Date Published: 27th January 2020
New research from Begbies Traynor, the UK’s leading independent insolvency firm, reveals the number of businesses in significant1 financial distress has risen to 494,000 – the highest number recorded by this research, with the real estate and property, support services, construction and retail the sectors particularly badly affected.
The latest Red Flag Alert data for Q4 2019 found there were large numbers of UK businesses experiencing significant financial distress at the end of December 2019. A considerable number of these companies were formed after 2014, demonstrating that younger businesses are the most vulnerable to failure. With this continued increase in significant distress there is a danger that in 2020, this distress figure could exceed 500,000 companies.
Across the 22 sectors monitored by the Red Flag Alert research, 15 sectors have witnessed increases in significant financial between the third and fourth quarter of 2019, compared to 13 out of the 22 sectors between Q4 2018 and Q4 2019, indicating that the latter quarter of 2019 has witnessed the broadest rise in financial distress.
Julie Palmer, Partner at Begbies Traynor, said:
“Businesses and the UK economy as a whole will want to avoid a repeat performance of 2019, where distress increased to record levels on the back of ongoing uncertainty around Brexit. These figures clearly demonstrate the impact of this indecision, and with political certainty and a clear Brexit path, UK businesses should, at last, be able to plan for 2020 with a greater sense of clarity.
However, the macro economic climate is complicated and we are seeing clear winners and losers, as evidenced by this latest Red Flag data. Currently, we do not know if the failing performance within some sectors is due to short term confidence issues, or more fundamental economic and structural issues.
Real Estate and Construction
The real estate and property sector, often considered a bellwether of the UK economy, has been particularly badly affected with a 13% increase in the number of businesses in significant financial distress between Q4 2018 and Q4 2019, the highest year-on-year percentage increase across any sector measured in the latest Red Flag Alert research (Q4:2018 – 47,147: Q4:2019 – 53,159).
Specifically, the data highlights that “property investors” (businesses involved in “the buying and selling of their own real estate”) experienced a 30% increase (Q4:2018 - 11,573: Q4:2019 - 15,033) in significant distress compared to the same period last year as the property sector continues to struggle with construction output falling and pre General Election and Brexit uncertainty having an impact. The construction sector has also fallen victim to the current economic conditions, with falling investment in the sector resulting in 7% more companies involved in “the development of building projects” suffering from significant financial distress when compared to Q4 2018 (Q4:2018 - 12,780: Q4:2019 - 13,686). This deterioration has also affected those businesses involved in “the construction of domestic buildings”, where significant financial distress has increased by 4% (Q4:2018 – 6,118: Q4:2019 - 6,360).
Following the Christmas period retailers would have been hoping to turn around their fortunes. However, there has been a 2% increase in the number of retailers in significant distress since Q4 2018 to 31,615. This malaise has also hit online retailers, with a 8% year-on-year increase in the number of these retailers facing significant financial distress (Q4:2018 - 8,464: Q4: 2019 – 9,117) demonstrating that a web based offering is no silver bullet for business performance.
London vs The UK Regions
The challenge for the new government in addressing regional decline is laid bare in the latest Red Flag data. Although there are almost 126,000 London businesses in significant distress, this figure is dwarfed by the other UK regions where more than 358,000 businesses are wrestling with significant financial distress.
Julie Palmer, Partner at Begbies Traynor, said:
“The landscape of UK business is slowly changing. In order to capture the attention of consumers, businesses need to demonstrate that they not only have a compelling product or service at the right price, but also one that has strong environmental credentials to boot.
“The modern consumer in the UK is increasingly being motivated by impact on the planet, and so the appeal of fast-fashion, like the Boohoo and Primark models could fall from favour in 2020. The key for businesses will be to keep up with this trend and understand the modern demands of the consumer. The knock-on effect is that companies start to look to the carbon footprint of their transport providers – an event which is being felt by the industrial transportation and logistics sector as the number in distress increased by 5% since last year.
Businesses will be hoping that the next budget will also give them some respite with a cut in business rates, if that happens the question for businesses in 2020 will be whether they can adapt to the new climate they now find themselves in and invest wisely to restructure and reinvigorate their organisation where needed.”
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
“This latest data from our Red Flag Alert research suggests that UK businesses are continuing to struggle as the economy slows. If this trend of rising significant distress continues then during Q1 2020 we could, for the first time, witness financial distress creeping over the half million milestone – a first since we started our Red Flag Alert research.
“However, the recent general election now ensures we have some political certainty for the next 5 years which should hopefully put an end to business stagnation and just as importantly help improve UK productivity, which has been a casualty of the malaise we have witnessed not just since the EU referendum, but since the financial crash for 2008.
“It feels like Brexit is reaching a conclusion and the UK will finally be able to start negotiating its own business deals with key trading partners together with a workable arrangement with the EU. However, the world faces a new set of economic challenges compared to 2016. Economic and business protectionism continues to spread, and the Euro block economy is faltering. This combined with a move towards carbon neutrality and the structural and economic changes affecting UK businesses means that the challenges ahead are likely to be considerable.”
Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.
Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.