Tough times for UK firms facing the downturn

Christmas was going to be make or break for many retailers on the British high street and unfortunately for many it was break. This comes despite pre and post Christmas sales which saw huge discounts and sparked a last minute dash to the shops on Christmas Eve.

Regardless of discounts of up to 90 percent, five retail chains have recently ceased trading, and up to 15 more are rumoured to be on the brink of closure.

Clinton Cards, JJB Sports and Land of Leather are among the stores struggling with lack of consumer interest and mounting debts and it was recently announced around 200 jobs would be axed at book retailer, Waterstone’s as a result of cost cutting measures.

Collapsed retailers such as Woolworths, MFI and Zavvi occupied 8.8 million sq ft of space across the best part of 400 stores which will now potentially lie idle. With more shops going into administration, the proportion of these empty sites will rise beyond 10 percent in the coming months. Many of these sites are just too big for other retailers to occupy and as a result are likely to lie empty. It goes without saying this will have a dramatic effect on the high street.

As well as resulting in the high street becoming less aesthetically pleasing there’s the added burden of business rates for landlords to contend with. Business rate rises will be calculated on the basis of September’s inflation, which was 5.2 percent, well above the current rate, and that alone could be the breaking point for many traders.

The outlook is ominous for retailers who have agreed relatively long leases, especially those with fixed rent reviews. Finances will certainly be squeezed, and as a result there’s likely to be more profit warnings, and announcements of deteriorating performance.

Silver lining
One positive sign for retailers is retail rents fell for the first time in 15 years in 2008 and don’t look set to return to growth until 2013. Property consultants King Sturge forecast retail rents will tumble by 5.6 pecent in 2009, 4.7 per cent in 2010 and 2.1 per cent in 2011. In 2012, there will be zero rental growth, but rents will finally increase by 1.6 percent in 2013. This will hopefully prove to be the lifeline retailers need to stave off the threat of administration.

The decline in annual rents will also give retailers substantially more negotiating power over landlords. Landlords are likely to let property on favourable terms to retail tenants for example monthly rental payments, rent-free periods, break clauses and generous incentives which will possibly include contributions to shop fitting fees. The flexibility means both parties benefit, the tenant has a lot more fluidity and the landlord has a tenant.

King Sturge also claims empty retail property will be absorbed back into the market straight away by retailers with major expansion programmes or established retailers with changing floor space requirements.

Reasons
From everything we’ve read recently, it may seem as though the high street is doomed but in fact most of the failures so far have been accidents waiting to happen. Both Woolworths and Zavvi were not innovative market leaders and didn’t specialise in anything that would encourage brand loyalty and simply traded on the back of a strong retail market for a long time. The sudden downturn has exposed this and weeded them out.

Also, many of the retail collapses so far have been directly related to struggling financial institutions. Bank of Ireland pulled the plug on Woolworths but also Rosebys, Royal Worcester, Spode and Adams.

And let’s not forget the effect Iceland’s economic collapse has had on our retail sector as well. An example being Icelandic owned maternity chain Blooming Marvellous which recently went into administration.

The media has played a huge part in the current high street situation. All of the headlines containing news of doom and gloom are scaring shoppers away from the high street.

While it’s grim on the high street and may get worse, there are always those who will exploit the crisis. We know grocery retailers will always fair better than other high street retailers – we all have to eat after all – but Morrisons for example has been declared the clear winner of the supermarket battles after reporting an increase in quarterly sales of about double Sainsbury’s 4.5 percent.

There’s no doubt consumer spending will regain momentum again, it always does. It’s all about confidence and unfortunately that’s taken a knock. Retailers that show credible management and a clear strategy moving forward will be in a better position to survive the current downturn.

Benefits for investors
Retailers going into administration will no doubt create investment opportunities and those looking to take advantage of the reduced commercial property prices will benefit. However, investors must carry out the necessary research and make sure previous owners have paid up any outstanding debts on the property.

Investors must also make sure they verify restrictions on how a property may be used before entering into a contract to buy it. This is so they’re not obligated to purchase a building only to find it isn’t approved for usage for their type of business.

For information call on 0161 827 1800 or visit www.lhs-solicitors.com