Every year, in the run-up to Christmas, the retail sector comes onto business-recovery radar screens and stays there to the end of January.
Traditionally, if retailers got through this period unscathed, the lenders would probably fund the working capital cycle through the following 12 months.
But the rules of the game have changed: lenders are manifesting a shift in attitude and a single lack of appetite for new money.
PricewaterhouseCoopers (PwC) business recovery advisers, who specialise in the retail sector, highlight an ominous set of circumstances:
Trading remains challenging
Consumers’ discretionary spending maintains its decline
The supermarkets continue to affect the high street (Verdict estimates non-food sales of£20 billion last year, against£13 billion in 2002)
Lenders are particularly wary of increasing their exposure to the high street
Investors’ appetite for buying into retail exits is diminishing
Landlords lack sympathy for retailers trying to pay quarterly rent bills on a monthly basis
Credit insurers are taking a harder line for fear of hitting losses later on
Suppliers are sticking to trading terms
These phenomena are well-publicised, but must not be underestimated – especially given their coincidental impact. For example, retail restructurings typically shed at least a third of the estate to create a viable business.
Success or at least survival, depends more than ever on that equally well-known edict of managing for cash. Warren Buffett famously likes to buy companies that generate so much cash they drown in it. The credit crunch and crises of confidence all come down to cash flows. And, when cash ebbs – from company coffers and household budgets alike – and borrowing lifelines break, that’s when the drowning turns serious.
PwC’s advisers re-emphasise the importance of managing the business for cash – even at the expense of margin and profit. It is crucial, they say, to understand the real levers.
This sounds obvious, but must be seen in the context of the lenders’ reluctance to fund any new-money requests. The debt markets are open, but requests need proper presentation to the right lenders (for instance, asset-based lending increased 12 per cent last year).
Eliminating new-money requests will be key for retailers to survive. There are four main stepping stones to guide them:
Formulate a structured 13-week cash horizon for the business
Think ahead by stress-testing the business model to understand pressure points and anticipate stakeholder behaviour
Explore every way to release cash and value from the business
Do not leave it all to the last minute
And, lastly, keep your head above water.
Michael Poynor is chief retail adviser to PricewaterhouseCoopers