Retail is now the most distressed sector in Europe
Distress in the retail and consumer goods sector has reached its highest level since the financial crisis as geopolitical and economic volatility continue to erode businesses.
The downturn has been driven by a combination of high interest rates, cost inflation and low consumer demand, with the latter a particular strain on UK businesses, according to the the latest Weil European Distress Index (WEDI).
Retail is facing a “sustained squeeze on profitability”, legal services firm Weil said, and UK firms are “particularly exposed”.
Even high income Brits have started to cut back, showing a “notable” drop in confidence about both their personal finances and the broader economy in June.
Younger Brits are more confident, but they’re also less likely to spend their money on clothes and more likely to spend it on food and entertainment, posing another problem for the sector.
UK retailers have long been warning about the difficulty of operating in the current environment.
Thinktanks and lobby groups alike have described the situation as a ‘permacrisis‘ for retail, as low spending compounds structural changes like the move to online shopping. As shops close and the state of Britain’s housing worsens, footfall is in turn pressured down.
“Retail’s position is a warning sign: rising costs and falling confidence are pushing firms to their limits,” Andrew Wilkinson, Partner and Co-Head of Weil’s London Restructuring practice, said.
“Resilience is being tested not just by one-off events, but by the accumulation of stress,” Wilkinson said.
The British Retail Consortium, a lobby group, has pointed to a huge rise in costs as retail’s current biggest problem, as tax hikes on wages and packaging add millions to business bills.
The Retail Jobs Alliance, a group of heavyweight industry firms, has similarly called the looming jump in business rates the “straw that breaks the camels back” for retail.
Firms suffer across the board
Retail is not the only sector under pressure.
Seven out of ten industry groups deteriorated quarter on quarter, at a faster rate than analysts had predicted, Weil said.
Neil Devaney, Partner and Co-Head of Weil’s London Restructuring practice, called the overall rise in distress across Europe “striking”.
“In the current operating environment, businesses are having to adjust to multiple challenges – from interest rates and input costs to geopolitical and trade disruption – and we’re seeing fragilities surface across the board.”
“We’re seeing less slack in the system and less capacity to absorb future risks,” Wilkinson said.
However, he pointed out that there are “pockets of resilience” on the continent.
Travel and hospitality businesses have held up, as has – perhaps less surprisingly – defence.