Retail Restructuring: Why CVAs alone are not the answer

Retail will continue to have difficultiesThis year some well-known household retail names have undertaken an insolvency process call an Company Voluntary Arrangements (CVAs) drawing a lot of attention in the retail news.

Although the number of retail CVAs has surged this year, a close examination of previous data reveals that around half of them fail. CVAs, however, are a sign of a more profound retail transition that goes beyond a switch from offline to online.

Therefore, a more specialised restructuring approach is needed for legacy merchants, one that considers consumer value, long-term cost reductions, and new capital expenditure

A brief history lesson

An insolvency company and its creditors may agree to the repayment of a portion of the company’s obligations over a predetermined period of time through a CVA, a UK-specific statutory insolvency procedure. If 75% (by value) of creditors vote in favour of a CVA, it is accepted.

To properly evaluate the effectiveness of CVAs since its debut in 1986, we have conducted extensive research and analysis. There have been more than 400 CVAs registered, with business services and retail making up the majority (19% and 15%, respectively) of those. Engineering and construction, industrial manufacturing, and hotel and leisure make up the remaining 11%, 11%, and 9% of all registered CVAs.

Contrary to CVAs in other sectors, which are distributed evenly throughout the year, the majority of retail CVAs are initiated in Q1 of the calendar year (usually after Christmas trading).

But according to our study, 31% of retail CVAs have ended satisfactorily, 51% have resulted in another insolvency proceeding, and 18% are still active. CVAs may offer a short-term liquidity bridge to improve performance. However, taken alone, they frequently fail to address the core problems or involve all relevant parties (e.g. landlords).

As of August 2018, there had been seven retail CVAs this year alone, which is the highest number since 2014. CVAs continue to be a common insolvency tactic. They are currently used by other businesses on the high street, including chain restaurants and hair salons.

A challenged retail sector

Retail will continue to have difficulties in the near future. A challenging margin equation is created by declining revenue and rising costs. According to a recent consumer poll conducted by PwC in September, consumer confidence is still very resilient. However, consumers plan to reduce spending in all non-food categories during the following 12 months (particularly eating out, big ticket items, technology, and going out).

Similar depressing retail industry measures include declining foot traffic, an increase in shop closings, and at best irregular like-for-like (LFL) sales for non-food items.

Online sales are predicted to increase over time, from 20% currently to 25% by 2022, which will have an effect on legacy retail estates. However, there will be more significant adjustments made to how consumers purchase and how companies cater to them.

Customers will increasingly connect with brands or one another directly, shop across numerous platforms (including e-commerce, mobile commerce, and now social commerce), and demand individualised experiences. In response, shops will need to investigate various business models, such as resale, subscription, or market places, that may appeal to consumers.

Our restructuring solution

Questions about how brick and mortar shops should restructure and how much fresh financial investment is necessary are raised by the physical and virtual evolution of the UK high street. Although they are insufficient on their own, we think that CVAs and other insolvency processes can be useful restructuring tools.

By making an appealing customer proposition investment, restructuring its operational model, and financing these expenditures, legacy businesses need to reinvent their place on the high street. There are numerous obstacles to overcome. Retailers will need to improve the end-to-end consumer experience using a combination of bricks, clicks, and third party channels, as well as digital tools. Retailers must optimise quality, speed, and flexibility in their operations, including a single view of the stock and reduced lead times. Retailers will need to minimise and reallocate costs from head office headcount and other non-customer facing activities to customer facing activities in order to pay for these expenditures (such as new product development and AI).

Given the delay between the costs of restructuring in the short term and performance improvement in the long term, legacy retailers will also likely need to raise fresh capital. In addition to establishing wider financial stability (cash, headroom, and facilities) with a clear justification for any new financial investment, a strong re-structuring strategy can offer a platform to improve the success rate of CVAs (and other insolvency instruments).

In conclusion, we recommend reconsidering the function of CVAs in light of the new retail realities. At business insolvency helpline, we see our role as an advisor in assisting management and owners in navigating the challenging terrain of addressing customer proposition, sustainable cost savings, and, if necessary, new capital investment.

Read more: Insolvency help for retailers

Note on methodology

We used a list of more than 100,000 registered firms at Companies House using the company registration number to determine whether the company had undergone an insolvency procedure and, if so, which proceedings were used. We have been able to analyse the number of companies that have entered a proceeding by sector using this information (based on SIC code).

The UK’s Companies House and various organisations in other nations have adopted the SIC (standard industrial classification) code to describe the retail industry.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.

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