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Retail insolvencies could soar in 2011

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Retail could see more insolvencies than any other sector in 2011, according to new a study from the Association of Business Recovery Professionals R3.

A poll of 300 insolvency professionals predicted that the number of corporate businesses collapsing in the next 12 months will rise by more than 1,000 year-on-year, with the retail and wholesale sectors particularly affected.

R3’s research shows that while 20 and 25 per cent of those surveyed said hotel & restaurants and construction respectively would experience the most insolvencies in 2011, 31 per cent named retail & wholesale as the sector that will suffer most.

One of the main reasons financial industry professionals are predicting a gloomy outlook for the retail sector is last month’s VAT rise from 17.5 to 20 per cent, which when combined with other economic factors is starting to put huge pressure on consumer budgets.

Steven Law, President of R3, told Retail Gazette: “Our members believe that the retail industry will suffer in 2011 due to a rise in VAT.

“This will make goods more expensive at a time when consumers are already tightening their belts.

“Retailers find themselves between a rock and a hard place as they struggle to work out what will damage their bottom line more: absorbing the extra tax or suffering an inevitable fall in consumer demand if they pass on the tax. Sadly, both will erode their profits.”

His assessment of the current retail landscape follows recent comments made by British Retail Consortium (BRC) Director Stephen Robertson, who said many retailers absorbed the shop price inflation throughout January, but will not be able to take this hit on margins for much longer.

BRC and Nielsen’s Shop Price Index placed shop price inflation at 2.5 per cent in January, and Robertson suggested the VAT rise was hidden from customers due to the surprisingly high level of discounting during the month.

There are, however, those working in and around the retail industry who do not expect the VAT rise to have a major impact on sales in 2011.

In an interview with Retail Gazette last year, Head of Retail for Large Corporates at Lloyds TSB Charles Lamplugh called the potential negative effect on retail as “a red herring”.

Speaking in November, he correctly predicted that retailers would use the weeks leading up to the tax rise to encourage people into stores, but added: “If you are going to spend £200 on a dress is £5 extra going to make a whole lot of difference? I don’t think it does.”

Whether the level of VAT is a major factor in dictating the health of the industry or not, both Lamplugh and Law agree that there are other pressing matters putting pressure on the retailers’ capacity to stay afloat against a tough economic backdrop.

For example, too large a store portfolio combined with rising business rates and an increase in red tape can cause problems for the companies concerned. Even this week, chocolate specialist Thorntons announced that it will be reducing its network of shops in an attempt to turnaround the fortunes of its retail operation.

Law added: “Our research shows that more businesses are seeing a fall in profits and one reason for this is an increase in overheads such as rent and utility costs.

“Retail businesses that are least likely to suffer are those with only an online presence as their business model has lower operational costs.”

Published on Thursday 17 February by Editorial Assistant

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