Tills fail to ring: 4,500 UK retailers facing 'critical financial distress' as pressures mount

On top of business headwinds, the financial situation is deteriorating for many consumers heading into 2024.

Nearly 4,500 UK retailers including online-only merchants face an uncertain new year as consumers continue to tighten their purse strings amid the cost-of-living spending squeeze, a new report has warned.

Insolvency firm Begbies Traynor said poor consumer confidence, sticky inflation and elevated interest rates were forcing consumers to hold back from spending in a big way, even in the run up to Christmas. The decision by many people to remain “very prudent on household expenditure” during the most critical shopping period of the year only adds to the pressures faced by the embattled retail sector, the firm warned.

Retailers rely on the so-called “golden quarter” covering the build-up to the festive season and post-festive sales to generate the bulk of their profits. Last week, the Scottish Retail Consortium said “alarm bells not tills” were ringing for Scotland’s retailers in the final countdown to Christmas after sales slipped for the fifth month in a row during November. Sales of big-ticket items such as white goods, home entertainment equipment and furniture were said to be particularly weak.

The most notable retail failure of 2023 was long-established household goods chain Wilko.

Publishing its latest Red Flag Alert report, Begbies Traynor said “critical financial distress” had risen considerably across the whole retail sector, with food and drug retailers up about 10 per cent and “general” retailers up 13.7 per cent on the prior quarter. Nearly 4,500 UK retailers are classed by the firm as being in critical financial distress while almost 46,000 retail businesses in the UK are now in “significant” financial distress - 7.5 per cent higher than the previous quarter and 4.6 per cent higher than the same period last year. More than a fifth of all retailers in critical financial distress are online-only organisations, the report noted.

Julie Palmer, a partner at Begbies Traynor, said: “There is no doubt about it, the last 12 months have been incredibly difficult for British retailers as an increasingly tough economic backdrop continued to pile on the pressure, with businesses that were only just standing on two feet again now feeling the pain this Christmas. And, after a year where consumers faced one of the worst cost-of-living squeezes on their wallets, the shopping bonanza many retailers were relying on this Christmas does not seem to have materialised, pushing many businesses close to financial ruin this winter.”

The fresh data also highlights the shift away from online-only retailers as consumers return to bricks and mortar stores, favouring an omni-channel offer. During the fourth quarter of 2023, the number of online-only businesses in critical financial distress leapt 11.7 per cent to 910, representing more than 20 per cent of all the businesses in critical distress, while 7,393 online businesses were in significant distress, up 6.5 per cent on the prior quarter.

Palmer said: “What’s particularly interesting is the number of online-only retailers now in critical financial distress. After the surge during the pandemic, it looks like the need to operate an omni-channel business model is more important than ever for retailers looking to succeed in this market.

Shoppers may have been out in force at times but they don't seem to be spending as much as before.

“Sadly, after the year they have just been through, many business owners will be looking ahead to 2024 with a degree of hope, but there’s nothing to suggest it’s going to be any easier next year. After years of being addicted to cheap money, many of these businesses must now grapple with increased costs and another minimum wage hike in April, while converting their stock into cash to avoid quarterly rent day turning into a fatal New Year hangover.

“On top of that, the situation is deteriorating for many consumers as energy bills and interest rates remain stubbornly high. It is likely this situation will only get worse when over 1.5 million UK households roll off cheap fixed rate mortgage deals in 2024.”

She added: “Ultimately, many of these businesses will have loaded up on debt during the good years and must now deal with the painful reality of higher interest rates at a time where demand is shrinking and margins are being eroded. So, plenty could fall victim to these pressures as the debt storm breaks across the country next year.”

Begbies Traynor’s Red Flag Alert has been measuring and reporting levels of corporate financial distress since 2004. It has become a benchmark on the underlying health of companies across every sector and region of the UK.

Michael Hewson, chief market analyst at CMC Markets UK, said the retail sector had managed to “hold up well” in 2023 despite a number of challenges. According to the Centre of Retail Research, 62 larger UK retailers went into administration, up from 49 in 2022, the most notable of which was Wilko. Despite this increasing failure rate, Hewson said the wider sector had been able to adapt to the challenging economic outlook, with the most notable outperformers being the established high street names at the expense of online retailers.

Last week, the Scottish Retail Consortium’s latest sales monitor revealed that takings had fallen for the fifth month in a row. Industry leaders branded Black Friday a “damp squib” for many stores north of the Border as the latest figures showed that total sales by value fell 1.2 per cent in November, once adjusted for the effects of inflation, compared with the same month last year.

Ewan MacDonald-Russell, deputy head of the Scottish Retail Consortium, said the figures would be of concern for “hard-pressed” retailers who are already facing large increases in wage costs in the new year.

Paul Martin, partner and UK head of retail at KPMG, which helps to produce the monthly sales monitor, added: “Looking ahead to the early months of 2024, the challenges are expected to persist, posing a threat to the sector and potentially leading to more casualties.”