GUEST BLOG - What's next for Retail?

According to the headlines, shoppers flooded back to the high streets of England when non-essential stores reopened on 15 June. In that week, queues stretched around the block for the most popular stores, and footfall was up 45% on the previous week. Is this good news for retail? Not entirely. When compared to the same week in 2019, footfall was down 54%.

The pandemic has accelerated trends in a sector that was already struggling to redefine itself in response to changing customer preferences. Even as the shops reopen, British Retail Consortium CEO Helen Dickinson said that consumer demand is expected to "remain weak", and retailers face an "uphill battle" compounded by rising costs. In this article, we look at how COVID-19 has affected the high street, and ask "what's next for retail?"

The COVID-19 effect

Over the past few months, consumer spending has halved. This collapse in discretionary spend has already led to a spate of insolvencies across the UK retail sector. Fashion and clothing have been particularly hard hit. Clothing sales alone are down by 60%.

Not surprisingly, online retailers saw a record jump in sales during the lockdown. In May alone, online sales increased by 130%, while Amazon reported sales of more than £7,500 per second as COVID-19 turbocharged online shopping.

Meanwhile, high street retailers unable to trade online are dealing with the combined effects of 100 days of closed doors and a build-up of stock. While this stock may have been in demand pre-lockdown, much of it will be out of sync with consumer needs in the summer months.

Sales have been their only option. The Times reported that during May, retail prices fell at the fastest rate on record as retailers resorted to heavy discounting. Quite apart from consumer migration from the high street to the internet, retailers are facing a rise in business rates and increased rents, which must be paid to landlords three months in advance. However, retailers have been given a lifeline.

Lease forfeiture moratorium extended

At the beginning of June, the Government announced an extension of its rent protection period for commercial tenants. The lease forfeiture moratorium, introduced in March and due to expire on 30 June, has been extended until the end of September.

This moratorium extension will be welcomed by retailers as a much-needed breathing space. However, it is by no means a long-term solution because:

  • the moratorium is not a rent holiday. Rents are due as normal unless an alternative agreement has been made with the landlord
  • itis not a waiver of a landlord's right to forfeit the lease. If rent is not paid during the moratorium period, a landlord remains entitled to forfeit for non- payment of that rent in the future.
  • For struggling retailers, the Government's measures may simply postpone the inevitable. Once the moratorium is lifted, landlords will expect outstanding rents to be paid. Some will be accommodating and agree on extended payment terms, but others will not.
  • Come the Christmas shopping period, many landlords will run out of patience, particularly if they hold significant rent deposits and feel they can easily re-let premises at a higher rate. They will inevitably take legal action to forfeit the lease and, amongst other measures, issue winding-up petitions.

Next steps

Few bricks and mortar stores remain unaffected by the pandemic. From small independents through to high street giants, the lockdown will bring huge changes to an industry already under pressure. It is important for retailers to take proactive steps now to prevent legal action being taken come the autumn. Retailers will need to evaluate balance sheets and look at inventories, bearing in mind that supply chains could be in the same predicament.

Now may be the time for a frank and upfront conversation with the landlord to discuss a rent concession. It is worth noting that where the parties do not agree to a concession, interest is payable on any late payment of rent. In addition, there is a possibility that the landlord will seek to charge back their legal and other costs for the recovery of unpaid sums.

Company Voluntary Arrangements and Moratoriums

The Government has shown its desire to bring rescue to the forefront as the country emerges from the economic downturn caused by the pandemic. This is demonstrated by the speed at which The Corporate Insolvency and Governance Act was rushed through both Houses and came into effect on the evening of 25 June.

One of the highlights of the new legislation is the introduction of a Chapter 11 type procedure. This provides a new moratorium to protect a company from actions by its creditors, but the company remains under the control of the directors. Initially, this moratorium is in place for 20 business days but can be extended with consent for up to a year.

The directors' actions are under the supervision of a Monitor who must be an Insolvency Practitioner. The aim is to provide breathing space to allow time to restructure or re-finance the company, possibly through a Company Voluntary Arrangement (CVA). While many retailers will have enough reserves to survive the effects of the lockdown, others will need to consider rescue procedures. Under the protection of the moratorium, we see this is an excellent opportunity for at-risk retailers to put together a workable CVA.

Over the last decade, the number of retailers mitigating against insolvency through this method has significantly increased. CVAs offer a solution which is less damaging to a retailer's reputation. Although negotiations can be fraught, CVAs between retailers and landlords can create opportunities. They can reduce the impact on vacancy rates, prevent the negative knock-on effects in the high street, and allow retailers to develop more robust business models.

About CVR Global

CVR Global is an independent firm of insolvency practitioners and forensic accountancy experts. They offer prompt, practical and cost-effective advice based on the needs of their clients.

Their teams are based in eight locations across the UK, and they have three offices overseas.

For friendly, accessible help with finding a workable solution, get in touch with CVR Global.