Retail sector sees uptick in company insolvencies

RSM UK reports an increase in company insolvencies, particularly in the retail, leisure and hospitality sectors, according to the latest data from the Insolvency Service. Over the 12 months ending in Q3 2023, these consumer-facing industries have witnessed a surge in insolvency rates, with wholesale and retail seeing a significant jump of 52 percent during the period.

Robyn Duffy, a senior analyst for consumer markets at RSM UK, explains: "The past year has presented the retail, leisure, and hospitality industries with one of their most challenging trading environments. Post-lockdown, there were high hopes for a rebound in business, expecting pent-up demand to surge. However, the impact of high inflation diminished this demand and raised input costs across various aspects of the business, including raw materials and utility expenses. These industries have also grappled with workforce shortages, resulting in significant wage hikes to attract talent and stay competitive. As a result, we've seen a substantial increase in insolvencies over the past year."

Duffy also notes that there's reason to be cautiously optimistic, stating, "Analyzing the data, we can anticipate that insolvencies may have peaked in both sectors. RSM's insolvency predictor model suggests that insolvency rates should decrease for the rest of 2023 and into the next year. In line with this, insolvencies in hospitality have remained stable over the past two quarters, and retail insolvencies decreased from 988 in Q2 to 910 in Q3. This offers hope for these sectors and indicates that the distress observed, especially among smaller businesses, is starting to alleviate."

In the retail sector, many businesses have actively worked to reduce excess stock throughout 2023, which has eased pressure on balance sheets. This, combined with decreasing input costs, presents a more favorable outlook for these businesses.

Duffy concludes on a positive note, "The outlook for demand appears promising, with real earnings for consumers on the rise, interest rates stabilizing, and prices returning to more normal levels. There are several reasons for optimism in both sectors at the moment."