The British high street has endured a string of high-profile insolvencies in recent years, leading to the demise of household retail brands. Retailers are fighting to stay out of the red as record-high inflation, rising rent, the cost of living crisis, and growing popularity for ecommerce dent already reduced budgets.
Chris Bristow, a company liquidation and corporate rescue specialist at Real Business Rescue, examines the financial health of retail businesses under the current climate.
Business distress levels in the retail sector
The Business Distress Index from Real Business Rescue, a leading corporate insolvency and restructuring provider, provides quarterly insolvency statistics and insight into distress levels across key UK sectors, including retail.
The Business Distress Index for Q4 (July to September) shows 632,756 UK businesses in significant financial distress, of which over 46,000 are retail businesses. This is a 38% change from Q3 2023 which saw 33,622 retail businesses in financial distress.
The Business Distress Index classifies companies in significant and critical financial distress as those showing sustained deterioration in key financial ratios, such as working capital, contingent liabilities, retained profits and net worth.
Out of the top ten sectors in significant financial distress, general retailers ranked number five after support services, construction, real estate and property services, and professional services.
The top three regions in critical and significant financial distress include London, South East and Midlands, all of which saw significant distress levels consistently increase from a year prior.
We look at some of the factors shaping the health of the retail industry, such as the evolution of retail technology, economic conditions and sector trends.
Evolution of retail technology
The retail industry is at the forefront of a technological revolution as online retailers incorporate fast-evolving technology into their service delivery to embrace a customer-centric approach. This is a necessity for both new and old-generation retailers to succeed as more consumers move online to fill their shopping baskets.
The UK is predicted to have 62.1 million e-commerce users by 2025, according to Statista. This foregrounds the pressure faced by traditional retailers to invest in technology to remain competitive and meet consumer expectations, or risk extinction.
Changing political and economic landscape in the UK
During Q3 2024, the political landscape in the UK was volatile as the country entered election season. At the beginning of July, the Labour party came into power and the date for the Autumn Budget was set shortly after.
Consumers and investors alike naturally paused spending in light of upcoming tax reforms. The Chancellor of the Exchequer, Rachel Reeves, set out to raise a record £40 billion in taxes in the Autumn Budget, resulting in key tax reforms affecting the retail industry.
As trading conditions become untenable for retailers, a series of measures have been announced, including a reform to the current business rates system, as promised in Labour’s manifesto.
The new business rates system sets out to achieve a range of targets, such as:
- Raise the same revenue in a fairer way
- Level the playing field between the high street and online giants
- Better incentivise investment
- Tackle empty properties
- Support entrepreneurship
Other notable measures announced in the Autumn Budget include:
- Employers National Insurance Contributions will increase from 13.8% to 15% in April 2025
- The threshold at which employers pay Employers’ NIC will be reduced from £9,100 to £5,000 from April 2025
- Employment allowance will increase from £5,000 to £10,500 from April 2025
- National Living Wage will increase by 6.7% to £12.21 an hour from April 2025
- Business rates relief will be extended to 2026, although relief will be reduced from 75% to 40%
What does this mean for retailers?
While the Autumn Budget unveiled a mixed bag of changes for retailers, new tax reforms are in the works to improve trading conditions for retailers.
Retailers at risk of becoming insolvent must investigate their financial position and seek early intervention to maximise the range of business rescue options available.
Whether it’s help dealing with creditor pressure or devising an exit plan to secure a future for the business, a corporate insolvency and business restructuring advisor can help.
