Skip to main content
QBE European Operations
About Us Products Contact Us
By Jamie Calder
Trade credit underwriting specialist

A perfect storm of rising costs and falling consumer spending points to tough times ahead for the retail sector, but trade credit insurance can help firms navigate their way to a brighter future

In February, the UK arm of toy seller Toys R Us and electronics outlet Maplin became the latest victims of the turbulent retail market. Like many other retailers to close their doors in recent months, the two firms were struggling to adapt to changing consumer demand and competition from online sales.


Shuttered shops have become a common sight on UK high streets. More and more shoppers seek convenience and savings online, while others just seek new and different experiences. Adding to the pressure, consumer confidence has been waning and costs for retailers have been rising.


A recent report from KPMG predicts that many retailers will have to “fight to survive” in 2018. This is likely to result in a period of consolidation and increased insolvencies, but a shakeout should result in a healthier and more vibrant retail sector in the long run.


High street failures

Toys R Us and Maplin were just the latest in a string of retailers forced to close their doors of late. Fashion brands East, Joe Bloggs, Jaeger and Jones the Bootmaker have all entered administration in recent months. Furniture and homeware retailers have also been struggling, with Warren Evans, Feather & Black and MultiYork all failing.


According to Deloitte, 118 retailers collapsed in 2017, 26% more than in 2016. Notable were the number of failures among large retailers (with more than 10 stores) which increased by 55%.


Why now?

The past 10 years have been relatively favourable for retailers, with low interest rates, low inflation and buoyant consumer confidence. Despite a competitive market, retailers with high costs or debt have managed to survive in this environment. But recent developments suggest that the trading environment has shifted and that some retailers face a make or break year in 2018.


In particular, the retail sector now faces the double whammy of falling demand and rising costs. According to credit card company Visa, consumer spending fell in January 2018, the first time it has done so in five years, driven by lower consumer spending on the high street. Eight of the past nine months have seen a year-on year fall in spending, with both in-store and online spending in decline.


Consumers are beginning to feel the pinch. Wages have fallen in real terms while higher inflation has led to an increase in living costs, which has seen consumers shy away from making large purchases.


Consumer confidence has taken a hit at a time when retailers’ balance sheets are already under pressure. As we discussed in our September blog, retailers already faced a host of headwinds, including increased costs of imports following a fall in the value of sterling, as well as rises in the minimum wage and business rates have added to the pain.


These trends will continue into 2018, but with the added prospect of rising interest rates. Following a 0.25 percentage point rise in November (the first in a decade) the Bank of England recently indicated that interest rates may have to rise faster and further than previously expected. A series of rate increases would hit both consumers and retailers with high levels of debt.


Bigger picture

Lower demand and rising costs come at a time of broader structural change in the retail sector. In particular, the growth of online sales is having a profound effect, although consumer shopping habits are also changing.
The UK has one of the largest e-commerce markets in the world -online retail sales in the UK account for a bigger proportion of total sales than in the US or Europe. Online retail sales are close to 20% of all retail sales in the UK (28% in non-food), according to figures from the ONS.


Survival of the fittest

The growth in online sales should result in a leaner, fitter high street according to, PricewaterhouseCoopers. It believes that retailers must continue to evolve if they are to make the most of both new digital opportunities and the country’s high streets.
High street retailers are already looking to reduce costs – Debenhams, New Look and Marks and Spencer have announced job losses and store closures. Maintaining a large high street presence is proving expensive, and many retailers have indicated that they will try to renegotiate or terminate leases, and some may use company voluntary arrangements (CVAs) to do so.


However, closing stores will not be enough. Retailers will need to invest in new business models, as well as innovative ways to attract shoppers to their remaining stores. The next few years will also see large retailers move away from their current labour intensive model to a capital intensive model, where technology and automation create efficiencies and lower head count. The British Retail Consortium predicts that one-third of retail jobs will vanish by 2025.


There is also talk of investment in technology, in particular Big Data and analytics, but also artificial intelligence, as retailers seek efficiencies and insights into consumer habits. In January, Amazon opened the first check-out free supermarket, where cameras and sensors monitor purchases and avoid the need to use checkouts.


Credit outlook

While most retailers will adapt, a good number will struggle and insolvencies are expected to rise. Many are already on the brink of collapse – some 45,000 retailers were said to face serious financial distress according to insolvency advisory company Begbies Traynor. Nearly one-fifth of clothing retailers in the UK are showing signs of financial distress and are at risk of going insolvent, according to accountancy firm Moore Stephens.


Investor confidence in the retail sector already appears to be diminishing. Trading updates after the key Christmas shopping period saw the share prices for several retailers tumble. Department store Debenhams saw its share price fall 15% in January after it warned of lower profits. Mothercare’s shares lost a third of their value following a profit warning in February and news that it was in talks with lenders.


Insurance support

Good credit risk management is important at the best of times, but trade credit insurance is even more relevant in an uncertain and volatile market. Credit insurance protects suppliers to the retail sector against bad debts, and can also help with cash flow when retailers push back on payment terms. Credit insurers also provide valuable information on trading partners helping suppliers limit their exposure to bad debt and select sound trading partners.


Long term partner

Despite the deteriorating outlook for the retail sector, we recognise that the sector still presents opportunities for those businesses that are versatile enough to diversify and adapt to the challenges they face. We remain close to our clients’ customers in the retail sector; continuing to engage in an open dialogue with them and working with their latest financial information. This enables us to continue to have a strong appetite for UK retail risks.


If you operate in the UK retail sector and have questions regarding any of the points discussed, or are interested in credit insurance in general, please do not hesitate to contact us, we are here to help you.

Would you like to know more?

To register for future updates from our trade credit specialists, please click here.

For further information regarding our trade credit offering, please click here.