Retail insolvencies rise by 56% to record high

The number of retail business insolvencies jumped 56% in the past year to hit 1,942, up from 1,243 in 2021/22, and the highest levels in at least a decade, new research from international law firm RPC shows. 

Despite the challenges faced by the sector, the insolvency of financially weaker retail businesses is creating opportunities for stronger players, according to the firm. RPC said these businesses may be able to increase their market share through strategic acquisitions of smaller competitors.  

There were 34 retail M&A deals in 2022, of which just under a quarter (eight) were purchases of distressed businesses. High-profile retail sector insolvencies, such as Made.com and Joules, have all been saved by larger retail groups.

One way retailers can make strategic acquisitions is by purchasing businesses via pre-pack administration deals, where the sale of part or all the business is negotiated before the appointment of administrators takes effect.

The smooth transition facilitated by pre-packs enables businesses to continue operating, making them a more attractive asset. Pre-pack administrations can be beneficial in preserving jobs, preventing negative publicity with the impact of losing goodwill and creating a higher return for creditors. 

Finella Fogarty, partner and head of RPC’s restructuring and insolvency practice, said: “Challenging economic conditions over the past year have had the impact of forcing struggling retailers into insolvency. 

“Retailers who are of questionable solvency may want to consider selling through a pre-pack administration if other restructuring options are unavailable to them or if they have failed. Pre-packaged deals ensure continuity and avoid the loss of goodwill and the inevitable uncertainty that comes with a trading administration.”

The current level of insolvencies amongst retailers means a continued supply of newly vacated retail property. 

Fogarty explained that commercial landlords looking to fill these units may likely be more amenable to negotiating terms that are favourable to retail tenants. These may include lower rents, more generous payment terms, turnover-linked rents and greater flexibility in lease duration. 

She said: “Landlords with a surplus of vacant units, particularly those outside of prime locations, will be eager to work with commercial tenants to arrive at a mutually beneficial solution. Some savvy retail operators are building a further lowering of rental costs into their business plans.”