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24/09/2013

Almost a third of retailers ‘at risk’ of failure as Rent Quarter Day approaches

Recovering economy and changing consumer habits take toll on sector

- Complex rules on ‘administration costs’ make post-Quarter Day insolvency spike common

Nearly a third of the UK’s retailers are at risk of insolvency in the next year, according to research from R3, the insolvency trade body, ahead of the upcoming Rent Quarter Day at the end of the month*.

Traditional Rent Quarter Days see retailers pay three months’ rent in advance – and often see a spike in retail insolvencies shortly afterwards because of the squeeze on cash flow and complex rules on ‘administration costs’.

R3’s research, using Bureau van Dijk’s ‘Fame’ database of company information, found that 31% of retailers currently have a higher than normal risk of entering an insolvency procedure in the next 12 months.

By comparison, only 25% of all UK businesses have the same risk of failure.

Liz Bingham, president of R3, says: “High Street retailers have had a tougher time of it than other sectors in the past few years. Now, after dealing with recession, a sluggish recovery, and changing consumer habits, traditional retailers will be put under more pressure as they are exposed to the stresses of expansion as economic recovery picks up.”

“Insolvency isn’t the end of the road for a retailer though. It can be an opportunity to restructure and rethink the business model. Many retailers have come out of administration and gone from strength to strength.”

As well as the added pressure of a large rent payment, Rent Quarter Days often see a spike in retail insolvencies because retailers will delay insolvency procedures until after rent is due, thanks to the complex rules on ‘administration costs’ that have developed in recent years.

Liz Bingham explains: “As a result of a series of court decisions, there are certain costs that have to be paid by businesses in administration before money can be given back to creditors; rent is one of these payments.”

“By delaying administration until after rent is due, unpaid rent becomes just another debt to be repaid to creditors, with no special priority. This could see a retailer rescued rather than dissolved, but, as a whole, the rules are a mess. They are a bad deal for landlords, retailers, and employees. Clarification from government is needed.”

R3’s recent (July) Business Distress Index found that 42% of retailers were experiencing signs of financial distress, compared to 35% of all UK businesses.

Meanwhile, while 42% of all UK businesses agreed with the Chancellor that the UK had moved from ‘rescue to recovery’, just 34% of retailers agreed; and while 49% of all UK businesses disagreed with the Chancellor, the figure was 65% for retailers, illustrating the level of stress in the sector.

*Rent Quarter Days traditionally fall on 25 March, 24 June, 29 September, and 25 December. 1 January, 1 April, 1 July, and 1 October are modern alternatives for some leases.

 

Business Distress Index

BDRC Continental conducted 501 telephone interviews with small, medium and large business owners and Financial Directors between 1st-5th July 2013. Strict quotas are set by size, region and sector and the data weighted to be representative of the ONS profile of UK  businesses, each with an annual turnover above £50,000. The respondent in each case is senior financial decision maker.

 

Bureau van Dijk’s ‘Fame’ database

      Figures on ‘at risk of failure’ are based on Bureau van Dijk’s ‘QuiScores’. The QuiScore is a measure of the likelihood of company failure in the twelve months following the date of calculation.

‘At risk of failure’ is defined as a company that has a QuiScore below the normal band.
The QuiScore is given as a number in the range 0 to 100. For ease of interpretation, that range may be considered as comprising five distinct bands:


82-99 The Secure Band:
57-81 The Stable Band:
37-56 The Normal Band:
19-36 The Caution Band:
01-18 The High Risk Band:

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.