Retail and manufacturing hit by surge of insolvencies

Recent data shows the hospitality, retail, wholesale and manufacturing sectors are the worst hit in Britain when it comes to a recent surge in insolvencies.

According to government figures, says money.co.uk, insolvencies in these industries are at an all-time 30-year high.

The accommodation and food services sector saw the biggest increase between 2022 and 2023, with a staggering 37.8% jump – more than 10% higher than any other sector.

This is likely, experts at money.co.uk said, due to skyrocketing energy bills and costs, and reduced consumer spending as a result of the cost-of-living squeeze during this period.

In retail, insolvencies between 2022 and 2023 increased by 23%, while wholesale and manufacturing business insolvencies increased by 19.3% and 17.9% respectively. 

The Food and Drink Federation’s (FDF) Q1 State of Industry report echoes these concerning figures, and attributes them in part to increased production costs (up by 9.2% over the last year to March).

Although inflation is easing, the FDF said stubborn labour shortages and shipping disruptions will continue to put upward pressure on food and drink businesses, while geopolitical and climate events remain significant risks to food prices, all of which impact the feasibility of remaining solvent.

“Manufacturers are yet to recover from what has been a challenging, unprecedented few years,” the FDF adds. “The last four years saw their costs rise at a faster pace than retail prices, which means that producers have absorbed a share of the cost rises. Businesses have also postponed or cancelled investment projects and diverted those funds to day-to-day operations.”

Tina McKenzie, policy chair of the Federation of Small Businesses (FSB), said, “Retail and hospitality businesses have been hit hard overall by the cost-of-doing business crisis, which saw the cost of everything from electricity and gas to raw materials and finished goods skyrocket. Similar pressures on consumers reduced spending, especially on discretionary items such as luxury food or trips to restaurants.

“There is always a delay between a business experiencing a downturn in trading and having to enter an insolvency process, as business owners understandably do everything they can to stave off the inevitable. This is why we tend to see insolvency numbers peak some months after a recession, as the economic damage works through the system.”

Tina said the FSB’s most recent Small Business Index Research for Q1, found that two-thirds of small businesses in the retail and wholesale sectors cited utilities as a driver of cost changes, notably higher than the 55% of businesses from all sectors who said the same. Inputs were also higher for wholesale and retail firms as a driver of costs, mentioned by 45% in the sector, against 37% of all businesses.

Helen Dickenson, chief executive of the British Retail Consortium, added, “Retail accounted for almost 9% of all company insolvencies in 2023. This represents lost jobs, lost investment, and lost tax contributions for the UK economy. These insolvencies are happening in every part of the country - from small villages to major cities - and they impact not only those employed, but the millions of us who rely on our local retail offering. Instead, we want to retail to head towards a better future – a net zero, digitally transformed, high skilled industry – and the election is the time for political parties to outline how they would support the industry in getting there.”

Despite the doom and gloom, the FDF’s report shows confidence amongst food and drink manufacturing businesses has risen by 20% in Q1 – the highest figure since tracking began, with 84% of businesses focusing on UK sales and NPD. SMEs have had the smallest increases in prices too (3.8%), an indication of the bargaining power these producers have with retailers.

How to avoid insolvency

“Seeking advice from a qualified and reputable source sooner rather than later will help to give businesses in financial distress the best possible chance of pulling through a difficult patch,” said Tina. More widely, small firms will be looking to see what political parties are proposing on areas such as business rates, VAT thresholds, late payments, and more, to try and judge whether the environment they operate in is likely to become more conducive to growth and strong trading levels.”

Business loans expert, Kyle Eaton, said there are seven steps to take which can help.

1. Understand your financial needs – Assess your requirements and estimate how much capital you need and what you need it for. Then create projections to understand the impact additional capital will have on your business. Make detailed financial projections, including cash flow, profit and loss, and balance sheets.

2. Explore other funding sources – Traditional business loans can be viable for established businesses with solid credit histories. Make sure you compare rates and terms. There are also research grants and low-interest government loans available. These often come with favourable terms and can provide significant support. Angel investors and venture capital are worth looking at too. These investors can inject large amounts of capital into a business in exchange for equity. Make sure you’re aligned on vision and goals.

3. Stay disciplined – Stick to a detailed budget, monitor expenses, and adjust as necessary to avoid overspending. Only take on as much debt as you can reasonably manage. And keep a reserve fund to handle unexpected expenses without compromising stability.

4. Work on your business plan – A solid business plan reassures investors and lenders of your vision and strategy. Include market analysis, competitive landscape, marketing strategies and operational plans. You should also identify potential risks, and outline strategies to mitigate them.

5. Build relationships – Communicate openly and honestly with your financial partners, giving regular updates on business progress to build trust and credibility. And use your professional network to get introductions to potential investors or advisors who can offer guidance and support.

6. Monitor performance – Continuously monitor business performance against your projections. Adjust strategies based on performance metrics.

7. Legal compliance – Ensure your business complies with all relevant laws and regulations. Non-compliance can result in fines and damage to your reputation and bottom line.