As trade credit insurance providers reduce levels of or withdraw cover from some of the high streets’ biggest names, including Debenhams and Arcadia Group, Drapers investigates whether the current risk-averse environment is killing fashion retailers’ ability to do business.
Earlier this month, insurance provider Atradius axed its cover to Debenhams’ suppliers. In September, Arcadia Group had its credit insurance reduced by provider Euler Hermes, and earlier this year retailers including The Original Factory Shop, New Look and House of Fraser all had cover reduced or withdrawn altogether as they battled slumping sales and profits.
A raft of high-profile retail administrations and company voluntary arrangements in 2018 have caused trade credit insurers to take a more cautious approach. Insurers have noted a rise in bad debt – the Association of British Insurers (ABI) says trade credit insurers have paid out a record £1m a day to help UK firms stay afloat in the second quarter of 2018 – the highest quarterly figure since 2007.
However, while many suppliers and retailers admitted that a more prudent approach to insurance was understandable, several told Drapers the risk-averse attitude is crippling the industry.
“The current credit world is killing the ability to do business because they are risk averse,” said one high street supplier. “I don’t blame them but it’s chicken and egg: the more barriers you have to trade, the less ability there is to trade.”
The former chief executive of one high street retailer agreed: “Immediately everybody thinks they should be paid up front, so if you are in a tricky position, the difficulty it puts on your cashflow is immense. It is almost a self-fulfilling prophecy.
“When we had credit insurance pulled, we managed to convince existing suppliers, but it means you have no chance of finding anyone new.”
One retail consultant said reducing credit insurance can shake suppliers’ confidence in a business: “Credit insurance is based on audited accounts. So if retailers are having a tough time, [insurers] say, ‘Hang on a minute – this business isn’t healthy,’ and they reduce exposure.
“The moment [credit insurance] is removed, the confidence in the business is shaken. Retailers who have good relationships with their suppliers will find ways through this, but only if they have looked after their suppliers.”
Patrick O’Brien, UK retail research director for GlobalData, said the current trading climate is to blame for “harsher” views on retailers by insurers: “The more claims insurers get, the more cautious they are generally. With the high street the way it is at present, insurers are taking a harsher view on what they are happy to give to their suppliers, even for retailers who might be doing reasonably ok.
“The knock-on effect of that is that the lack of confidence that credit insurers show starts to echo or get magnified, and can cause problems for retailers. Those that are perhaps still solid businesses can find themselves facing a cash crunch.”
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One supplier told Drapers that following the fallout from House of Fraser’s administration it is treating other retailers with more caution: “If Debenhams had their cover pulled completely, we probably wouldn’t work for them. House of Fraser is an example of what can happen and how risky business can be.
“We do a risk assessment ourselves and look at the volume of business going through: in some instances we totally stop working with a customer, sometimes we look at payment plans, or we take a risk – we don’t treat any one decision the same.”
Clare Kennedy, director at turnaround and restructuring practice Alix Partners, said the impact of a withdrawal of insurance can impact retailers differently, depending on the timing.
“There are times when retailers are cash rich and others when they are under pressure to pay for stock. Retailers are increasingly having to find a way through big swings in working capital, which can be compounded by withdrawal of credit insurance.
“It is essential to have robust cash-management tools in place, and that businesses are accurately forecasting their cash position to avoid ending up in a position where they have limited funds.”
Speaking off the record, one credit insurance provider said it seeks open dialogue with clients to mitigate risk. However, as an unsecured creditor, it has to manage the risk profile of its retailers.
“We are actually on risk for quite a considerable time after a policy stops because we insure stock that has already been delivered.
“We are there to provide a resource for suppliers but we are not a lender of last resort.”
The Drapers Verdict
With unpredictable consumer habits hitting many retailer’s profits at the same time that insurers are facing the prospect of paying for claims, the daunting prospect of losing credit insurance is a headache many fashion chief executives do not need.
However, as many of the fashion companies that have flourished in 2018 so far have shown, brands that have their own USP, a strong identity and are actively courting consumers with what appeals have little to fear.
Maintaining good supplier relationships is key if insurance is pulled, but for suppliers who have racked up losses already in 2018, this will not be an easy task.