Over one-third of retailers risk collapse this year
Companies need to react appropriately at the first signs of business collapse. This is according to Christine Cullen of Vision-net who spoke to Fionnuala Carolan about the potential pitfalls for Irish businesses in 2013.
Print13 March 2013
Over one-third of retailers could be in danger of collapse, according to an analysis of almost 5,600 companies in the retail sector by Vision-net, a business and credit risk analyst in Ireland.
Vision-net recently stress-tested 5,597 companies across the economy, selected randomly from its database, and found that 36%, or 1,992, of them were showing signs of business failure. The analysis categorised 19% as being at medium risk of collapse while 45% were deemed low risk.
The figures come after recent high-profile retailers including Monsoon Accesorize, Black Tie, HMV and B&Q recorded trading difficulties. According to Vision-net’s figures, companies in the retail and wholesale sector made up 8% of insolvencies so far this year. But firms in the hospitality and construction sectors showed the most acute signs of trading difficulty, recording risk failure levels of 52% and 40%, respectively.
Cullen says there are a number of factors at play that can cause business failure but the upward only rent issue is one that resonates with many. "The retail sector accounts for over 14% of jobs in the country but, as our figures show, the high street is feeling the impact of curbed spending as a result of pay freezes, job losses and sapped confidence. Anecdotally, we know that retailers and wholesalers are coming under increasing cost pressures from upward only rents."
Use risk analysis
Cullen says that Vision-net looks at the reasons why companies have gone out of business in the past as a way of predicting future failures.
"We’ve been analysing companies for about 20 years and in order to predict insolvencies in a business to business environment, we put companies through a scoring model or a stress test. We use characteristics of companies that have gone out of business in the past, not just the past year but the past five years and we look at what factors led up to that closure and we are only looking at companies that have an unfavourable closure which is one where they left debt behind rather than people who just wound down a company."
This scoring model has predicted 80% of business failures in the last five years and the company estimates that 80% of them had less than 15 employees.
"The signs we saw in the retail sector, were that some companies had an overreliance on interest baring forms of capital. They were funding the company on this type of capital. That’s not something that’s sustainable when you are into a prolonged recession. We’re hearing that the retail sector is down about 25% since 2008 and that’s when we would have seen first signs of difficulty in the economy."
The signs that Vision-net look out for are poor cash flow and reduced liquidity.
Cullen says: "The banks are trying to fix their own balance sheets and that’s what’s causing the problem for many of these small to medium size companies. What we’re seeing at the moment is the average age of insolvencies in the country is about 10 years old. It’s not the newer companies. The average age of companies in the retail sector is about eight years old."
Examinership process
Cullen says that a lot of companies in distress are starting to look at the examiner process as a way of saving a business.
"I would expect to see an increase in examinerships in 2013. I know that the government made a lot of pre-election promises in terms of looking at the issue of upward only rents but we found out that there were legal difficulties involved in changing these agreements. Company law has made it easier for the small and medium type companies to go to the circuit court for protection. I think that this new legislation will help people seek core protection through that examinership process and help them sustain a business."
Advice
One of the most important things for a business is not to take on trade commitments if they don’t think they can make the repayments, says Cullen.
"Making late payments on trade commitments is just the start of the end. If a company looks as if it is heading for a loss, it needs to immediately review all business overheads. Any unprofitable contracts need to be cut, or cost reductions and efficiencies implemented. Reduced margins alone won’t kill a business. A good healthy balance sheet is very important which is difficult to achieve at the moment but I think that is why so many in the retail sector are pointing to high rents. For a lot of them, that’s the biggest outlay."
Good news
Cullen thinks the recent deal on Ireland’s debt burden should generate positive economic sentiment which is key to a recovery in the retail sector. "The latest figures from IBEC showing that consumer spending power is expected to stabilise this year and improve next year are encouraging too."
She also says that the recession has brought a lot of start up companies to the retail sector. "About 12% are new companies. There is a lot of necessity driven entrepreneurship out there at the moment. Competition breeds innovation. Retail is one of the top five sectors in terms of insolvencies but having said that it’s also one of the top five sectors in terms of start-ups. You are going to get a correlation between them."
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