Struggling Retail sector faces quarterly rent payment crunch day

The Red Flag Alert early warning system for the period December 2008 to February 2009 shows that retail companies with critical problems have increased by an average 22% month on month, while actual insolvencies show an average 19% month on month increase:

Companies with Significant Problems Companies with Critical Problems Insolvencies
Dec 3,630 80 105
Jan 3,789 98 114
Feb 4,278 120 146
Against this backdrop of worsening conditions for retailers, the concern is that the large quarterly rent payment might be enough to push a lot more retail companies – where rent is a significant cost – into insolvency.

In addition, this quarter is traditionally seen as the toughest in the annual calendar due to the seasonally weak trading period between January and March. The tough quarter will no doubt be further exacerbated this year by the late timing of the important Easter trading period (Easter Sunday falls on 12 April 2009 vs. 23 March in 2008).

Easter trading is typically the single most important weekend of the year for DIY and gardening stores, quickly followed by two more key weekends – the May bank holidays. This group of retailers in particular will be crossing their fingers in coming weeks for a combination of good weather and consumer confidence holding up against the odds.

Nick Hood, Partner at Begbies Traynor, commented:

"The prospects for the retail sector remain tough. Two new challenges are now impacting them, namely the continuing weakness of sterling, which is forcing up costs at the worst possible time, and the deluge of negative news on jobs, which continues to savage consumer confidence.

Landlords offering monthly rent payment as an alternative to quarterly payment can only be a short-term, one-off cash flow palliative which will not cure the retail patient. The continuing unwillingness of landlords to consider either lower rents or turnover rents to help their struggling tenants is understandable, but unhelpful to retailers.

Whilst the failure rate amongst major store chains may not reach the crisis levels of the festive season, we are still likely to see insolvencies of well known retail chains in the high single digits over the next three months."