22 January 2008
The BRC announced the retail figures for December last week and indicated that the high street was far from festive over Christmas.
Source: Retail Bulletin.
The report indicated that UK retail sales rose only 0.3% on a like-for-like basis, compared with December 2006, when sales were up 2.5%.
But what does this mean for retailers?
In any business a low inflow of cash leads to a stressed outflow. When this happens firms need to look at the value of their assets in order to find the most cost effective solution to the cash flow problem. Simon Waller, partner in the retail team at international law firm Eversheds reviews: "Fixed costs such as lease liabilities are being analysed by retailers, commercial property landlords also don't want to have a flood of empty retail sites on hand. This situation has lead to an increasing number of deals that are being done on rent prices."
While many businesses have the option of turning assets in to cash or lowering operating costs, some retailers who have been struggling for a number of months may find that they have exhausted their avenues. Simon continues: "Liquidity issues make it difficult to see a future for a number of businesses, in the current structure, post the next quarter date."
The results from the high street indicate that consumer confidence in retail is becoming increasingly fragile. Results from the heavyweight retailers such as Marks & Spencer show a significant reverse in market sentiment. In November, M&S revealed an 11.5 per cent increase in their half-year profits while latest reports indicate that like-for-like sales at its UK stores fell 2.2 percent in the quarter to December 29. M&S is a prime example of how the effects of issues such as the credit crunch and the price of commodities such as oil, have affected consumer confidence.
The downturn in confidence means private equity exits might not be available for retailers. "Historically, when markets have become challenging there have been a number of takeovers or restructurings backed by private equity houses," says Simon. "The credit crunch and general lack of liquidity means that the obvious exit route for some retailers has been closed. This could, if they are unable to find a legal restructuring vehicle to reduce costs, lead to firms failing."