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Retail’s nightmare before Christmas begins with September cash crunch

Santa Claus isn’t coming to town just yet, but retailers already have one eye on what could be a make-or-break festive period this year with the coronavirus threatening to steal Christmas.

26th Aug 2020
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September will be a pivotal month, experts have told AccountingWEB, with the end of the government’s furlough scheme on the horizon and redundancies stacking up just as businesses require extra cash to stock up their wares for the busiest period of the year.

“Cashflow is going to be crucial for retailers in the run-up to Christmas,” said Richard Pilmore, director of Derby-based accountants and bookkeepers RLTP. “It could be the difference between a company surviving or closing for good if it manages its cashflow poorly.”

Spending on stock and new lines is the main focus now, said Mike Stanley, lender partnerships manager at intelligent cashflow management and funding platform Fluidly, meaning firms constantly need access to available cash and it’s likely many will resort to additional loans. “We would advise customers to play out more than one scenario and discuss it with their accountant,” he said.

Better watch out

Unlike previous years, where seasonal demand follows a pattern and retailers gain insights on popular lines as well as staffing needs and stock levels, there are new unknowns, said Stanley.

“Businesses will have to base investment decisions on some key assumptions, and will likely need additional support from their accountant,” he said. Inevitably, this could lead to a serious liquidity crunch at a critical time, Stanley said, leaving them “in grave danger of insolvency” if they don’t get it right.

The next four weeks will be pivotal, experts agreed.

“September will provide a temperature check of what retailers need to adjust to achieve desirable results over the Christmas period,” said Sabrina Benjamin, founder of booking tool Q Manager. “Cashflow will be at the top of every retailer’s objectives. Everyone will be taking a closer look at their investment in product, range and buying quantities.”

It’s only just begun

Retailers have shed jobs during the year to August at the fastest rate since 2009, according to the CBI’s monthly distributive trades survey, with an even steeper decline anticipated for the figures to September.

The business lobby group this week said the outlook was expected to further deteriorate in the autumn, as more than half of retailers expect to cut the number of employees in the next three months as the pandemic continues to drag consumer confidence.

“The end of September may trigger more redundancies due to notice periods, and a reduction in the percentage of funding that employers receive,” said Pilmore. “September will play a vital role in the recovery of the UK economy.”

Some 74% of eligible retail businesses claimed financial support from the government’s job retention scheme. The taps are being turned off in October, and it is expected that many of the workers currently furloughed some 6.8m at the end of June, may be laid off as the scheme is wound down.

“As we come out of the Christmas period, it won't be surprising to see more retail casualties,” Benjamin said, adding that the strain may even force stores to do the one thing shoppers complain about every year: “It will not be surprising, if the pressure results in retailers putting their Christmas range out even earlier.”

Online all the way

“Given the continued uncertainty, retailers must consider an online presence as there is likely to be subdued footfall in town centres and retail outlets in the Christmas run-up,” added Allan Cadman, director at Poppleton & Appleby and North West Chairman of R3, the trade body for the UK’s insolvency and restructuring profession.

Spending habits have skewed dramatically towards online during the lockdown as consumers adjust to life away from the workplace, for businesses without significant internet exposure, now is the time to revisit that strategy, said Julie Palmer, partner at Begbies Traynor.

“With online sales seeing a threefold rise in the last ten years, coupled with the ongoing effect on shopping habits during the crisis which has seen online sales soar, many consumers will focus on this sales channel for the immediate future and retailers will have to respond accordingly,” she said.

The CBI survey revealed the move toward online sales continued strongly through August with the retail internet sales score broadly unchanged over the past three months.

For some firms it means a complete rethink of their physical presence entirely, explained Nick Tiley, portfolio FD and founder and director of Cambridge Financial Direction Ltd.

One of Tiley’s clients is a niche retail group, and last autumn he was refining the strategy as the firm coped with “the usual cocktail of misery” afflicting much of retail, reduced footfall, shrunken margins from increased online competition, burdensome business rates, landlords wanting rent increases and ever-higher staff costs.

