Retail sector shows greatest risk of insolvencies – EY Profit Warnings Report

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A higher proportion of listed retail companies are at risk of insolvency compared to other sectors, according to data from the latest EY Profit Warnings Report.

In 2020, 19% of FTSE Retailers issued their third or more profit warning in a 12-month period, higher than any other sector. By comparison, FTSE Travel and Leisure was the second highest with 16%, while the figure was 5% for all UK listed companies, and 10% for UK-based companies in the FTSE 350. Typically, up to one in five of these companies enter Administration within 12 months.

Retail has been one of the hardest hit sectors of the pandemic, having reported the worst sales figures on record and 72% of FTSE Retailers having issued profit warnings in 2020. The final quarter of 2020 concluded with FTSE Retailers surpassing the highest annual total of profit warnings for the sector by reaching 53 – two more than the previous high set in 2008.

Reshaping retail

Dr Mona Bitar, EY-Parthenon Partner and UK&I Consumer Product Leader, said: “Brand survival for retailers in 2020 relied on smart, new strategies around what and how to sell consumer products. Understanding the consumer has never been so important and the increased penetration of the online channel, which is likely to stay beyond the pandemic, has forced retailers to accelerate improvements in their end-to-end supply chains.  As well as the challenges retailers are facing, new opportunities are opening-up as a result of the rapid scaling-up of online operations, the expansion of fulfilment capacity and establishing a presence in new markets.”

Retail has been one of the hardest hit sectors of the pandemic, having reported the worst sales figures on record. Lockdown restrictions have significantly impacted traditional bricks-and-mortar retailers. Those with a good mix of digital across multiple channels, and the capability to adapt quickly to customer demands have performed better. For example, the shift away from formal and work wear to ‘athleisure’ has been a pocket of success within fashion.

In a recent EY survey of 300 UK retail leaders, the rapid and permanent shift to online was the outright, key challenge facing the sector in 2021, accounting for 45% of responses. The top priority for 2021, as identified by 30% of the responses, the channel shift to (and cost efficiency of) online. In terms of sentiment, 51% of respondents assessed their confidence in the retail sector for the year ahead as ‘cautious, but willing to invest in the right projects and businesses’.

Dr Bitar added: “UK retail must adapt further if it is to ensure long-term success. Developing a deeper understanding of evolving consumer needs and the agility to respond to them is more important than ever before. It will be pivotal to take bold, strategic decisions, such as transformation projects, simplifying unnecessary complexity within the business, and making appropriate investments. Consumers are also demanding more from brands on both purpose and sustainability – these are no longer optional extras but should be considered intrinsic to retail.”

Record profit warnings across all quoted companies

A total of 583 profit warnings were issued by UK listed companies in 2020. This is the highest annual total in 21 years of EY research – 15% higher than the previous record of 506 in 2001. This historic high contrasts with very low levels of corporate insolvency.

In 2020, there was a surge in the number of UK listed companies issuing three or more profit warnings in one calendar year. Sixty-two UK listed companies issued at least their third profit warning in 2020, almost double that of 2019 when there were 32 and more than double the 31 recorded in 2018.