Recent data from the Insolvency Service indicates a worrying uptick in UK business insolvencies. Though specific sectoral breakdowns for February weren’t provided, recent trends suggest that insolvencies are mainly concentrated in industries like retail, construction and manufacturing. 

The UK’s retail sector, once renowned for its prosperity, has faced significant challenges over the past year due to rising inflation and a cost of living crisis. As a business investor, how can you leverage these circumstances to capitalise on failing businesses and transform them into lucrative ventures? Let’s delve deeper into recent trends to understand how. 

Sector Overview

More than 2,102 businesses registered as insolvent in February – with a whopping 18% rise compared to the same period last year. A large percentage of these businesses operated in the retail sector, and the surge in insolvencies aligns with the Bank of England’s strategy to tackle inflation by gradually raising interest rates. Since November 2021, the base rate has climbed from a historic low of 0.1% to 5.25% by August 2023, marking the highest level in 16 years.

UK chains saw a rise in new outlets last year, primarily dominated by coffee drive-throughs, bubble tea shops, and fast food restaurants. However, these openings couldn’t offset the closures of other chain stores, resulting in a net decrease of 5,000 stores. High-profile failures at Wilko, Lloyds pharmacy, and Paperchase contributed to more closures than openings overall. The total number of closures reached 11,530 in 2023, driven by restructurings and failures at major retailers, some of which had been struggling for years.

The surge in new openings, totaling 9,138 last year, was largely driven by the hospitality sector’s rebound after experiencing high closure rates during the pandemic. However, closures were still significant, with notable failures in various sectors, including LLoyds pharmacy, the Slug and Lettuce pub chain, and fashion store M&Co.

Already this year, the Body Shop and night club chain Pryzm have faced challenges, announcing closures across the UK. Despite the focus on failing retailers, services have been driving closures over the past decade, particularly with the shift to online operations. However, there are indications that this trend may be slowing down.

Looking ahead, there could be a different picture in 2024 as underperforming chains undergo restructuring or change ownership. Additionally, services like charity shops are expanding their online operations alongside their physical presence.

Opportunities in the Distressed Market

The high number of closures indicates a potential gap in the market. Analysing closures and identifying areas where there’s a lack of new entrants can help business owners acquire, reposition and turnaround struggling businesses to unlock profitability within distress:

Prime Locations at a Discount: Struggling retailers may be forced to close stores, leaving behind prime locations at potentially lower rents. Distressed business owners can acquire these locations for their own ventures, benefiting from established foot traffic.

Acquiring Underperforming Assets: Struggling businesses might have valuable assets like established customer lists, brand recognition, or intellectual property. Acquiring these assets at a discount could be a strategic move for a new concept.

Focus on Shifting Consumer Experiences: The rise of coffee shops, bubble tea stores, and fast food restaurants highlights a consumer shift towards experience-driven retail. Distressed business owners can consider pivoting their business model to incorporate experiences alongside their product offerings.

Omnichannel Strategy: While online shopping continues to grow, the decline in service closures suggests a potential return to a combined physical and online presence. Distressed business owners can leverage existing brick-and-mortar locations while establishing or strengthening their online presence.

Two more retailers under Frasers Group file for insolvency

Just after the news of fashion retailer MatchesFashion entering administration last week, two more retailers under the Frasers Group have declared insolvency and shut stores. Shoppers have expressed discontent as Game, a popular high street retailer under Frasers, boasting 240 branches, prepares to permanently close one of its stores. The Game branch in Newton Abbot, Devon, is slated to shut for good in less than two weeks. Signs announcing a clearance sale and the store’s impending closure are already in place.

The second company is Base Childrenswear, a retailer of designer clothing for children has been placed into administration, just over a year after being acquired from JD Sports. A team from Kroll have been appointed as joint administrators. 

Base Childrenswear was acquired from JD Sports in December 2022 in a deal worth up to £47.5 million, along with brands including Tessuti, Topgrade Sportswear, Kids Cavern, Clothingsites and Pretty Green.

The company, which claims to be the UK’s leading retailer of designer clothing for children aged 0-16, was brought under the Flannels brand following the acquisition and began trading as Flannels. 

Till January 2022, it had a turnover of £13.4 million, up from £11.8 million a year previously, while cutting its operating losses from £746,000 to £387,000. At the time, its total assets were valued at around £6.6 million, but the company’s debts left it with net liabilities exceeding £2 million. It was subsequently sold by JD Sports along with other brands considered non-core to the business, before ultimately being placed into administration by Frasers.

Government funding for Welsh retailers

The Welsh government has announced the £20m Future Proofing Fund, aimed at helping businesses nationwide strengthen their future trading position by increasing profitability. Businesses in the retail, hospitality, and leisure sectors located in Wales, either headquartered or with an operating address in the country, and employing people there, are eligible for the fund.

The Welsh government highlights investment options such as renewable energy technology, improvements to premises, and upgrades to systems or machinery to reduce energy use. Grants will cover up to 75% of project costs or £10,000, whichever is lower, with businesses contributing the remaining 25% from other sources.

These grants will help micro, small, and medium-sized businesses make significant changes in the way they run their operations to adapt for the future. An eligibility checker will open in mid-April 2024, with applications opening in May. In 2023, the Welsh government published an action plan, “Together for retail: a Wales Retail Forum action plan,” to improve the retail sector and support its workers.

To learn more about businesses in distress all across the UK, visit Administration List today.