Trade credit insurer Atradius anticipates round of retail insolvencies in New Year

Retailers are holding out hopes for a last minute Christmas shopping frenzy to keep them afloat throughout 2016, say retail experts at trade credit insurer Atradius.

With more positive economic news on the horizon, improving employment prospects, low inflation and a significant drop in the cost of fuel, consumer confidence has been boosted to arguably the highest level in a decade. Against this backdrop, Owen Bassett, senior risk underwriter at Atradius, observes that conditions for a strong retail performance this Christmas should be close to perfect – however, he fears that instead there may just be a perfect storm – with shoppers still hungry for bargains, discounting remains high leaving retailers facing another difficult festive season. The New Year could start bleakly for some and a fresh wave of insolvencies could be around the corner.

Bassett said: “With consumer confidence riding high, retailers might have hoped for improved customer spending in the run up to Christmas. However, so far, retail hasn’t performed as strongly as anticipated and it seems that the extra pound in people’s pocket has been spent on leisure activities such as holidays, entertainment events and eating out.

“Retailers traditionally take upwards of 40% of their annual profits between October and December so it is a crucial time of year for them. Those who went into the fourth quarter needing – rather than wanting – a strong performance could be looking at a troubled future. Experience tells us that when retailers need an exceptional seasonal sales period and then hit financial difficulty, we often see failures in the first quarter. It is not unusual in this sector to be loss-making during Q1 and with the first payment of quarterly rent due in January it can be difficult to survive after a poor Q4.”

In a bid to pull in customers, we are now seeing heavy discounting in stores but Atradius also warns that for many Black Friday may prove to have a negative revenue impact in the post-Christmas analysis after the hype failed to materialise on the high street, causing real problems for retailers.

Bassett said: “Last year, retailers felt that they gave away too much with such heavy discounting leading to finer margins and some retailers having to release profit warnings. This year, the market was more measured having learned their lesson the hard way last year. Some didn’t compete at all and others reduced their offering. However, for in-store retailers the lack of a rush for bargains has left many with significant stock to shift and, if sales cannot be achieved at normal price before Christmas, retailers will be forced into discounts after Christmas. Last year the revenue impact from Black Friday was felt immediately, this time the effect on margin erosion is slower to show – but will still be felt.

“Looking at the sector as a whole, while electrical, furniture and DIY retailers have performed well this year, clothing retailers – particularly female fashion – have struggled and that pattern continues. Certain sub sectors are benefiting from pent-up demand. After a long spell of ‘tight belts’, consumers are no longer delaying spend on their homes and on items that are overdue for replacement such as electrical appliances which only have a limited lifespan.”

“However, the story for high street fashion is not so positive and despite continued demand, the outlook is mixed. The female fashion sector is now saturated  with many similar businesses competing for the same pound. Those that cannot compete in terms of operational efficiency or that don’t continue to appeal to consumers’ tastes in fashion will find themselves in difficulty.”

Trade credit insurance supports businesses in all sectors to manage risk and to trade safely.