As UK inflation figures remain at 40-year highs of 10.1%, corporate failures in the UK retail sector could spike by as much as 71% in 2023. According to the Centre for Retail Research, in the first month of 2023 alone, seven UK retailers failed, affecting 361 stores and putting at risk 3,215 jobs.
Whilst consumers spent well over the Christmas period, it is estimated that disposable income is expected to fall for 70% of UK adults, reducing budgets for discretionary and obligatory purchases, which will inevitably lead consumers to trade-down, with mid-market discretionary items expected to be hit hardest.
Already, 84% of Uk shoppers say that they feel that they are living in a recession and plan to cut back on spending on eating out, clothing and apparel and entertainment, while watching closely what they spend on groceries. They are also looking to cash in on loyalty points and other discounts.
Businesses too are being hit by higher costs of energy, materials, products and services, which only exacerbates the pressures felt by struggling retailers.
Carl Jackson, Quantuma chief executive and retail sector restructuring expert explains: “As retailers look down the long road ahead to Black Friday and the festive trading period, most will have a series of critical questions they will need to address, in order to correctly position themselves and maximise sales during these key trading periods.
“Returns policies and working capital will be brought sharply into focus for online retailers.
“We have seen a large number of stakeholders seeking to reduce their exposure to the retail sector including trade credit insurers, lenders, high yield bonds and equity backers. We expect lending to retailers to contract, and where lending is feasible, pricing will be high.
“Reliance on overseas supply chains, particularly in the Far East and China, has exposed UK based retailers to substantial forex challenges, the impact of which has seen price hikes, as suppliers seek to pass on costs.
“With online giants Amazon, BooHoo and ASOS all suffering the impact of direct overheads in their business models and declining revenues as a result of the cost-of-living crisis, we expect to see Next and Fraser Group as the clear winners for the foreseeable future, as they accelerate their aggregator of online Intellectual Property strategies, as they strive to present real competition to Amazon and the online giants.”
Kevin Pratt, personal finance expert at Forbes Advisor, adds: “Businesses are consumers too, of all manner of products and services, so they’re ensnared by the cost of living crisis in the same way as their customers. And they remained faced with the stark and unhappy choice of either passing on the higher prices they are paying, or absorbing increased costs by making smaller profits. Neither option is sustainable.
“Much of the financial pain currently being felt by UK businesses of all sizes comes in the form of higher energy bills. Whether they run an enterprise from home or have separate premises, the cost of powering the operation has become a massive part of their overheads. And with government support for business energy bills reducing considerably in April, many firms will be worried about their medium-term viability.
“We can only hope inflation continues its recent downward trajectory, and that this is coupled with a steep and sustained decline in wholesale energy prices as the year progresses. Analysts suggest we may see significant falls in the spring and summer, but if we don’t, the government may need to rethink its business support programme to avert a catastrophe for UK businesses.”
