As the retail sector braced itself for what is traditionally the busiest time of the year, growing retail insolvencies and a fall in consumer spending were causing concern for businesses in December 2022. Simply put, people have been much more selective and discerning in their shopping patterns than they were in the pre-pandemic days.
Fears that Q4 2022 would be challenging for retailers were not entirely unfounded. Retail sales volumes declined in September by 6.2% (excluding automotive fuel) compared with September 2021. In value terms, sales increased by 3.3% which was all accounted for by record inflation. September was the first month post-lockdown when retail sales volumes dipped below pre-pandemic levels, suggesting that consumers’ post-COVID pent-up demand may have fully dissipated. This did not inspire optimism for Q4 and that all-important festive season.
The cost of living crisis, supply chain problems, rising energy prices and food price inflation, which soared to a record high of 15.2% in November 2022, have all taken their toll on consumers, who curtailed spending on non-essentials.
Another factor not inspiring a lot of confidence in Q4 2022 was the number of retail insolvencies in the second quarter of same year, which climbed to their highest level since 2012, according to the Office for National Statistics (ONS). By August 2022, over one in ten businesses saw themselves as being at risk of insolvency and cited rising energy prices as their biggest concern during this period.
Retail insolvencies rising
Retail (and wholesale) is now the sector with the second largest number of insolvencies – after construction – accounting for 14% of total company insolvencies in England and Wales in the first half of 2022.
To add to that, survey results from customer insights platform, QuMind, show that 80% of British consumers worried about Christmas spending in 2022, with 56% saying they feared they would not be able to buy as many presents as last year.
Qumind issued some predictions for Q4 2022 in their report, with Mark Ursell, Qumind’s CEO, stating: “Luxury and consumer goods will be particularly hard hit, with half of all Brits predicting to spend less this year on consumer technology (55%), fashion (54%), jewellery (54%) and beauty products (50%)”.
Richard Lim, chief executive of Retail Economics, sums it up: “The cost of living crisis and shock to housing affordability will make life extremely difficult for swathes of households as we head into 2023. Peak trading will be incredibly tough and is likely to push many in the industry to breaking point.”
A trade credit insurance policy can help to protect your business against the fallout of retail insolvencies. It can provide peace of mind and security, ensuring payment if a firm cannot settle invoices.
Big retailers are not impervious to changes in consumer behaviour
In these uncertain times, even the bigger players in the market are facing challenges.
H&M is considering charging fees for online returns. Zara and Boohoo have also announced plans to introduce similar changes. There’s no guarantee this cost-saving exercise will be a success though. A recent report revealed that 60% of UK consumers would consider shopping elsewhere if retailers start introducing fees to return online orders.
Back in September, John Lewis said that while their stores were seeing larger numbers of shoppers than last year, customers were spending less and avoiding buying as many "big ticket" items.
Even online retailers faced problems in the last quarter of 2022. Non-store retailing sales volumes rose by 1.8% in October 2022, but that was following a fall of 2.5% in September. Since early 2021, there’s been a broad downward trend in sales volumes, although this can partly be attributed to the wider economy reopening after the lockdown and people returning to shopping in stores.
ASOS, the online fashion retailer and holder of the Topshop brand, has also warned that it expects people to cut back even further in the weeks and months ahead.
There may be a speck of light on the horizon for some retailers in 2023, however. The British Retail Consortium reported that physical retail footfall “rallied” in December to its highest level since before the pandemic amid a month of postal strikes and online delivery backlogs.
It remains to be seen whether this trend will continue in 2023. It’s crucial to ensure you are protected against the consequences of what may continue to be a rough ride for the retail sector amid the cost-of-living crisis and record food inflation.
Retail insolvencies – tough times ahead?
Knowing your customers is vital in every sector, and retail is no different. If you’re worried about potential trade debtors as retail failures continue to climb, you need to consider which firms could potentially have a cash flow crisis, leaving them unable to pay your invoices. Often, the risk factors are the credit risk iceberg beneath the surface.
Get in touch if you want to learn more or get a quote from Allianz Trade, the world leader in trade credit insurance.