Small retailers face unique challenges

Philip Stephenson
small retail
Small retailers don't have the same options as larger retail chains during periods of stress or distress. Philip Stephenson explains the unique challenges they face right now.

The retail sector continues to be impacted by a challenging trading environment, accounting for 16% of insolvencies in the 12 months to February 2024 – the second highest sector total. High-profile administrations this year include The Bodyshop, Ted Baker, and online luxury marketplace sellers:  MatchesFashion and Farfetch.

However, larger retailers can have more options available to them than smaller, independent retailers when facing stress or distress. For example, they may have an existing shareholder-base to call upon or hold more negotiating power with their landlords. SuperDry’s announcement in April 2024 that it was intending to use a restructuring plan to put the business on a more stable footing by seeking an equity raise and rent reductions on underperforming stores illustrates this.

Small retailers often don't have the same choices, and can be family-owned and managed. Many were only able to stay afloat during the pandemic by making use of government loan schemes.

These firms will be facing the following challenges right now:

Limited access to equity investment

Small retailers don't have the same financial resources to draw upon as larger chains, with a limited existing shareholder base to call on. Where larger retailers might attract trade buyers or the attention of foreign retail groups looking for an entry point into the UK, smaller retailers often can't attract private equity or interest from other trade buyers.

Higher cost of debt

Debt service costs are a huge challenge for many businesses, with repayments due on bounce-back loans, Recovery Loan Scheme, CBILS, and rent arrears accrued during the pandemic. The cost of any new debt for small retailers is also significant, driven by higher interest rates together with the risk currently associated with the sector. For example, among SME applications for new credit which were successful in Q4 2023, 33% were offered an interest rate higher than 11% – the highest proportion since 2014, when the Federation of Small Businesses started collecting data. A lack of collateral can also hamper small retailers in accessing debt, although there are different financing options to be considered, including asset-based lending.

Reliance on marketplace providers

Many small retailers are dependent on marketplace sellers, such as Amazon or Etsy. Amazon is introducing new payment terms, delaying payments for one week plus delivery time, which typically equates to 10 days. Originally intended to be implemented in September 2023, the policy has been delayed, with Amazon sellers most recently reporting a new start date of September 2024. While the company says it's implementing this policy to safeguard refunds and claims, it's the small retailers - often heavily reliant on cashflow, who'll be negatively impacted. Etsy has also introduced delayed payments to sellers, with up to 30% of sales withheld for at least 45 days to cover potential customer refunds. Small retailers have little recourse against the sway held by these marketplace providers.

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Cost of labour

It has always been difficult for small retailers to compete for talent against the greater resources of larger competitors and the cost of attracting and retaining staff continues to be a challenge. The annual growth in wages for all UK businesses was 6% in December 2023 to February 2024, and the rise in the national living wage of nearly 10% implemented in April 2024 has had a further knock-on effect for workers across the pay distribution. 

Lack of bargaining power with landlords

While some landlords have been willing to move towards more flexible lease arrangements with rents linked to turnover, small retailers can often lack the same bargaining power with their landlords compared to larger chains. With the current shortage of residential property, landlords faced with tenants asking for flexibility may be more motivated to consider residential developments instead.

Cost of crime

Shoplifting has risen to unprecedented levels, with losses to retailers from customer theft reaching £1.8 billion in 2022/23, up from £950 million the previous year according to the British Retail Consortium’s 2024 Crime Survey. While the retail sector as a whole has spent £1.2 billion in crime prevention measures, smaller retailers are much more limited in what resource they can commit to crime prevention – and report that the police are often not investigating these crimes, making insurance claims difficult. 

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The cost of standing out from the crowd 

Small retailers are often not destination shops, but rely on customer footfall to town or shopping centre, and are disproportionately impacted by reduced discretionary spend: retail sales are currently enduring the longest dip since the pandemic. Without large marketing budgets it can be hard for smaller retailers to make an impact online and compete with attractive payment options, such as BNPL, offered by larger chains. While many large retailers are leveraging technology and AI to forecast customer sentiment and demand, this is something that smaller retailers don't always have the resources to do.

We are experienced advisors in the retail sector and are currently helping many businesses manage these challenges, together with managing the options available to them. 

For more insight or guidance, contact Philip Stephenson.

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