UK retail net store closures quadruple in first half of 2018

14 November 2018 Consultancy.uk

The UK high street is enduring its most challenging period in five years, according to a new study. Averaging 14 closures per day, the UK saw a net closure of 1,123 stores in the first half of 2018 alone, with worse expected for the year as a whole.

A year can make all the difference, as the UK high street has found to its cost in a tumultuous 2018, which has seen a seemingly endless list of once household names collapse. A potent blend of spiralling debts, climbing business rates, and crippling costs related to a weakened pound triggered by Brexit have seen multiple casualties in the British leisure and retail scene throughout the year, with no end in sight.

In winter 2017, the mood was very different. At the time, PwC and the Local Data Company (LDC) released an analysis of more than 67,000 outlets in the UK, finding that 2,342 companies actually opened on high streets, retail parks and shopping centres, while 2,564 closed – averaging out at a net total of 222 closures. While the result was still in the negative, this represented a milestone for British retail, in that it was lowest level of closures since 2010.

While bricks-and-mortar stores were later found to have also won back the hearts and minds of many British consumers – with former ranking topper Amazon usurped by M&S Simply Food, which was closely followed by John Lewis and Lush – however, these results did not prove to be a turning point for the sector as a whole. Indeed, British high streets have instead endured a torrid year, and by July, the number of profit warnings by FTSE-listed retailers had doubled since the same period of 2017, while the UK economy as a whole had seen profit warnings hit a seven-year high.
A net of 1,123 stores closed in the first half of 2018

Now, the latest report released by PwC and LDC has found that in the first half of 2018, about 14 shops were closing every day, with this likely to be compounded at the close of the year. While that is actually still the same rate as in the duo’s last benchmark, what has changed is that the number of openings balancing it out has plummeted, as UK retailers face their toughest trading climate in five years. Compared to last year’s 222 net closures, the net closure of some 1,123 stores from the nation's top 500 high streets in 2018 makes for grim reading, as the UK stumbles ever closer to an uncertain Brexit, which many experts anticipate will drastically exacerbate the negative trading conditions already hampering the high street.

Fashion hit hardest

While PwC suggested in its findings that fashion outlets like Debenhams (net closure of 104) and electrical stores like Maplin (net closure of 44) had suffered most, as customers did more shopping online, the broader conditions of the market suggest it is far less easily explained. Primark, for example, is enjoying a bullish period, and is expanding determinedly across the US. Yet while a number of high street names, which have since collapsed, have invested large sums in their online capacities in a bid to turn around their fortunes, Dublin-headquartered Primark steadfastly refuses to digitise, and only makes its products available in store.

Because Primark offers some of the lowest prices for clothing available, its profit margins are meagre. Too meagre, in actuality, to face online retail, where it would have to absorb shipping and returns costs, or pass them onto the consumer, compromising the store’s business model, and potentially reducing sales anyway. This highlights a major bone of contention in the clamour for digitisation seen in the retail sector; should stores adapt for the online world, they may have to pass the cost onto the consumer, driving further business away.

At the same time, restaurants and pubs also floundered, with a net closure of 99. Part of this has seen the UK witness a string of casual dining chains looking to find efficiency savings, or entering into full-blown restructuring efforts in 2018, as a casual dining crunch continues to threaten thousands of jobs across the country. While the sector saw outlets in positive growth in 2017, heightened costs, again including costs of imports thanks to a pound battered by Brexit uncertainty, saw this trend continue throughout 2018, as businesses attempted to rein in spending amid a saturated market.14 shops in the UK are closing every day, with fashion retailers hardest hit

At the same time, consumer power has taken a hammering of its own, with average weekly wages still lower than the 2008 levels achieved before the financial crisis, remaining £31 below the pre-crisis average, meaning fewer people are willing to go out and spend on food and drink. The warning signs of this coming reckoning have been in the cards for some time now, and at the start of the year, a study from Deloitte was one of the most recent to note that consumer confidence had flat-lined, with anxiety over stagnant wages and a spiralling cost of living meaning many were reluctant to spend on anything approaching ‘luxury’.

Commenting on the results, PwC UK’s Consumer Markets Leader, Lisa Hooker, remarked, "The continued rate of store closures reflects the new reality that many of us prefer to shop online and increasingly eat, drink and entertain at home. The high street is adapting to an overcapacity in retail and leisure space resulting from these channel shifts.”

Moving forward

Of the few segments enjoying positive growth in 2018, the supermarket scene is perhaps the least surprising, though it enjoyed a slim net increase of eight stores. With discounters Lidl and Aldi still excelling in the UK, the German-origin duo continued their spree of openings throughout the year, while top competitors also looked for ways to increase footfall, including grocery giant Tesco, which launched a new discount brand of its own, Jacks, in a bid to keep pace.

Elsewhere, ice cream parlours also saw net growth of eight stores, possibly due to the fact that they can still be regarded as a ‘treat’, but will not break the bank, as consumers look to find less expensive ways of enjoying themselves while living within their means. Also seeing a net increase of eight stores, bookstores are also enjoying something of a resurgence in the UK. In their case, it seems that they are the unexpected beneficiaries of a fractured social and political climate. To illustrate that point, earlier in the year Waterstones reported that it had sold more books on politics in the first 10 months of 2018 than in the whole of 2015 or 2016, with sales boosted by more than 50%, buoyed by the controversies of Brexit in the UK, and the Trump Presidency in the US, among other issues.

Looking forward, however, Hooker concluded that the worst may still be to come for all aspects of the UK high street. She added, “The turmoil facing the retail sector is unlikely to abate… Store closures in the second half of the year due to administrations and company voluntary arrangements [a form of insolvency] already announced will further intensify the situation."

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.