Close×

PwC partner Daniel Walley reveals his thoughts on why some fashion retailers have entered into administration this year.

We believe that a large proportion of retailers remain remarkably resilient to the myriad challenges facing the sector, despite an increasing number of high-profile retailers encountering distress.

Following a mixed holiday trading period and subdued consumer confidence, many retailers remain cautious about the year ahead. However, there are opportunities abound for the well prepared.

The retailers that are well placed to withstand these pressures are those that anticipated the structural changes we are currently witnessing in the sector and have adapted their business models accordingly.

That said, we are amid a cyclical change in the Australian retail sector, and pressure on under-performing retailers isn’t likely to abate in the near term.

Despite interest rates being at historic lows, consumer confidence has remained subdued and retailers and their stakeholders are feeling the pinch.

Over a number of years, retailers have been contending with some consistent issues such as: the challenges from new online entrants, the challenges of building their own online presence, highly competitive overseas retailers moving to Australia, reducing their physical store numbers and a falling Australian dollar making importing much more expensive.

Compounding the huge structural challenges above are the recent negative impacts of: the devastating effect of the bushfires on retailers in both regional and metropolitan areas with lower foot traffic and consumer sentiment and the unfolding issues around the coronavirus and its impact on tourist visitor numbers to Australia.

Shopping habits are also rapidly changing and evolving, with many retailers scrambling to keep pace.

Consumers continue to move their spending online often with offshore retailers, and new channels such as social media (in particular Instagram) have become mainstream ways to shop, adding to the complexity of retail operations.

In the period leading up to Christmas, many consumers also gravitated to the Black Friday and Cyber Monday sales which when combined with lower consumer confidence, will have negatively impacted Christmas spending.

This is important as retailers’ funding lines often have financial covenants and debt repayments that are underpinned by the assumption of a strong Christmas trading period.

Despite the negative outlook, there are a range of opportunities for retailers to actively navigate the current retail climate, optimise their customer experience and fortify their businesses for future success.

Many retailers are currently focused on survival, but they also need to re-invent and establish a sustainable business model that will allow them to navigate the ongoing industry disruption and factors within their control.

We find that resilient retailers tend to share common traits so there is an opportunity for others to follow suit.

The successful retailers that we are working with are highly focused on customer experience, actively selling on social channels, ensuring a consistent experience across all of their channels and optimising last mile delivery services.

They are also right sizing their store footprints, using technology to drive cost efficiencies and may be partnering with aligned brands to widen their customer base.

For retailers in distress, there are still opportunities to address both adverse financial and operational issues and implement strategies to turn around their business.

This may include optimising debt and capital structures, rapidly reducing overheads and reviewing individual store performance.

The following are 8 typical ‘red flags’ that often portend distress within a retail business:

  • A tired management team that has been unable to react to the structural changes of the past 10 years.
  • Prolonged like-for-like sales or gross margin declines.
  • Unfunded working capital requirements, particularly in January to March when sales fall away.
  • Recurring trading losses and a reliance on shareholder or third-party support.
  • Material under-performance against forecasts.
  • Failing or significantly prolonged M&A or capital raising processes.
  • Restructuring plan in place but key milestones not being met.
  • A retail portfolio with a number of loss-making stores, geographies or brands.

There are factors involving third parties that can often put retail businesses under pressure.

This could include:

  • Lenders becoming concerned about the sector and restricting access to credit.
  • Disputes with landlords over rental costs and negotiations to exit leases.
  • Suppliers (or their trade credit insurers) restricting trading terms and reducing access to inventory.

Macro-economic factors also play a key role.

Currently, there are high levels of Australian household debt, so people are spending less as they focus on paying it down. Additionally, household incomes aren’t growing but prices of non-discretionary items like electricity, gas, school fees, petrol, insurance and childcare are going up.

Following a period of relative stability, we have seen the rate of retail insolvency events accelerate in the past 12 months.

Prior to that, the Australian retail sector had been relatively resilient having benefited from the wealth effect of large house price increases, low unemployment and steady economic growth.

Australia appears to be going through a similar cyclical change in the retail sector to that experienced in the United States and Europe earlier this decade in the period following the GFC and the changes in the retail landscape seen in those territories is a useful indicator for what we expect to see in Australia.

comments powered by Disqus