Retailers are being urged to exercise caution next year as insolvency levels could increase 15% in 2014, industry experts have warned.
Despite improvements in official growth figures, retailers with depleted reserves following the recession could still be left vulnerable as January rent and VAT payments loom.
Figures from the Centre for Retail Research show that on average 2,950 companies were declared insolvent each year over the last five years, and the centre predicts this will increase to 3,400 businesses in 2014 when zombie retailers fail to meet rent and VAT payments in January.
A zombie company is one that can just about afford to pay the interest payments on its loans, but not the debt itself.
Professor Joshua Bamfield, director at the centre, said the first three months of the year would be “make or break” for many companies that are “hanging on by their fingernails”.
“The number of businesses getting into difficulty between January and March will increase, as those who haven’t had a good Christmas won’t be able to manage coming up to rent quarter day. Even those making a bit of profit will be in trouble if interest rates on loans rise,” he said.
Despite a more optimistic GDP forecast of 2% for 2014, up from 1.5% in 2013, Bamfield said retailers still need to be wary.
“Although consumer confidence is growing, the predicted market growth for 2014 is nowhere near the 4% growth we were experiencing pre-recession,” he said.
Nick Hood, business risk analyst at financial research firm Company Watch, agreed, adding that January would be a testing time for retailers once the reality of the festive trading period becomes apparent.
“The key will be seeing how much retailers had to give away for top-line vanity at the cost of bottom-line sanity. The big pressure point will be the end of January when indulgent landlords and banks look for rent and VAT payments they may have waived in the run-up to the festive period.”
Hood added: “A period of sustained recovery is often the most dangerous time for zombie and less healthy companies. In a recession, companies burn their reserves and experience a spurt of growth, but additional capital is needed to maintain this. However, the balance sheet is rarely strong enough to raise this capital or convince banks to lend it to them.”
In the 10 months up to October 31, 47 large retail companies, classed as those with more than 25 stores, went bust, resulting in 2,469 store closures and 24,940 employees affected.