UK retail is facing a perfect storm of rising costs and plummeting consumer confidence. Could an excess of stock be the final nail in the coffin for many in the squeezed mid-market?

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Many retailers were looking to 2022 with something resembling optimism

After more than two years of intermittent Covid lockdowns, ‘pingdemics’, international supply chain snarls, new Brexit legislation and the subsequent whiplash changes to consumer behaviour, many retailers were looking to the end of 2021 and the beginning of 2022 with something resembling optimism.

With no Covid restrictions in the UK, and customers looking to celebrate, a bumper Christmas was in the offing. All retailers needed to do was navigate the international supply chain problems that had dominated the second half of 2021. 

The prevailing wisdom heading into Christmas was to stock up in bulk – at once ensuring good stock levels over the crucial holiday period and limiting the drip-feed of lofty shipping costs from spreading across multiple financial periods. 

At the time this made sense and seemed to lay out a blueprint for dealing with a post-Covid world where costs were already set to rise. 

But fast forward six months or so and the picture looks very different.

Inflation on the rise


Russia’s invasion of Ukraine in February sent inflation into overdrive

While costs were already on the rise at the beginning of the year, Russia’s invasion of Ukraine in February sent inflation into overdrive.

With war in Europe added to the cost mix, UK inflation is well on course to hit double digits in the summer. With the price of energy set to jump again in October, inflation will only get worse heading into Christmas. 

And as prices rise, consumer confidence has plummeted – to an all-time low of -40 in May’s GfK consumer confidence index. Subsequently, sales have slackened and excess stock is building up. 

This problem has already reared its head in the US, where retail stock levels rose faster than sales in May, according to data from banking giant Citi. 

This has led retail titans like Walmart to begin, in the words of chief executive Doug McMillon, “aggressive” rollbacks on prices of high-margin items such as apparel. Meanwhile, American fashion giant Target blamed ballooning stock levels for a first-quarter profit warning last week, while Costco inventories are up 26%.  

While excess stock wasn’t explicitly flagged in any of the welter of profit downgrades from Asos to Halfords and ProCook issued over the past two weeks, many did blame the cost-of-living crisis as a key factor. It would be logical that excess stock is a gathering issue this side of the Atlantic too. 

One banking source says the 37 listed businesses that make up ‘UK retail plc’ have a £2.8bn excess stock millstone around their collective necks. This would be a concern at the best of times, but now seems a potential ticking timebomb with inflation topping 30-plus year highs.

While many larger, better-resourced businesses will be able to absorb the loss of marking down prices and generate enough cash flow to trade through, not all listed businesses will have that ability. 

“The 37 listed businesses that make up ‘UK retail plc’ have a £2.8bn excess stock millstone around their collective necks”

As one retail analyst observed: “If you can’t sell the stock, all you can try and do is liquidate it through promotional activity. But in this environment, for many non-food retailers, people aren’t shopping for their products.” 

Asos was one of a number of retailers that flagged excess stock as an issue last year. However, many retailers were able to liquidate this excess stock by selling it at a markdown in international markets like Central and Eastern Europe.


Asos flagged excess stock as an issue last year

Given the current geopolitical environment, that avenue now appears to be closing, if not entirely shut off. 

“The next option then is to write off that stock as a loss,” the analyst continues. “The bigger retailers can absorb that cost, but your mid-market players can’t. If you can’t sell it or write it off, then you can’t pay your suppliers. If you can’t pay your suppliers, you’re a credit risk and you won’t be able to borrow more money to stay afloat.”

It’s this kind of vicious circle that led to the ultimate demise of Debenhams from the UK high street pre-pandemic – mounds of nearly worthless stock and cash flow that’s too weak to convince lenders that a business is worth saving. 

“There’s a handful of retailers in that mid-market where you’re already starting to see evidence of financial distress,” says one banking source. 

Inflation will only worsen as the year goes on and there’s no real end in sight. As more and wealthier cohorts of consumers are forced to tighten their belts, so more retailers could be affected. In terms of lending, banks are already cutting back.

While mid-market retail proved to be remarkably more resilient than many had first feared through the pandemic, it was undoubtedly helped by a mixture of government intervention and support from lenders. 

With no government support forthcoming for businesses in this latest crisis and financial institutions limiting their exposure, the prognosis for any retailer dragged into this excess stock black hole could be grim.

With retailers already looking towards yet another uncertain Christmas period, it seems all but inevitable now that more retailers will be forced to shutter stores and let go of staff before this crisis is over. 

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