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Will COVID-19 be the nail in the coffin for UK retail?

By Clotilde Gros
03 April 2020
Consumer Industries

By Clotilde Gros

The retail industry is the UK's largest private sector employer with almost three million workers. It is a vital part of the economy, generating sales of over £381 billion in 2018 (source: BRC). Therefore, it is no surprise that the UK Government launched a number of initiates to support the sector through the COVID-19 crisis. However, in these uncertain times, there is no guarantee that this support will ensure the sector’s long-term viability.

From the outset of this crisis, the immediate pressure on cashflows and liquidity for most retailers has been evident. Following the Government instruction to shut down non-essential stores, cash has been drying up quickly. Bricks & mortar retailers, who have managed to navigate through a number of challenges since 2008, are now facing a brutal new way of life, heavily reliant on (in many cases non-existent) cash piles. Online-only retailers, who had been the winners of the last decade, are also facing increased pressure to shut down operations to help slow the pandemic.

There is no doubt that those with cash will be in a stronger position to navigate through this crisis. Whilst some of the pressures to pay overheads will be mitigated by Government support, retailers will need to find new ways to manage costs tightly. What does this mean in reality? Either they cut back on buying new stock or look at ways to reduce costs such as, delaying payment terms with suppliers and landlords or laying-off staff.

We are already seeing a number of retailers delaying payment terms to suppliers in order to improve their own financial position.  JD Sports and Primark, amongst other big names and thousands of small retailers have already taken advantage of the emergency legislation and stopped making rent payments in order to stay afloat. Whilst legally speaking, delayed payments are an option for all, it is important for companies to consider the reputational risks of doing so if they have the cash to continue payments as normal. Adidas recently made the headlines for withholding rental payments despite having cash in the bank to pay them.

Discussions with landlords to move quarterly rent payments to monthly payments are ongoing. Disputes also look set to arise in the UK over service charges in shopping centres where, for instance, supermarkets and pharmacies have continued trading while other retailers have been forced to shut due to the lockdown. The one piece of good news is that they all are taking these radical actions to protect the staff they are employing. But for how long?

According to the Deputy Chief Medical Officer, Dr Jenny Harries, it is very unlikely that life will return to normal before September, and so the question is, can UK retail survive that long? Much of the immediate liquidity squeeze will unwind as and when inventories can be sold.  What will happen to these lovely summer dresses or shorts in inventories ready for the SS20 sale? As Lord Wolfson stated: “People don’t buy new outfits to stay at home.” Needless to say, retailers face another layer of larger overall relative cash loss and disruption.

In an event like COVID-19, reputation is key for those looking to survive in the eyes of the consumer. The whole world is united in facing this unprecedented and frightening new challenge and that is why reputations can make or break a company. In the last couple of weeks, a number of CEOs have come under fire for deciding to keep non-essential stores open or for continuing to trade online, putting their own staff at risk of becoming sick. Their excuse is often that they are trying to save jobs, but it is hard for consumers to see anything other than a company going against public health advice in favour of the bottom line. Six months is a long time away and perhaps poorly behaving companies are banking on consumers simply forgetting their bad behaviour when life returns to normal? I certainly hope not.

It is unclear which retailers will emerge intact from the pandemic, but one thing is for sure, significant restructurings will need to take place to significantly modify the financial and operational aspects of the survivors in order to limit damage and improve business efficiencies.

Right now, we are all concentrating on managing the short-term impact of COVID-19. But it is also important to focus on how businesses can emerge from this crisis. Short-term cash management will buy some time but it will not secure the long-term viability of the business. However, the extent to which retailers act as responsible citizens might not only strengthen brand loyalty but define their reputation for years to come.