Half of retailers face administration by end of summer

Half of the UK’s high street retailers could go bust by the end of the summer as a result of the coronavirus crisis according to a new report by global professional services firm Alvarez & Marsal (A&M), in partnership with Retail Economics. The report found that the companies could deplete their entire working capital should the COVID-19 lockdown continue through the summer.

Large multiple retailers were under significant pressure going into the crisis, driven by a legacy of inflexible lease structures and changing shopping habit. Five out of the 34 major non-food retailers analysed already had negative cash flow at the outbreak of the pandemic, a possibility even for large, profitable companies that rely on credit and capital markets to fund investment, growth, and shareholder returns.

A ten percent reduction in sales would have resulted in over two-thirds of major U.K. retailers falling into negative cash flow. But sales are forecasted to have dropped as much as 70 percent since the lockdown was introduced on 23rd March, tipping every retailer sampled into immediate negative cash flow.

Government policies have provided significant short-term support. A 12-month business rates holiday and the Job Retention Scheme directly address the majority of operating costs for U.K. retailers. Further concessions including the option to defer VAT, the Coronavirus Business Interruption Loan Scheme, the COVID-19 Corporate Financing Facility and protection from eviction for commercial tenants.

These support measures have proven a lifeline for retailers and as a result, scenario analysis by A&M and Retail Economics suggests that near-term liquidity over an initial three-month lockdown period is manageable for most large retailers.

Should the lockdown persist into the summer, working capital demands will intensify and large parts of the sector will be decimated as swathes of retailers seek additional funding in order to survive.

Richard Fleming, Managing Director and Head of Restructuring Europe, A&M, said  “Government measures have spared the major retail brands from immediate collapse. You could characterise this three-month period as a payment holiday. But prudent retailers are still pivoting their focus towards what cashflow they have and can expect in future. This is the essential fact base upon which turnarounds can be built.”

“The next few weeks will be critical. Retailers need to ask themselves the tough questions and take steps to address underlying operational issues while they still have the chance.”

The pandemic has brought about a new set of purchasing behaviours – most notably accelerating the existing shift towards online shopping after all non-essential physical stores were closed. One-third of consumers have switched to purchasing products online that they would have previously (and exclusively) purchased in-store. A&M and Retail Economics expect this behaviour to broadly continue even into a period of economic recovery as consumers overcome the initial friction of setting up online accounts and begin to form new habits.

Erin Brookes, Managing Director and Head of Retail, Europe, A&M, said  “Managing Director and Head of Retail, Europe, A&M, said: “It has already become clear that the high street will take on a very different form once the pandemic is over. Weaker players will, unfortunately, cease to exist, leaving behind a smaller but more resilient sector comprising operators that acted fast. The survivors will benefit from strong trust in their brands, underpinned by fewer experiential stores that drive customer engagement and multi-channel sales.”

Assumptions concerning the timeframe for recovery are highly debatable and dependent upon the duration and trajectory of the pandemic. Should the rate of infections ease over the coming weeks as hoped, a lifting of restrictions in May should see a recovery in consumer spending start in June/July.

Retail Economics has forecast a hit to the U.K. economy in the region of -15% in the second quarter of 2020 (quarter-on-quarter), before rebounding in the third quarter as the impact of the virus dissipates.

However, even in this optimistic scenario, government measures could fail to curb unemployment which would have a negative impact on major U.K. retailer sales (particularly those focused on non-essential items) throughout 2020 and beyond.