Exploring the industries with the highest insolvencies in 2023

14 February 2024

Neil Dingley, Partner at Moore Recovery, looks at the sectors that were most prominent for insolvencies in 2023.

2023 was a rocky year for companies in the UK, with a total of 25,158 registered insolvencies - a worrying 30-year high.

Last year actually broke the record for Creditors’ Voluntary Liquidations; 20,577 were recorded in the last 12 months, more than in any other year since records began. This means that the UK is currently experiencing more company closures now than it did at the height of the 2008/2009 Global Financial Crisis.

However, while all industries have struggled, some have suffered much more than others: in fact, the construction, retail and hospitality sectors collectively represented 49% of all recorded insolvency cases in 2023.

In this article, we’ll be taking a look at why these industries have faced such a disproportionate level of insolvencies and what the future might hold.

Construction

The construction industry is struggling immensely at the moment - out of all industries in the UK, construction has suffered the most insolvencies for the last several years.

The industry really started to falter at the end of 2021, thanks to government pandemic provisions coming to an end. There were 2597 registered construction insolvencies in 2021, which rose by 59% to 4143 in 2022.

This number has continued to rise in 2023, although at a decreased rate. There were 4371 insolvencies in the trade this year, a 5% increase from 2022.

It wasn’t just smaller construction businesses on the chopping block in 2023; many large firms also went under this year. Casualties included industry giants such as the £200m Tolent Construction Ltd, and the £665m Buckingham Group, resulting in the loss of around 700 jobs.

The industry is suffering heavily from spiralling inflation on necessary materials. According to Statista, the price of structural steel was inflated by 26.67% in 2022. Inflation on building materials is now beginning to stabilise, but the impact has already been felt.

These rising costs have suffocated profit margins - in an industry where margins are already very tight. Thanks to decreased demand, construction companies have had to accept low prices in order to secure contracts, leaving little room for error.

These issues have been compounded by a lack of skilled workers post-Brexit. Labour shortages are causing delays in construction projects that can ultimately result in the company having to pay out compensation to its clients, making the work unprofitable. In other cases, work has to be simply refused.

To top it all off, many firms are now facing sudden - often large - tax liabilities deferred from the start of the pandemic.

Retail

While it isn’t struggling as much as the construction industry, the retail sector is not far behind, having the second-highest amount of registered insolvencies for several years.

Much like construction, the retail industry really began to suffer in 2022, following the end of government pandemic provisions in 2021. There were 1722 insolvencies in 2021, which rose by a whopping 89% to 3263 cases in 2022.

Retail insolvencies rose by 20% again last year, with 3939 instances recorded in 2023.

Some major retailers entered into insolvency in 2023, including the likes of Paperchase in January and - most notoriously - Wilko in August.

Retailers have long been facing a slow decline due to consumer habits switching towards online spending. The harsh economic conditions we’re currently facing have exacerbated the strain on many wholesale & retail businesses, pushing many over the brink.

Supply chain issues caused by Brexit import/export laws and the geopolitical tensions around the Red Sea have significantly inflated the price of goods, a phenomenon well-documented in the media.

As talk of economic uncertainty continues, consumer anxiety grows, dissuading individuals from making purchases. This has led to tighter consumer spending, creating massive problems for retailers of non-essential goods.

While some retailers have made a shift towards digital sales to accommodate changing consumer behaviour, this, too, has presented its own unique set of challenges.

A 2021 study by market research group Mintel found that 38% of shoppers had become more comfortable with making returns during the pandemic, with 49% of customers having made a return within the last year.

This “buy, try and return” attitude costs retailers and contributes to rising overheads. Some retailers, like H&M, toyed with the idea of introducing a charge to return items, but this idea proved deeply unpopular, forcing the retailer to announce a U-turn in September.

Stiff digital competition, high costs of goods, and reduced consumer spending have created the perfect storm for many retail businesses. The living wage is also set to rise by 9.8% in April this year, adding additional pressure to already-steep monthly overheads.

Hospitality

Coming in at third, hospitality has experienced fewer insolvencies overall than the construction and retail industries; however, the industry’s rate of insolvencies is accelerating at the fastest speed.

The hospitality sector endured 3727 registered insolvencies in the past 12 months, a 37% hike. If the industry’s increase continues at this pace, it could soon overtake construction as the industry with the most insolvencies.

The sector also suffered a large increase in 2022 - 2704 insolvencies were registered, a 67% rise. Again, this was largely the result of government provisions coming to an end in 2021.

Small, independent restaurants have accounted for the vast majority of closures. Meanwhile, larger franchises - such as Burger King - faced the prospect of aggressive downsizing in order to stay afloat.

The industry has faced a set of trials very similar to that of the retail sector.

The cost of living crisis and its high levels of inflation have had a pronounced effect on the hospitality sector. Rising food costs slice profit margins and increase the pressure to sell consumable goods before their sell-by date. Some establishments have been forced to resort to selling lower-quality goods, damaging their reputation and decreasing an already-stifled consumer demand.

People nationwide have sought to cut costs amidst the cost of living crisis as their earnings are spent on expensive essentials like gas and electricity. Naturally, this has led many to cut out non-essential expenditure, opting to cook for themselves or drink at home rather than going out to spend money on hospitality services.

Hospitality businesses are also struggling from a worker shortage, effectively capping the amount of service - and thereby profit - they can actually achieve on their busier nights. Industry leaders say this problem will be exacerbated by the government’s recent immigration legislation, raising the minimum salary for a skilled worker visa from £26,200 to £38,700.

Hospitality sector businesses will also need to contend with the rise in the National Living Wage in April this year. Some businesses, already struggling with tight overheads, may not be able to stomach the rapidly approaching 9.8% wage increase for workers.

Looking Ahead to 2024…

While decreasing inflation levels are expected to slow the rate at which insolvencies increase, 2024 is still expected to be another record-breaking year.

The economy is beginning to stabilise, but many more businesses are sure to find themselves in the firing line over the course of the next 12 months.

Insolvency Service figures show that more directors than ever before are placing their companies into voluntary liquidation. However, business recovery procedures are on the decline. There were 4167 registered administrations in 2009. This number has now dropped significantly - only 1633 companies entered into administration in 2023.

It’s unclear whether this trend is a result of directors seeking advice too late or the product of reduced confidence amongst business owners; most likely, the answer is a mixture of the two.

The industries most affected by insolvency this year are likely to remain the same as they have for the past few years. Directors in these fields should keep a careful eye on their books and learn all of the options available to them, should the time come when they need them.

You can find out more about Moore Recovery here.

 Neil Dingley

 Partner, Moore Recovery