The festivities are over, Brexit is looming, and for some retailers a bleak and uncertain trading future awaits.
The retail sector has faced many challenges in 2018, with a number of high-profile companies entering foreclosure, and increased retail insolvencies – we have seen many brands disappear from the high street, including Toys-R-Us and Maplin.
Rising operational costs, soaring business rates, fierce competition and the growth of online shopping, means retailers are faced with an avalanche of mounting pressures, forcing many to partake in extended discounting in an attempt to keep shops open, drive footfall, push sales and carve out some profit.
However, more recently, the American import of Black Friday appears to be running out of steam. Introduced to the UK by Amazon in 2010, Asda, a Walmart brand, drove momentum when it participated in 2013 and, initially, increased the volume of sales and period of sales, year-on-year.
Fast forward to 2018. November was saturated with discounts to boost volume of sales and make up for tough trading periods throughout the year. But the benefits of Black Friday are wearing thin after previously helping retailers. The trend of extended discounting is now negatively impacting the sector, creating a race to the bottom.
In December, retailers were attempting to encourage customer spending by offering discounts on average of 44 per cent, increasing to 48 per cent by Christmas Eve.
While driving footfall and sales in the short-term, the detrimental effect of extended discounting is taking a toll on retailers, as reflected by increasing numbers facing insolvency – with figures continuing to creep up to levels not seen since 2012.
To make matters more challenging, in the weeks before Christmas, footfall on the high street was down 7.3 per cent from the same time last year and Black Friday sales experienced the biggest decline in three years.
Shoppers are now expecting highly discounted deals around the festive period and are under the impression that it will always be. The lure of not paying full price has become normal and the effect on the sector is detrimental.
Fashion retailers, in particular, suffer with extended discounting. Returns of Black Friday and festive buying power has cost them £2.4billion, an increase on 2017’s figures. Nevertheless, some, such as Marks and Spencer and Primark, have avoided Black Friday and the trap of trading volume of sales for value of sales.
With the nature of retailing, this should come as little surprise, but it is a stark warning for businesses to forward plan in order to prevent shutters closing in 2019. Retailers must recognise the changes in shopping behaviours and costs year-long, not just at the festive period.
Many stores are closing or adjusting their store portfolio in anticipation of a difficult trading period during 2019, with many researching to identify the most competitive offering that will benefit them financially. Reviewing cashflows and retail forecasts allows retailers to form and adopt rigid cost structures which help prevent foreclosure or insolvency.
In the event of trading challenges, early engagement between landlords and lenders is essential. Early reviews can help facilitate controlled and realistic cost management plans with agreements from debtors, lenders and landlords. These measures, which may seem like a hard pill to swallow, throw a potential lifeline to businesses – allowing them breathing space to further evaluate their proposition and plan for the long-term.
Similarly, landlords must recognise the trade-off between keeping a tenant secured at a lower rate or face the prospect of an empty unit where the high street is no longer king.
Addi Spiers is a partner in business support and restructuring at Addleshaw Goddard.