Retail Insolvencies in Europe – What’s the deal?

02. October 2020


Storm clouds have been gathering over the retail sector for some time as it struggles with the long-term impact of digitisation and the move from high street to online shopping.

Coronavirus related lockdown measures have slowed growth further still with younger consumers expected to continue online shopping more often post COVID-19. As changing rooms remain out of service for the most part, the drift away from brick-and-mortar stores is perhaps not so remarkable.

For some retailers looking towards the future, managing the process of insolvency and restructuring is becoming increasingly important.

 

A troubled sector driven by changing customer behaviour

 

2019 had the slowest rate of spending growth since 2010. Moody’s predictions for 2020 suggested the sector would continue on this sluggish trajectory for the following 12 to 18 months. Despite this, the report, which came out at the end of 2019, predicted slight growth in the share of online sales.

There have also been important geopolitical events that have had an impact on the European retail sector. The most influential of those being Brexit, which has created market uncertainty, especially in the UK. However, analysts were cautiously optimistic at the start of 2020. According to the KPMG/Ipsos Retail Think Tank’s (RTT) outlook for 2020, the “end of political paralysis” and a “rebound in consumer confidence” was on the cards.

Over the last ten years, the retail space has certainly been influenced by the rise in technology and digitisation, as well as changing customer behaviour. In their analysis of the European retail sector, Deloitte pointed out three key drivers:

 

  • Call for sustainability – consumers are becoming increasingly environmentally conscious and aware of their own behavioural impact. Companies need to provide more alternatives and sustainable solutions to attract consumer interest.

 

  • Continued digitalisation – consumers are also turning to online retail as the shopping experience becomes more personalised. Digital experiences are increasingly important even on the high-street and will likely gain further ground with the widespread introduction of 5G networks across Europe.

 

  • Conscious consumption – tying into the above two points is the change in customer attitudes and the search for purpose. The retail sector has to provide a more authentic experience and outline its mission as a brand to attract consumers and meet their values in the modern world.

 

Insolvencies on the increase

 

Slow growth has resulted in a series of restructurings and, in some cases, a number of insolvencies.

The number of insolvencies in the retail sector hit a five-year high in 2019, according to data by RPC whose report counted 1,252 that year. Similarly, Allianz’s research into global insolvencies predicted 2020 to witness notable collapses in the European retail space, with countries like Germany, Italy and Spain experiencing higher than average insolvency cases. To date noteworthy examples include:

 

Galeri Karstadt Kaufhof

 

One of Europe’s largest department stores filed for insolvency in 2020 despite receiving state aid following the coronavirus outbreak.

 

Debenhams

 

In April 2020, to protect itself from creditors, the UK department store went into administration for the second time in 12 months. The company has already closed 22 stores including  in Hong Kong and Bangladesh with more on the cards by 2021.

 

Victoria’s Secret

 

The UK-arm of the US retailer went into administration in June 2020. The company is reportedly looking to restructure by reducing costs and finding a new owner.

 

Monsoon Accessorize

 

The British retailer filed for insolvency in Germany in 2019. It is thought that the Monsoon Group’s issues were largely linked to changing consumer behaviour in the country. In June Monsoon Accessorize fell into administration in the UK, attributing issues to the COVID-19 outbreak.

 

More insolvencies on the horizon

 

According to the head of the German Retail Association, Stefan Gendth, the rest of the year could see as many as 50,000 German retailers, the equivalent to one in every six, file for insolvency. In the UK, experts are expecting rather similar outcomes. According to the Centre for Retail Research (CRR), there could be more than 20,000 permanent store closures, which would be 16,000 higher than in 2019. However, it’s not all doom and gloom. According to Eurostat data, by June 2020 total European retail sales regained 99,7% of the volume it had reached in February.

Potential barriers to growth include:

 

  • A drop in customer confidence and interest – even as restrictions lift, concerns remain over how social distancing rules might impact customer confidence and sales. It is not yet known how consumers will respond long-term.

 

  • The cost of maintaining physical stores – one big issue for retailers is the cost of holding on to physical stores experiencing a decline in foot traffic. With the cost of renting and owning property increasing, many retailers will find it difficult to justify spending in those areas.

 

  • The lack of available funding – so far European governments have pumped money into the economy in the form of grants and loans but many argue that the latest measures are not enough with some struggling with the idea of taking on extra debt.

 

According to data by LearnBonds, European retailers are expected to lose over $4 billion due to pandemic related disruptions. On the other hand, retailers that manage to create a digital approach to sales could win, big. As millions of Europeans continue to stay at home to prevent the spread of COVID-19, many have taken advantage of cashless payments and digital accounts. An Ipsos survey recently revealed that over 30% of Italian consumers increased their online shopping in March and April compared to the previous month. The UK, France, and Germany came next with 18%, 16%, and 12% of shoppers following suit, respectively.

 

Restructuring businesses in administration

 

It’s unlikely the situation will improve much in the coming months as retailers experience the full effects of the pandemic on business.

Navigating insolvency and restructuring can be both complex and challenging. Strict rules on information sharing exist for companies in distress filing for protective measures. The appropriate and timely disclosure of large volumes of information to multiple parties involved in a sale, liquidation or reorganisation is imperative to deal success and can be facilitated with the use of virtual data rooms (VDRs). With a Drooms virtual data room, retailers can target the due diligence process and create a system of organised and secure access to documentation. With the help of a data room, parties can enjoy:

 

  • Flexible access to documentation
  • Proper indexing of data
  • Auto allocation of documents
  • Ease of search
  • Improved reporting
  • A centralised Q&A

 

Improved access to data will allow parties to limit risks, reduce costs and help handle a delicate situation with efficiency and care.