The increase in insolvencies in the retail sector over the last 5 years shows no sign of slowing down. Research carried out by The Insolvency Service found that 17,243 companies entered insolvency last year, rising 4.2 per cent year-on-year.
Rising business rates and the increased staff costs following the introduction of the National Living Wage have resulted in retailers having to increase prices or lower profit margins to meet these costs. Accountancy firm Moore Stephens found that 19% of UK clothing retailers are currently exhibiting early warning signs that they are at risk of becoming insolvent. On top of this, the cost of the store itself with rising rents and maintenance of the building are adding to retailers’ woes.
Online retailers are largely sheltered from these costs. With more manageable bills for business rates, lower payroll and less rent to pay it is not surprising that sales at the UK’s top 20 online-only retailers increased by 23% last year to £8.4billion, whilst footfall on the high street fell by 6% in March 2018 (according to recent research from RPC LLP).
With increased competition and developments in technology it is becoming more common for consumers to shop online for the best deals. The need for physical shops on the high street is decreasing. It is simply not worth retailers bearing the costs of a store when many of their sales have shifted to online purchases.
With many companies facing financial difficulties due to the costs of running a store and the shift to online retailing, it is not surprising to hear that even the larger of the traditional high street shops are looking to their landlords to help ease the pain by reducing rents or seeking to re-negotiate the terms of their existing lease in a bid to reduce their costs. Unfortunately, many commercial leases restrict the Tenant’s ability to end the lease early or assign or sublet any expensive excess space which makes it increasingly difficult for the company to stay above water. The best known and most recent example is House of Fraser who recently announced that they were looking for a Company Voluntary Arrangement to try and restructure its portfolio in an attempt to reduce their costs.
Retail companies who are just starting out need to bear in mind the cost that will be incurred in running a business on the high-street before they tie themselves into a lease for a term of years which is too long or too restrictive on the ability to sub-let or assign the premises should the business not develop as anticipated.
Entering into a lease, in particular a retail shop, can be a very complex matter which should not be undertaken without professional advice. If you are seeking advice on taking out a new commercial lease or have found that the terms of your current lease are making it hard for your business to remain solvent following the current retail trend of online shopping then do not hesitate to contact us. Call 0845 287 0939 or submit your enquiry online.