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Interest rate rise will spur retail insolvencies

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The number of retailers entering into insolvency has been surprisingly low so far this year, but an almost inevitable rise in interest rates in the next few months could change all of that.

According to an insolvency lawyer Retail Gazette spoke to, there are a number of retailers teetering on the edge of a precipice and if the base rate goes up lots of retail companies could find themselves in trouble.

Richard Curtin, leader of the Finance and Restructuring Group at Faegre & Benson’s London office, thinks that the Monetary Policy Committee (MPC) will have to increase the rate from its historic low of 0.5 per cent at some point in 2011.

“A growing bulk of the MPC are favouring a rates rise, in spite of the fact that there is a lot of political pressure to keep it at a low level,” Curtin said.

“That dam is going to break at some stage and when it does it will have a big impact as so many businesses are hanging on by their fingertips, assisted by interest rates.”

Curtin sees the shedding of poorly functioning companies as part of the economic cycle and predicts more retailers coming under pressure as we move into summer.

“Nobody is 100 per cent safe,” he warned. “Those that will survive are those that are addressing their problems now and implementing the appropriate strategy.”

Wine merchants Oddbins announced earlier this week that it is closing 39 stores as it attempts to save itself but it is competing in a transformed market.

“Oddbins seems on the way out which is not much of a surprise once you look at what happened to Wine Rack,” Curtin added.

Supermarkets now dominate the alcohol market, with people increasingly used to picking up a bottle or two with the rest of the weekly shop.

“We would all like to see Oddbins survive and the new CEO did the right thing when he took over and tried to take it up-market, but unfortunately it may be too little too late.”

Another retailer attempting to rapidly cast-off stores is JJB Sports, which issued a second company voluntary agreement (CVA) last month, a move which has already come under a fair amount of criticism.

Curtin can see why JJB Sports’ landlords will be wary of the CVA because they will also suspect that many other retailer will run into trouble later this year and will be fearful of setting a precedent.

“These are big institutional landlords who will be very adverse to doing anything that could be perceived as opening the door for other tenants of theirs to approach them to reduce their rental exposure.

“You can not blame the landlords for wanting to tough it out, I would do the same. There is too much vacant property and too many tenants in distress. They will lose more tenants and it is a question of damage limitation until retailers stop going to the wall.”

Perhaps predictably for a insolvency lawyer, Curtin advises companies to seek advice early before financial problems become insurmountable, but he also argues that senior management of all retailers can help avert problems right now by taking necessary measures.

He says they must ensure that their company is targeting the right section of the market to be profitable, they must be strictly policing their overheads, all suppliers must be scrutinised and all waste must be eliminated.

“Its difficult to be optimistic about any sector, but there will be companies that will do well because they have a good business plan and a good target place in the market.

“When it gets to the stage of breaching covenants, companies should have been already taking advice, otherwise they are vulnerable to directors’ disqualification procedures and there are more disqualifications now then there used to be.”

A recent study by the Association of Business Recovery Professionals R3 predicted that 1,000 more companies will face insolvency this year than last and retail will be one of the worst affected sectors.

Curtin anticipates a less dramatic increase however and expects insolvency numbers to rise steadily over the next two to three years.

“Insolvencies mount up after an economy leaves a recession and I do not think we are completely out of it yet, there is more pain to come.

“At the end of this period we will have discarded a lot of the deadwood however and be left with a much healthier economy which can drive UK business forward.”

Published on Friday 11 March by Editorial Assistant

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