Business failure rate falls but increase in 2011 likely, warns advisor

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Fewer retail and wholesale businesses went into administration in the last quarter of 2010, compared to the same period in 2009, figures from the Office for National Statistics reveal.

But a leading financial adviser has warned this is the lull before the storm and more business failures are likely in 2011.

The Q4 2010 provisional data, issued by the Insolvency Service, shows 58 administrations of wholesale and retail companies (excluding sale and repair of motor vehicles and motorcycles) in the quarter. This is an 18% decrease from the 71 sector failures in Q3 2010 and a 39% decrease from the 95 business that collapsed in the same period last year (Q4 2009).

Barry Knight, head of retail at finance and business advisors Grant Thornton UK LLP, said: “The decline in the number of retail and wholesale administrations seen in Q4 2010 represents a clear improvement on the same time last year (Q4 2009), with numbers down by 39%. It is also interesting that the number of CVAs (Company Voluntary Arrangements) on a year-on-year basis has remained constant at 22.

“The latest figures are also a drop of 18% on the previous quarter (Q3 2010), which is encouraging and shows the sector is moving in the right direction for now, particularly in the light of a shrinking economy and adverse weather conditions towards the end of the last quarter, which kept many shoppers off the high street.

“There is however, no room for complacency as retailers will still face very difficult conditions in the year ahead, and this might be the lull before the storm.

“The UK economy is still volatile and there is a risk we could see an increase in business failures in 2011. Pressures from high inflation, particularly in relation to commodity prices, the VAT increase, a looming rise in National Insurance contributions and a potential hike in interest rates, combined with falling consumer confidence, are bound to take their toll. The retail sector relies heavily on consumer discretionary spend and will feel the pinch as customers with squeezed disposable income look to rein in their spending on non-essential purchases.

“It will be critical for retailers to face these difficulties head on by reducing their cost base where possible and keeping a tight control over working capital. It will be more crucial than ever to keep customers spending by offering quality products and services at a price point, which ensures stock sell through is in line with expectations and with emphasis on cash margin. It is also important that advice is taken on available options when a retailer faces difficulties, and relevant procedures are put in place sooner rather than later to avoid administration.

“At the moment the UK banks in particular, and to a lesser extent landlords, are very aware of the difficulties facing the sector and are working with retailers who are struggling, in a sensible and proactive manner. This is shown through the fact that the number of CVAs as a proportion of administrations has increased,” Knight said.