According to the Centre for Retail Research, 989 stores accounting for over 20,000 employees, have been involved in some type of insolvency process during 2016. Circumstances differ, from misguided management to online competition but we are able to identify a few common themes.
Consistency is key
Everything about the business, store size and location, stock and pricing, must be consistent with its brand. If it is not, the business can flounder quickly. I witnessed first-hand when a failing fashion chain failed to identify the most profitable store locations, by ignoring the key target locations of large town centre developments and adding stores in smaller quieter areas which put enormous pressure on the business.
Continuous change is vital
With online retailers disrupting the market, it is increasingly important for retailers to diversify and adapt their business model. Netflix, Amazon and ASOS have set the benchmark for customer expectations, while retailers who are slower to adapt, such as Blockbuster, have fallen short.
Closing loss making stores is tough
Lease liabilities are often fixed for years in advance and difficult to assign where the store is unsuccessful or over-rented. Unless the landlord agrees to stop rental obligations, and there is no reason they should, rent remains payable even if trading has ceased. Rents can be reduced via a Company Voluntary Arrangement, although this needs to be carefully managed.
Trading can be seasonal
Many retailers depend on the Christmas season for profit. Post-Christmas and during the summer holidays can be particularly tough. Even successful retailers may settle to just breakeven or accept they will trade at a loss during these periods. By late summer cash can be very tight which is magnified by the need to build stock for increases in autumn trading.
If one of your clients is trading with a retailer, what can they do to protect themselves?
When things do go wrong it is of course not just the retailer who is affected. If this all sounds rather negative, the good news is that there are some simple things that a supplier can to reduce risk:
- Avoid relying on a single customer - even if solvent, a dominant retailer can apply unfair pressure to negotiate an unsustainable stock price.
- Control the terms of trade- Woolworths for instance insisted all suppliers gave up ownership of goods on delivery, meaning any retention of title clauses no longer worked.
- Track your goods - understand how your goods are treated post-delivery to ensure they remain identifiable and recoverable for as long as possible.
- Be proactive – if the worst happens don’t wait for the administrators to come to you, make sure any goods you supplied are identified before they are sold.
- Understand your worth - if a supplier is critical to continued trading, advantageous terms can be negotiated.
To find out how RSM can help retailers and their suppliers, please contact Nick Edwards.