Fall in CVAs could lead to spike in retail administrations

24 January 2020 Consultancy.uk 4 min. read

2019 was undoubtedly a tough year for the retail sector – however Britain’s high street crisis could be on the verge of deepening this year, according to the latest research. Company Voluntary Arrangements in the sector trended down significantly over the last 12 months, but this seems to have resulted in a dramatic spike in the number of administrations occurring in December – suggesting worse could still be to come in 2020.

Volatile trading conditions, business uncertainty, and trading models in need of change are all putting huge pressure on companies’ abilities to survive. For many, the subsequent result of these challenges has been a Company Voluntary Arrangement (CVA), which gives directors some breathing space and the means to redefine and reshape their businesses to better survive in the future.

However, earlier in 2019, the popularity of CVAs as a solution was found to be waning significantly. CVAs decreased 5.6% in the first half of 2019 compared with 2018.

A new study from Deloitte has found this trend even played out in the UK’s beleaguered retail sector, suggesting that things may finally be picking up for stores moving into 2020. Retailers entering CVAs decreased by 24% in 2019, from 38 in 2018 to 29 in 2019. There was also a 38% decrease in the number of large retailers that chose CVAs as a restructuring method. This is in part due to push back from the landlord community which has made CVAs harder and less attractive to implement. However, 2019 also saw a drop in administrations.

Retail CVAs fell in 2019, while retail administrations plateaued

2019 saw a total of 124 UK retail administrations. This represented a minor fall from the 125 retail administrations reported in 2018. While that seems like minute progress, that number had ramped up by more than 30 over the last two years, so optimists in the sector might see this plateau as a sign the end may finally be in sight for the UK’s high street crunch.

It would though be wrong to infer from these results that British retail is out of the woods just yet. While the number of insolvencies on a brand basis showed signs of peaking, the number of people affected by the financial distress of the sector increased. Backing up figures from PwC which suggested the number of stores closing had actually increased year-on-year in 2019, Deloitte found that the number of large retail insolvencies had ramped up over the last 12 months.

In 2018, there were an alarming 26 insolvencies among top retail brands – impacting 2,354 stores and 23,691 employees. In 2019, this situation worsened, with 28 large insolvencies impacting 2,504 stores and more than double the number of employees – with the staggering increase hitting 50,686 people in the sector.

A troubling picture?

At the same time, retail administrations saw a concerning increase in December 2019. The number of retailers having to call in administrators at the end of the year spiked by 57% compared with the year prior, as the sector closed the decade on a worrying low. This may well be connected to the decrease in CVA activity, which in turn resulted in an increase in the number of administrations. As retailers are left with fewer options to restructure their business, looking ahead, this could paint a troubling picture for the consumer-oriented sector in 2020, as Britain finally braces for the culmination of its protracted divorce from the European Union.

With the fall in the value of the pound that Brexit anxiety has already sparked, imports have become more expensive, driving up retail prices in the UK. At the same time, wage stagnation means many people still earn less in real terms today than they did over a decade ago – a factor which cannot be ignored in terms of the fall in consumer spending power blighting the retail sector. These factors look likely to plague sales well into the future, and may well mean retail administrations see rapid growth in the coming months.

Despite this, Dan Butters, Head of Restructuring Services at Deloitte, remained upbeat, saying, “2019 has proven to be another challenging year for retailers… However, entering a new decade brings fresh opportunities for retailers, particularly with a review of business rates as announced in the Queen’s speech in December. With this in mind, 2020 may see improvement in the retail environment for a number of retailers.”