“We modelled reducing from four stores to two or three, and low-cost pop-up stores with minimal fit-out costs,” he said. “In March we were handed our new strategy – no stores at all.  We quickly pulled stock from the stores back to the central warehouse and became an online-only retailer. Running at 40% of normal sales with just 20% of costs (thanks to furlough) provided a survival strategy, but there is new debt to service later.”

The four stores have now reopened, some reduced in size, on an appointment-only basis for “consultations”, with the majority of sales being made online, Tiley said.

“The delivery of online orders needs to be slick, so larger items are now delivered directly from the manufacturer / distributor to the customer with no stock held by the business,” he said. “Stock of some smaller items is funded through consignment - self-billing - arrangements, and agreements have been made to support seasonal peaks through supplier finance - extended credit terms or display stock funding.”

Every time a till rings

High street stores have the added complexity of Covid health and safety restrictions this time around, requiring them to further protect the premises as they try to tempt customers back to their stores.

“This requires careful planning around the safety measures that follow government guidance will be essential,” Palmer said.

There will be limits on shopper numbers, protective screens at tills and the closure of cafes and fitting rooms in fashion stores, Palmer said. This will go hand-in-hand with new ways of dealing with customer interaction.

“Systems that include drop boxes for those wishing to return items or using retail car parks for the collection of online orders, can help provide a new way of meeting customer service expectations,” she said.

Retailers should plan now for a reduction in sales accordingly over the Christmas period, added Pimore, as many people have seen a reduction in their own income they will look to cut luxuries that they cannot afford this year.

“Retailers will need to get creative to get shoppers through the door,” he said.

Look to the future now

More than ever there will need to be a fine balancing act between stock held and cash spent for retailers to survive, said Pilmore. “Retailers could stock less and order more often to increase liquidity to keep their stores stocked. This will allow for cash to flow in for more stock to be purchased.”

Stores should practice caution when ordering, look carefully at their supply terms and think about a possible sale or return strategies, added Cadman.

“The upcoming Christmas promotions usually begin in September and this year will be like no other in living memory,” he said.

Other approaches could include development of a pre-order and deposit procedure for certain types of goods, he said, adding that firms will need to be aware of supply chains which have already been affected by the pandemic.

“Longer-term strategies such as forbearance in terms of rent deferrals or re-negotiation should continue to be pursued with landlords,” he said. “Retailers need to be imaginative in their approach and try to avoid introducing personal funds or security as a way to solve a cashflow crisis.”

Replies (4)

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By k743snx
27th Aug 2020 13:10

Coming next from Mark Taylor - in-depth analyses of:

1. the religious affiliation of the Papacy.

2. what bears do in wooded areas after a big meal and a sleep

Thanks (2)
Replying to k743snx:
John Stokdyk, AccountingWEB head of insight
By John Stokdyk
07th Sep 2020 09:52

Please don't shoot the messenger here. Mark Taylor is a competent financial journalist, who delivered an article on a subject we asked him to write.

As part of our business-focused coverage this autumn, we've been looking at some of the sectors worst affected by coronavirus such as the arts, hospitality and retail.

You may feel it's stating the bleeding obvious, but I found it useful to get a detailed view of how the downturn and cash shortfalls were playing out in these sectors.

What would you suggest AccountingWEB does to make its content more relevant? Perhaps we could begin that process by hearing how your industry has dealt with the crisis?

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Replying to John Stokdyk:
avatar
By John Isabel
18th Sep 2020 10:46

John Stokdyk wrote:

You may feel it's stating the bleeding obvious, but I found it useful to get a detailed view of how the downturn and cash shortfalls were playing out in these sectors.

Please read the rules at https://www.accountingweb.co.uk/any-answers/how-to-use-any-answers. This is intended to be a happy, clappy, place, remember. If you cant be nicey nicey then "back away from the keyboard"

Thanks (2)
Replying to John Isabel:
By k743snx
18th Sep 2020 16:03

Thanks for the support John (Isabel).

Pleased its just a light rap on the knuckles. I was expecting to fall victim to the Great Assault On Free Speech that we're currently experiencing.
Where's my sackcloth and ashes?

Thanks (1)