The 2022 festive period saw some retailers reporting an increase in sales volumes growth in the year to December, according to the Confederation of British Industry’s Distributive Trades Survey.
In November, retail sales volumes were 0.7% lower than the pre-coronavirus level in February 2020, as reported by the Office for National Statistics. Sales volumes also reportedly fell in the three months to October when compared with the previous three months.
Pressures faced by retailers are expected to continue in the new year as consumers become ever more mindful of their spending habits.
Cost of living crisis
In the UK, the cost of living has been increasing since early 2021. The annual rate of inflation reached a 41-year high in October as it rose to 11.1%. As the prices of consumer goods are rising faster than wages, people’s wages are decreasing in value.
Retailers face the challenges posed by the cost of living crisis alongside the ongoing impact of the COVID-19 pandemic. Retailers are struggling with recruitment as they grapple with a shortage of skilled workers and staff demanding wage increases. Disruptions to supply chains globally means maintaining quality of product at competitive prices is becoming increasingly difficult.
The rising costs of food, energy and housing has resulted in many consumers actively looking for ways to reduce their spending. For example, demand for loft insulation rolls and other energy-saving products is on the rise.
Impact on Retailers
Maintaining profitability through the cost of living crisis has proven difficult for some notable names in the retail sector. Recent trouble faced by brands which had stellar pre-pandemic performances demonstrates that consumer behaviours can change drastically in a relatively short amount of time.
For example, the lifestyle retailer Joules was recently acquired by retailer Next after entering into administration. Following supply issues faced by the retailer last winter, stock delays led to frequent discounting which impacted brand image. By November 2022, Joules appointed administrators after months of poor trading.
The online furniture retailer, Made.com, also collapsed into administration in November. The retailer faced supply chain issues and a decline in consumers purchasing homeware after lockdown. The result was an accumulation of stock for a business which was originally designed to be inventory-light.
The downfall of the brand is an example of the decreasing demand for larger items, such as homeware and white goods, especially due to the cost of living crisis. In addition, the downfall may be indicative of more online businesses collapsing under the pressure.
Innovation amidst the crisis
The CEO of Made.com, Nicola Thompson, said that the brand had thrived in “a world of low inflation, stable consumer demand, reliable and cost-efficient global supply chains and limited geo-political volatility”.
“That world vanished, the business could not survive in its current iteration, and we could not pivot fast enough [emphasis added].
It’s paramount that in these financially difficult times, retailers adapt in a timely manner in order to remain profitable.
As well as focusing on offering competitive prices amidst the cost of living crisis, some retailers are finding creative new ways to interact with consumers. Such initiatives have the potential to deliver value whilst reinforcing brand image and creating a buzz. Sainsbury’s, for example, recently presented the concept pop-up store, ‘Sainsfreeze’, which focussed on the grocer’s ranges of frozen foods and providing tips on how to freeze food in order to reduce wastage.
The retailer Very launched its ‘Everyday’ collection in 2022 which intends to provide more affordable clothing items and homeware. The brand has stated that the products will be typically priced at 20% less than its ‘V by Very’ own-brand range, in order to offer better value to consumers through the cost of living crisis.
Significance to directors
Directors owe a duty to promote the success of the company for the benefit of its shareholders. However, when a company is bordering insolvency or insolvent liquidation or administration is probable, directors are also under a duty to have regard to creditors’ interests.
There are risks to directors if they continue to trade whilst the company is or is becoming insolvent. For example, a director may be held liable for wrongful trading if they continued trading when they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation or administration. This can result in a director being held personally liable for the company’s debts.
Turnaround
It is paramount that businesses adapt quickly to stay ahead of the curve during economically challenging times. It may be that the directors of a company which is in a period of poor performance require legal advice in regard to turnaround strategies and their legal entitlement to continue to trade the business despite the financial pressures. An effective turnaround strategy may dispense with the need to enter into a formal insolvency process but it needs to be managed carefully. It is important that directors seek legal, accountancy and other relevant forms of advice when a company is facing financial difficulty.
If you are concerned about your business in light of issues raised in this article, please do not hesitate to contact a member of our Restructuring and Insolvency team.
