Restructuring Trends

Trouble in store - how can retailers deal with the headwinds?

The wave of distress among retailers that many had predicted for early 2017 is now materialising in certain parts of the middle market. While many larger retailers delivered positive Christmas trading results, they were also tempered with cautious messages about the future.

This time last year, the real debate was whether cost pressures would overwhelm retailers, but they weathered the storm and there were relatively few failures in 2016. This year we predict retailers will face a new set of headwinds, which could have a different outcome. The evidence so far is that while there is no overall toxic environment affecting consumer demand, the retail casualties are those whose long established brands have been left behind by their customers.

Outlook according to the consumer

If in doubt, ask the customer. Despite Brexit, the consumer remained confident and resilient in the second half of 2016, although this confidence tailed off towards the end of the year with increasing fears about the economy.

Our recent survey has identified problems in 2017 among the group we term ‘pressured families’, who are aged between 35-54 years and who expect their disposable income in the next 12 months to fall. The sentiment we found was that these consumers plan to spend less across the board (eating out, clothing, fashion, holidays, etc.) over the next 12 months. Interestingly, lower spending is likely to be driven more by buying less, rather than trading down or trading out so discounters and value propositions may not necessarily be sheltered from these factors.

The UK economy has remained resilient since the Brexit vote. This reflects somewhat stronger global growth, easier UK monetary policy and continued robust UK consumer spending in the second half of 2016. But real income growth looks set to slow in 2017, as inflation rises sharply and job growth slows. The retail sales data from March supports the hypothesis of a slow-down.

Our main economic scenario is for UK GDP growth to slow to around 1.5% in 2017, with consumer spending growth easing to about 2%. Clearly considerable uncertainties remain both about Brexit and the wider global outlook.

Changing fundamentals

The economic fundamentals for retailers have and continue to shift in areas such as:

Sterling’s weakness has now been permanently added to the ever-growing list of factors putting upward pressure on retailers’ costs, such as increased business rates, the rising National Living Wage, and higher fuel prices. This is a difficult choice whether to raise prices and pass cost on to consumers, squeeze suppliers to try and pass cost up the chain, or absorb the costs themselves.

Consumer debt, which has supported spending over the last 12 months, is at record levels, clearly prompting the question, ‘how high can it go?’ There are mixed predictions but when the Bank of England Financial Policy Committee starts to raise concerns, they should not be ignored.

Thirdly, retail footfall in most locations has dropped, and the pain has not been limited to the high street: shopping centres and out-of-town retail parks have both shown consistent year-on-year declines as well. In-store sales fell by 1.2% in the final quarter of 2016, while online grew by 7.2%. We have expressed caution about businesses with too much high street exposure since the mid 2000's. Recent data has been slightly better on overall vacancy rates, but the trend in longer-term vacant property has deteriorated. Retailers, especially those with large store portfolios in secondary towns, still need to address this issue. Larger retailers have announced store closure programmes and our opinion is that high street’s future is not particularly rosy from a pure retail perspective.

What can retailers do in 2017?

Retailers need to stay nimble and to innovate across multiple areas, taking into consideration the often overused phrase ‘multi-channel strategy’. Some of the 2017 failures so far have been driven by lack of online investment (measured relative to competitors and their core customer requirements), lack of any distinctiveness (especially in fashion chains pretending to be middle or upper mid-market), historic lack of capex, poor management, poor systems, old stock, uncontrolled stock, and too many loss making, over-rented stores. Does that sound pretty familiar? 

Working capital

Perhaps less well trodden is the opportunity for retailers in working capital - we estimate that there is a €112bn opportunity to release cash in the retail industry worldwide, based on findings from the latest PwC Working Capital report and the analysis of 1,000+ globally listed companies representing €3.7 trillion in sales. The largest opportunity in value terms and relative to sales is in the general merchandising sub-sector.

To capitalise on these opportunities and achieve sustainable working capital improvements, management teams will have to look at a number of levers within their businesses.  These include addressing broad strategic issues such as sourcing strategy and SKU rationalisation through to detailed areas of supplier terms and conditions and payment process optimisation.

With a prize this large and the level of margin pressure we expect to see over 2017, working capital improvement is the area that no retailer can afford to ignore.


Despite excess liquidity in the debt markets, with banks and credit funds alike chasing too few lending opportunities, lenders in general remain particularly cautious about the UK retail sector.

Whilst consumer confidence and retailers’ performance have held up better than expected since the Brexit vote, most lenders view the sector as challenging, anticipating a squeeze in retailers’ margins – this was probably the sector which caused most concerns for lenders immediately after the referendum. 

We believe companies in the sector with upcoming debt maturities (in the next 18 – 24 months) should engage with their lenders earlier than they might normally and consider widening their finance raising processes to manage contingency. They should also approach likely leverage ratios very cautiously.


There are some clearer signs from the first quarter of 2017 that all is not rosy in the retail sector. Some of the failures so far have been businesses which have struggled for a number of years. The cost pressures and competition from all sides, but notably online, are proving unsustainable in several cases. Levers such as working capital are important but they must be used all day every day, and not just in a crisis.

Management teams should also be realistic - there are strategic buyers and refinancers of distressed retailers but like all problems they should be addressed before the horse has bolted.

Contact us

Mike Jervis

Mike Jervis

Partner, Restructuring and Insolvency, PwC United Kingdom

Tel: +44 (0)7768 336225

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