Rising unemployment and low consumer confidence that is further suppressed high street spending, meant around 3,600 retail businesses went to the wall in 2009.
Don Williams, Head of Retail at BDO LLP explained: “Failures were depressingly high in 2009 but they have hit their peak and the good news is that we will finally see a fall in 2010.”
The BDO figures indicate that retail business failures will decrease by 8% year on year in 2010. This is significantly slower than the 14% decline in business failures expected for the economy as a whole as retailers face headwinds from rising inflation, increasing mortgage costs and low earnings growth.
Consumers have shown remarkable resilience in the face of the recession in 2009. Retail spending has held up unexpectedly well throughout the downturn; the Office of National Statistics data shows that during 2009 retail sales volumes were up 1.0 % year-on-year.
Although worryingly high, retail business failures in 2009 rose less than widely expected as consumer spending held up well. However, many retailers have paid the price by heavy discounting which has left profit margins painfully thin.
In future, stabilising unemployment will likely support consumer spending in 2010, driving down insolvencies with 3,335 business failures expected in 2010, reducing to 3,269 in 2011. However, wage growth is likely to remain historically low and tight consumer credit will also contribute to a sluggish decrease in business failures.
Williams concluded: “Headwinds in the form of high inflation and rising mortgage costs will mean that retailers will continue to struggle. While we expect insolvencies to decline from the record peak seen in 2009 they will stay elevated for some time.”
According to BDO’s latest Industry Watch covering all business sectors a number of factors have worked in tandem to mitigate the worst impact on business during this downturn:
1,600 – 2,000 corporate business failures were avoided thanks to the ‘time to pay’ scheme that offers struggling businesses the chance to defer tax payments and was refined in the March Budget.
Between 3,600 – 4,900 business failures were prevented due to falling mortgage and interest costs which boosted disposable income and corporate profitability.
Between 800 and 1,050 business failures were avoided due to the impact that the reduction in VAT had on consumer spending.