Regardless of the business you’re in, you’re in it to trade profitably – not suffer the threat of bad debt, default and insolvency. Cash flow is a fragile pact based on mutual trust and confidence.
Today’s retail picture
Two more high profile UK retailers recently hit the buffers in early 2018 as the High Street feels the ongoing pinch from a range of pressures. Maplin, with a turnover of over £230m, was put into administration after struggling with online competition and unaffordable rent payments. Toys ‘R’ Us has followed its US parent into administration citing a fall in sales coupled with inflationary pressures. Creditors for both companies can expect to receive a formal notification of the appointed Administrator in the near future however the full administration process is likely to run for 12 months. The knock-on effect is likely to be felt in the short and medium term as suppliers who are particularly reliant on trading with them seek to adjust to commercial life following their collapse.
This challenging environment for the UK retail sector is expected to continue with House of Fraser, Jamie’s Italian and Byron Burger’s difficulties all being well document in the press. In addition, Mothercare1 has recently issued a profit warning.
What are the factors driving the pressure on retailers?
There are six major reasons for this ‘perfect storm’ on UK high streets:
- Pressure on incomes: fluctuating sterling values have made imported goods more expensive and wages rising slower than inflation means less disposable cash in consumers’ pockets.
- Rise in online shopping: the click is easier and often cheaper than the trip - and with retail growth stagnant, it’s all about market share that has seen the online slice rise to 20%2
- Evolving tastes: consumer desire for a superior shopping experience means that retailers with bland or impersonal outlets will suffer either at the hands of better competitors or simply go online.
- Higher overheads: National Minimum and National Living Wages add between £1.5bn - £3bn to labour costs each year and business rates will increase costs by £2bn over the next three years2
- Too many outlets: over-expansion means there are too many outlets and the underperforming ones will inevitably be closed down. Figures suggest the number of shops across the UK will fall by 22% to 220,000 in 20183
- High operating debts: that same overexpansion created higher debt burdens for retailers which must be serviced.
Some suppliers have scaled back their exposure to the businesses, however many remain unsecured creditors and this is a high-risk position.
It is likely there will be more high street casualties in the coming months as retailers battle with online competitors, tough market challenges and the uncertainties that surround Brexit. We recommend any company operating in a major retailer supply chain should review their risk strategy when offering credit terms and think about ways of securing their receivables when offering credit terms. That’s where trade credit insurance can assist.
An effective policy and specialist advice will span the full spectrum of trade credit applications, identifying liabilities, cutting costs, quantifying risk and helping offset losses across the following areas:
- Working capital and profitability protection that cuts your loss exposure from insolvency or default
- Access to unique, constantly updated creditor information that helps you plan risk exposure
- Active assistance that supports and helps drive your credit risk management function
- Security to financial institutions to help you negotiate finance facilities
- Access to integrated collection and recovery services for improved loss control.
A best practice approach to trade credit insurance enables risk and credit management that smooth out the effects of bad debts, helping protect your balance sheet and deliver greater certainty. With a thorough approach in place, a longer-term benefit is the assistance it gives you for identifying credit worthy customers and suppliers at home and abroad from the outset.
What sort of trade credit insurance feature should you be looking for?
Check the features available and how they relate to your business and the level of tailoring required to get the fit just right. While not an exhaustive list, a policy would have the flexibility to include:
- Whole turnover: solutions personalised to your specific risk analysis, control and transfer needs
- Catastrophe cover: protects high turnover firms against exceptionally high levels of bad debt losses
- Pre-delivery or pre-credit risk: provides cover for manufacturing or service costs incurred prior to delivery
- Specific/selective account cover: ideal for business-critical exposures to single or selective customers
- Top-up cover: enables you to add credit limits through additional excess layer cover
- Political risk: protects you from trade or investment disruption overseas caused by political upheaval
- Factoring/invoice discounting recognition: enables you to receive an initial amount of your outstanding invoices upfront to ease the pressure on your cash flow.
The Gallagher perspective
You can’t control the economy and you can’t second guess uncertainty - but you can protect yourself against undue risk. That’s why in 2018 you’ll need to be resilient and that’s where we can help. Trade credit insurance protects you against the impacts of bad debts arising from a customer or supplier’s insolvency, protracted default or as a consequence of a political event.
The UK high street faces many challenges and it’s clear that there will likely be more insolvencies in 2018. By applying trade credit insurance, you are protecting yourself from the domino effect that can be created by the insolvency of a supplier or customer. You only have to look at recent examples - Maplin, Toy ‘R’ Us. Plus, a robust Trade Credit policy can put you at a competitive advantage, reducing the risk to potential investors and helping to nurture trade with exporters in areas of the world where non-payment may be problematic. While many of the hurdles you will face this year will naturally be outside the control of your business, remember that with the right help, you are very far from powerless. When it comes to planning for the unexpected, Gallagher is ready to help.
1. Mothercare issues profit warning as Christmas sales sink / January 2018 / BBC News
2. Six reasons behind the High Street crisis / by Daniel Thomas / BBC News.
3. Centre for Retail Research / Toys ‘R’ Us and Maplin on the brink of collapse putting nearly 6,000 jobs at risk / by Hannah Boland / The Daily Telegraph / 27 February 2018.