Are some types of business more susceptible to failure and ultimate bankruptcy/liquidation? It seems, in the UK and US that retailers are having a tough time of late. There have been several high-profile retailing failures such as Toys ᴙ Us, Radio Shack, Payless and Maplin together with reconstructions such as Mothercare and Kmart.
But is it because retailers are in the public eye and some commentators have seen the “retail apocalypse” (BBC, 2018) that we think them worst hit or do the UK statistics bear this out?
Well, in a word, NO.
Things are bad for retailers (Centre for Retail Research, 2018) but the data from the Office for National Statistics shows that others are in a worse state. Two of the biggest categories appearing in this impromptu "league table" of distress above are the Transportation industry, with 1,668 insolvencies in 2017 and Accommodation at 1,764 failures. Although the proportions are higher in other industries such as mining and quarrying, these are relatively small sectors.
Retailers, however, lumped together with wholesalers and motor dealers in this dataset, show a below average (0.84% for 2017) insolvency rate as a proportion of all companies with the same Standard Industrial Classification (SIC), as does construction (1.09%), the average being 1.12% for all companies.
Higher chance of failure
So, why are Transport and storage companies and Accommodation and Food Service companies batting above the average?
Well, they share a number of features:
- Both have demand profiles that are derived.Our primary demand is for the goods that transport delivers, not for the transport itself.Our primary demand is for the business trip, the holiday or lodging for the visiting relatives, not for the accommodation provider itself.
- Both are “service” industries and when costs must be cut by customers they can be the first to suffer.There’s a thriving “do it ourselves” mentality in many areas when faced with higher costs.
- Both have negative drivers from environmental factors such as technology.Video conferencing makes many business trips unnecessary and an expensive luxury.The internet also provides us with opportunities to spend our holiday £ in foreign parts by piecing together the elements of a holiday.
This is not an exhaustive list but a useful starting point to answer why this type of business should be more vulnerable than, say, Agriculture (0.25%) or Education (0.57%).
Regular readers if this blog will have seen the observation that insolvency has only ONE cause – running out of cash. It is in asking “How did that company run out of cash?” that bankers, regulators, business and researchers will find the answers.
But – do ask the question BEFORE there are signs of cash drying up!
BBC, (2018), Who will the “retail apocalypse” claim in 2018?, available at https://www.bbc.co.uk/news/world-us-canada-42418902
Centre for Retail Research, (2018), available at: http://www.retailresearch.org/whosegonebust.php