The Federal Government’s policies to reduce inflation and cost-of-living pressures could be the last roll of the dice for thousands of struggling retailers. Insolvency specialists are forecasting a shakeout of struggling retailers facing expected tightening economic conditions and legacy debt. While none of the practitioners have made bold predictions of the number of retailers at risk, they forecast an increase on the 10,566 business failures recorded for the 2023 financial year. Back in 2016
k in 2016, SV Partners predicted 1200 retailers, including seven major brands, were at risk of financial collapse. The prediction was pretty much on the mark with sluggish economic growth and stuttering consumer spending a factor in a slew of retail failures. The casualties included Gap, Toys ‘R’ Us, Ed Harry, Jeanswest, Bardot, Topshop, Kikki K, EB Games, Dimmeys, Roger David, Harris Scarfe and Napoleon Perdis. The business failures were not saved by the then-Federal Government’s efforts to boost economic growth and successive interest rate cuts by the Reserve Bank. Then along came the pandemic that saw 11,224 businesses, a large number of which were retailers, close their doors according to the Australian Bureau of Statistics. That level of business closures was the highest for any year since the global financial crisis in 2008. The businesses in administration and walkaways in FY23 no doubt included a cohort of zombie enterprises that had realistically collapsed during the pandemic but were propped up by government support packages. However, forecasts suggest there won’t be any reduction in the carnage in 2024 with CreditorWatch expecting the number of business failures this year to hit 5.8 per cent of all businesses, up from 4.2 per cent in 2023. Running on empty tanks Retail is not flagged as the highest-risk business sector for the year ahead, in part, because it has already experienced a substantial shakeout. However, retail is marked as the business sector with the lowest confidence for trading prospects in 2024. The reason for that lack of confidence is a perfect storm for many retailers of rising costs of doing business, falling sales volumes and any sales gains made largely dependent on discounting. Business failures in 2023 were well above the long-term average according to insolvency practitioners, reflecting the fact many businesses had been running on empty tanks hoping for an economic turnaround. For some retailers, the online event-driven November sales may have provided comfort for that hopeful thinking but economists indicate trading in the months ahead will be much more challenging. That’s why the last roll of the dice for some retail businesses is the tax cut rejig to put more money in lower-paid workers’ pockets and other Federal Government cost-of-living concessions. Inflationary pressures remain Of course, the other hope is that there will be no more interest rate increases with battered consumer confidence taking an upward swing and lifting retail spending. Economists for the most part are forecasting a fall in interest rates in late 2024 or early 2025 but that remains an uncertain prospect unless inflation levels continue to drop. Inflation dropped from 7.5 per cent in January 2023 to 4.3 per cent last November after successive interest rate increases by the Reserve Bank. Some inflationary pressures have certainly eased but others remain problematic, including oil prices that could be adversely impacted by the Middle East conflicts and food prices for products hit by extreme weather events as well as government sector wages and spending blowouts. Even if interest rates do fall, pain is still locked in for most mortgage holders while the tax cuts rejig will realistically provide little cost-of-living relief with the weekly dollar gain falling short on rising rents and energy bills let alone other household expenses. The ABS and economists report a sharp decline in savings since pandemic support measures ended and credit card, buy now, pay later and other debt liabilities are increasing and slashing household spending capacity. Belt tightening, if not despair, for consumers does not suggest a boost in headline revenues for retailers let alone an opportunity to pare back discounts and restore satisfactory margins. Ongoing cost and operating issues To add to the likely revenue woes, for many retailers, the cost and operating issues in the year ahead could well mean it is time to seriously consider appointing administrators and restructuring or even simply closing the doors and walking away. Retailers that didn’t get some wriggle room with November to January sales and those carrying significant debt will certainly be under real pressure in the weeks ahead. Retailers will be under heavy scrutiny from their banks and financiers with some facing demands to reduce debt levels or a squeeze on credit. However, the retailers at greatest risk are likely to be those that have continued to receive support from landlords anxious not to have vacant space with no prospect of a replacement tenant, or those that have outstanding debt obligations to the Australian Tax Office. The Covid days of largesse and leniency are well over. The ATO is pursuing a more aggressive debt recovery approach to recoup around $50 billion in outstanding tax liabilities, two-thirds of which is owed by small businesses, many of them retailers. The ATO claims many businesses have an increased reliance on unpaid tax and unpaid superannuation to prop up the cash flow and they are now imposing heavy penalties on outstanding debt and more frequently taking legal action to wind up companies. For a wider cross-section of retailers, occupancy costs continue to increase, particularly energy bills and insurance premiums that have been driven up by catastrophic events, crime and a more litigious business environment. IT security costs, supply chain issues, higher taxes and charges from all levels of government, increased wages and staff entitlements as well as additional regulatory costs are all compounding the cost pain for retailers. Insolvency specialist KordaMentha expects business insolvencies will ramp up as early as the current March quarter. Statistics compiled by another firm, Alares, for the first half of the 2024 financial year, record 5497 insolvencies, well over pre-Covid levels and insolvency practitioners report an elevated level of administration inquiries in January. The insolvency firms believe that businesses trading at a loss will be unable to sustain another six to nine months of high-interest rates and low consumer confidence. Creditors, landlords, banks and financiers as well as government agencies are all taking a tougher approach to outstanding debt obligations. Retailers that did not trade strongly in the crucial November to January period are now quite possibly facing the last roll of the dice.