Is your retail business struggling? Here’s what to do if disaster strikes

Written by Henry Page, corporate restructuring partner, Mercer and Hole

The Office for National Statistics has confirmed what many retailers feared: December 2023 was the quietest precursory month before Christmas in three years with sales dropping by 3.2 per cent on 2022.

For many retail businesses, success relies on a busy and profitable golden quarter in the run up to Christmas. So, if your business is now struggling following a difficult festive period, taking swift action is key to your survival.

Where to start

Cashflow is king and knowledge is power, so having good cashflow forecasting and modelling tools will let you make informed business decisions. It is essential to know what payments are coming up and to look at areas where you can make cost savings to enable you to meet them. You can’t control your fixed costs such as rent but you can control your payroll and suppliers, which is often the place to start to maintain a healthy cash position.

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Access to real time financial data will also allow you to analyse trends, in particular what is or isn’t selling and which products are producing the best margins. This can help to adjust your product mix accordingly.

Ask yourself if you really understand your current customers and the potential market? Do you have loyal customers who might be key to your business survival? If you do, understand why they are loyal and how you can retain them.

Also, think about ‘floating’ customers who are ambivalent to whether they go to your shop or your competitors. How can you attract them in and create more loyalty? There is a reason why big stores invest so much in their loyalty schemes and as well as rewarding customers, it can give you a huge amount of data about spending patterns that can be analysed and used to create more sale opportunities.

Consider the whole shopping experience and value you offer to customers. Really set yourself apart from fast fashion and online only retailers. There is a big rise in sustainable shopping and in-store experiences, which attracts more ethically driven purchases and appeals to certain groups such as Gen Z or the cash rich/conscience driven middle-aged shoppers.

Make the experience pleasant and give customers a sense that you’re doing the right thing. However, be wary of issues around greenwashing. Customers are clued up and willing to do their research, so make sure you have a genuine, ethical proposition.

Attract new customers. This may sound obvious, but sending out a couple of emails inviting people to drop by isn’t going to cut it, so give thought to your promotions throughout the year. Can you regularly show customers new items you have coming in or use different seasons or events to encourage people to visit.

Know what you want to be and make changes to achieve your purpose. However, don’t change everything, everywhere, all at once – doing so would cost a lot and be unsettling for customers. Plus, you’d have no idea what worked and why, and what was a waste of money.  So, plan and take your time and monitor the results.

It’s good to talk, so invest in training your staff to open conversations with customers. Encourage them to ask soft questions that will provide useful feedback, such as: “did you find everything you needed, do we stock the kind of brands you are looking for or what would you like to see in our stores?”

If you are still struggling

Businesses struggling with cash flow need to understand HMRC’s position as a secondary preferential creditor whose claims are paid after preferential amounts are paid to employees. HMRC will allow you to make an arrangement to pay if you can’t pay on time, however they are less generous on terms than they were during the pandemic. Communicating your issues is key if there is no other alternative.

Communication with your landlord is also important if you are not able to make rent payments in full for the next quarter. If you are in a prime site, they are likely to want to remove you straight away. However, for those medium to poor sites, landlords might be more accommodating as they will be keen to avoid taking on the responsibility of business rates if they were unable to relet quickly. Talk to them about what you can pay, but don’t take advantage of the situation as you will ruin your longer-term relationship.

For businesses that would be otherwise profitable if they were not saddled with unserviceable debts, it’s worth considering whether a Company Voluntary Arrangement (CVA) or a Prepack Administration are suitable. A CVA can be used where creditors will be willing to accept a compromise on their debt. However, you will need to have the support of HMRC in relation to their preferential debt (VAT and PAYE) as well as your secured creditors. 

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If an agreement can’t be reached with creditors, then a prepack sale may be a constructive solution. A prepack sale, to either an independent third party or connected party, can free a prospectively profitable business from historic liabilities, whether because of the pandemic or other unforeseen shock, which has led to an unserviceable debt burden. 

Typically, a sale takes place, so the business closes one day and reopens the next, to minimise the impact of a protracted insolvency period. The benefits of a prepack may include continuation of employment for the workforce, a viable tenant for landlords, a profitable business able to pay taxes going forward and continuation of supplier/customer relations. The prepack should also provide the best return possible to existing creditors from the distressed position the insolvent company was facing. It is inevitable that creditors will face losses in a prepack and so every effort should be taken to ensure it is the best solution available to the company and its directors prior to embarking on the process. If a director is considering a CVA or Prepack, specialist advice should be sought to ensure that the process is transparent, and the transaction has the best prospect of success.

Henry Page is a corporate restructuring partner at leading accountancy firm Mercer and Hole; E: henry.page@mercerhole.co.uk mercerhole.co.uk