Grant Thornton: retailers gloomiest about financing in the UK

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Retailers are the gloomiest about the prospects of the prevailing financing environment in the UK, according to a study of 200 CEOs and CFOs by accountants Grant Thornton.

The finance flow – will the money start moving in 2011? study reveals almost a quarter of retailers believe the financing environment will deteriorate over the coming year, while a further 30% see no likely improvement. 

In addition, half of company chiefs who rated the market as static or declining are not predicting an improvement in conditions until 2013 or beyond – by far the most pessimistic forecast among all industries polled.

The retail sectors feeling the pinch the most are businesses focussing on the sale of higher value items such as cars, furniture, carpets, and certain electrical goods, said researchers. In contrast, retailers of essentials, mainly the supermarkets, have fared better, as have DIY chains.  

Retail businesses appear to be facing especially tough conditions when it comes to accessing bank funding compared to peers in other sectors, the report shows.

In total, 60% of retail respondents rate the banks as being more conservative now than they have been over the past 12-18 months, and a further 13% see no change. 

In contrast, across all other business sectors, less than 40% of respondents rate banks as more conservative. Retailers are also more pessimistic about future progress, with only 27% of respondents saying they see an improvement in bank lending, compared to 38% across all business sectors.

Cash flow remains the biggest hurdle, with 90% of respondents citing this as something banks would examine, compared to 66% in the other sectors sampled. 

Retailers also reported higher scrutiny from banks than the rest of the sample across all other metrics – from business plans to historical earnings – suggesting retail businesses looking to raise capital are much more likely to have to tick all the boxes for the banks.

Tim Hansell, corporate finance director at Grant Thornton UK, said: “The fact retail groups are finding the lending environment difficult is not a new phenomenon – the banks have treated the retail sector with considerable caution for some time now.

“However, despite the current weakness in consumer confidence, investor appetite still remains high to provide equity funding to support growth in certain niche fast-growing segments of the UK retail sector, such as online retail. The current economic backdrop aside, with the ongoing channel shift from the high street to online continuing to build momentum we expect to see future growth in this area.

“Lenders are however still cautious about providing leverage to ‘new to bank’ retail customers, and leverage multiples in retail/online transactions continue to be conservative, particularly where the off balance sheet rent roll is significant.”

Retailers are also the least likely to have explored the potential for raising capital from alternative funding providers to support their growth strategies, said Grant Thornton. 

However, opportunities do exist, especially from within the ranks of private equity backers both in the UK and internationally, as seen across a range of deals over the last few months, it claims.

Hansell said: “Private equity has been a consistent supporter of the retail sector and has reaped huge rewards from backing high quality businesses in the past. More recently, however, the record has been somewhat mixed, with the double-whammy of the consumer recession and over-leveraged businesses leading to some high-profile failures. Notwithstanding this, we have seen significant private equity interest in the sector, focussed on businesses with robust propositions, typically those in a unique market position such as HobbyCraft.

“Funding for retail deals continues to be challenging, and presenting well-thought-through business plans that will stand up to the rigours of lender credit committees is more important than ever. The winners – both investors and businesses – will emerge from those who are willing to embrace innovation and technology in their business model as well as their approach to the consumer,” said Hansell.