been 74 major failures. Worse still, the number of stores affected is already up to 3,778 (over half the number for the whole of the previous five years).

The number of staff impacted since the start of 2018 is 81,608, only just short of the figure for the previous five years. This means that 2018 was the worst year for staff since 2012 and 2019 could very well be even worse. Of course these numbers do not include the employees of landlords impacted, or the huge numbers of CVAs now in progress (which are omitted from the Centre for Retail Research numbers), or by the store closure programmes of many retail giants such as M&S, House of Fraser, under Mike Ashley’s ownership, and most recently Sainsburys.

The shop vacancy rate in July 2019 hit its highest level since January 2015 at 10.3% according to the British Retail Consortium and the vital measure of footfall fell by 1.9% in July, the worst July performance for seven years.

Store vacancies created by insolvencies now total over 20m sq.ft since January 2018, which shows the scale of the clear out going on in physical retail and the severe knock-on effect on the retail property sector which is seeing valuations and, even more worryingly, loan to value ratios tumble to critical levels for some big landlords. All is very far from well on the High Street.

Key Risk Issues in the Retail Sector:

Profitability1. Competition/ discounting2. Margin control3. Cost/ prevalence of returns4. Business rates5. Rent/ onerous leases6. Rising labour costs7. Costs of re-shaping store portfolio

Commercial1. Quality/ experience of management2. Store portfolio/ locations3. Effectiveness of online offering4. Effectiveness of multi-channel routes to purchase5. Credit insurance

Debt

Investment 1. Constant technology updating2. Store interior refreshment3. Logistics

Opaque corporate structures



There have been dramatic structural changes to the retail industry over the past few years, brought about by changing consumer behaviour driven by technology, an outdated business rates system and the prevailing economic conditions. Other new and unforeseen factors like Brexit have exacerbated problems, with a weaker pound and the subsequent pressure on retail margins.

The challenges facing retailers are so numerous, so interlinked and so complex that it is no surprise that weaker and badly run businesses are failing in increasing numbers. In this era of bricks and clicks, there are too many stores and too many inadequately functioning online retailers. The investment required to keep up with changing consumer habits and evolving technology is frightening and only for those with strong balance sheets or that are exceptionally well financed.

Town centre and high street renewal, now brought together under the buzz word ‘place making’, is key to the future of retail in the UK. This will need not just entrepreneurial flair, flexible planning and genuine political engagement, but a significant re-purposing of whole town centre areas and of many properties within them.

The H-Score®


The H-Score® measures a company’s financial health. It is derived from a company’s published financial results and quantifies how closely the accounts resemble those of companies which subsequentlyfailed.

Displayed graphically over five years, on a scale of 0 (weakest) to 100 (strongest).Companies with an H-Score® of 25 or less are placed in the Warning Area. Not all companies in the Warning Area will fail, however, of the companies that do fail, the vast majority were in the Company WatchWarning Area prior to collapse.

The H-Score analytics look at a company’s financial position from a number of aspects including profit management, working capital management,liquidity, and how the assetsare funded.

To find out about subscribing to Company Watch please contact us on: +44 (0)20 7043 3300 or Email: [email protected]


Company WatchCenturion House37 Jewry Street

London EC3N 2ER

+44 (0)20 7043 3300 [email protected] www.companywatch.net

industry watch: retail sector...retail and the severe knock-on effect on the retail property sector...

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