Changes in customer preferences and shifts in the retail landscape are placing pressure on high street retailers. In order to survive, businesses must identify and address potential sources of financial distress at an early stage.
The changing face of the British high street has been evident for some time. BHS, for example, secured its place as a popular mid-range retailer in the 1970s and 80s. However, the rise of online retail and consumers’ search for both quality and value led to a steady decline in sales and the company is now in the process of being wound up.
A fast-paced market and strong competition has been adding to the pressure on retailers. Rising property costs and expensive long-term leases have left some businesses with unsustainable property portfolios and this, combined with other fixed costs has put pressure on margins. Alongside this, some long-standing businesses have found that their product offerings no longer fit with current consumer trends.
Spotting signs of financial trouble well in advance can allow businesses time to make changes and prepare accordingly. Sustained periods of financial struggle, along with a slow and prolonged erosion of sales are indicators that the business is getting into difficulty. More specifically, when a business is taking longer to pay key creditors, negotiate with suppliers or is using bank debt to fund overheads, it is time to seek third-party advice.
Seeking appropriate advice at an early stage forms part of a proactive approach that should be adopted by all businesses. Company boards looking to put preventative measures in place should start by targeting key areas of cost, namely property, personnel and inventory.
Early negotiation with landlords for a reduction in rent or more flexible lease options can relieve pressure on cash flow. Adjusting staffing levels to mirror weekly retail habits can also deliver savings. Although controversial, zero hour contracts may also be an effective way of managing people resources and can provide flexible work options for staff.
An in-depth audit of products, services and retail strategy is a useful proactive activity that can help reveal problem areas. Taking a step back and critically assessing target demographics and product or service offerings could highlight flaws with the current business model. For instance, having a large portfolio of high street shops could be a drain on company finances as customers are purchasing more products online. In this case, moving to a business model focused on e-commerce should be considered. Tighter control of inventory using automated tilling systems could also help to protect working capital.
A key piece of advice for businesses that are experiencing a period of financial difficulty is that the earlier advice is sought, the wider the range of options available to improve the position. Running a failing business is risky for any party and many business owners end up investing huge amounts of personal capital just to keep a retail business afloat. This is obviously a dangerous option as there is no guaranteed recovery of such investment. Speaking to restructuring and turnaround experts before it’s too late is more likely to result in a positive outcome for the business.
If the financial situation worsens to a point where the business becomes insolvent, it could enter into a company voluntary agreement (CVA), allowing voluntary repayment schedules to be agreed with creditors. One of the benefits of agreeing a CVA is the ability for a business to continue trading, improving cash flow and cutting costs in the process.
Taking lessons from the recent collapses of BHS and Austin Reed, businesses need to stay focused on giving customers what they want – this will help to ensure its sustainability in the future. They should also have a clear and flexible property strategy and keep a close eye on managing working capital.
Simon Underwood is a partner and business recovery specialist at Menzies LLP.