Many Australian retailers are in for a bumpy ride this Christmas and into 2018 – and the franchise sector, in particular, is one to keep an eye on, predicts national insolvency specialist Jirsch Sutherland.
“We’re hearing from accountants and business advisors that the retail sector is really struggling,” says Andrew Spring, Jirsch Sutherland Partner.
“Many of those who are not selling consumables are having a particularly tough time. We’ve already seen a number of high profile retail brands collapse in 2017, including 80-year-old brand Oroton – which paints a gloomy picture for other Australian retailers.
“We predict that we haven’t seen the worst of it, and that the new year will see many more homegrown brands go into insolvency.”
Spring pointed towards a number of isssues making retail conditions tough.
“Two of the greatest factors for retailers are high leasing and staff costs,” he says. “For many retailers that become insolvent, the reasons are similar – other key reasons include stock costs, obsolete stock issues, poor accounting or record-keeping practices, no-interest competitors and low margins – we see this time and time again.”
Jirsch Sutherland was recently appointed to handle the liquidation of a women’s clothing group which experienced a range of issues that Spring describes as “a perfect storm”.
“The company had four bricks-and-mortar stores across Sydney and then attempted an online presence. However, that platform didn’t work for them and then the performance of the stores became inconsistent. The company was then forced to rationalise its operation to the point of having just one store and a warehouse,” he explained.
“Unfortunately, the failure of its e-commerce and the seasonal nature of clothing meant the company ended up with a large amount of obsolete stock in its warehouse that it couldn’t clear.”
The impact of e-commerce is having a major effect on the retail sector. Unsurprisingly, the arrival of Amazon is also making retailers nervous, with the most recent Dun & Bradstreet Business Expectations Survey (2018) revealing that one in five retailers and wholesalers are concerned about the potential negative impact Amazon will have on their business.
“E-commerce is a necessity now, not a point of difference – especially with savvy competitors entering the market. However, unfortunately some retailers are being left behind or have not sufficiently invested in their e-commerce platforms; they’re finding that the fixed costs of having a bricks-andmortar presence alone are too high,” added Spring.
“Many retailers have simply been holding on to achieve the pre-Christmas sales, but after the holiday period ends there are many who will struggle to maintain their sales levels to meet their overheads. The declining trading base means many are not in good shape to survive an extended lull over the holiday period.
“Retailers need to understand that the increased prevalence of online shopping has expanded their competitor base. Geographical barriers to entry are being eroded and if retailers are unable to find ways to explore new markets for their products, then they are likely to see their sales base continue to decline as their competitor’s pitch to their historical customers.”
Franchisees in for greater pain – evolution is key
One particular sector that Jirsch Sutherland believes will face a tough new year is franchising. “The problem is systemic. They face the same issues as other retailers – rising rents and staff costs – but there’s also an added layer of having to pay franchise fees, often based on sales rather than profits, which really chews into their margins. And as we’ve seen with a couple of franchise groups, the crackdown on correct payment of wages by Fair Work Australia has highlighted the struggles being faced by franchisees to turn a profit,” said Jirsch Sutherland Partner Amanda Young.
Lack of support is another major issue, Young added. “We have been involved with a number of franchisees and that’s a common complaint. The level of support doesn’t match expectations.”
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