|Retail gloomiest sector about financing environment
The retail sector is the gloomiest of all industries across the UK economy about the prospects of the prevailing financing environment.
This is according to a study of 200 CEOs and CFOs across mid-market firms from financial and business advisors Grant Thornton UK LLP.
'The finance flow – will the money start moving in 2011?', revealsAlmost a quarter of retailers believe that the financing environment will deteriorate over the coming year, while a
further 30% see no likely improvement. In addition, half of company chiefs who rated the market as static or declining are not predicting an improvement in conditions until 2013 or beyond –
by far the most pessimistic forecast among all industries polled.
The retail sectors feeling the pinch the most are businesses focussing on the sale of higher value items such as cars, furniture, carpets, and certain electrical goods. In contrast,
retailers of essentials, mainly the supermarkets, have fared better, as have DIY chains.
Poor access to capital
Retail businesses appear to be facing especially tough conditions when it comes to accessing bank funding compared to peers in other sectors. In total, 60% of retail respondents rate the
banks as being more conservative now than they have been over the past 12-18 months, and a further 13% see no change. In contrast, across all other business sectors, less than 40% of
respondents rate banks as more conservative. Retailers are also more pessimistic about future progress, with only 27% of respondents saying they see an improvement in bank lending, compared
to 38% across all business sectors.
Cash flow remains the biggest hurdle, with 90% of respondents citing this as something banks would examine, compared to 66% in the other sectors sampled. Retailers also reported higher
scrutiny from banks than the rest of the sample across all other metrics - from business plans to historical earnings - suggesting that retail businesses looking to raise capital are much
more likely to have to tick all the boxes for the banks.
Tim Hansell, Corporate Finance Director at Grant Thornton UK LLP, says: "The fact that retail groups are finding the lending environment difficult is not a new phenomenon – the banks have
treated the retail sector with considerable caution for some time now.
"However, despite the current weakness in consumer confidence, investor appetite still remains high to provide equity funding to support growth in certain niche fast-growing segments of the
UK retail sector, such as online retail. The current economic backdrop aside, with the ongoing channel shift from the high street to online continuing to build momentum we expect to see
future growth in this area."
"Lenders are however still cautious about providing leverage to 'new to bank' retail customers, and leverage multiples in retail/online transactions continue to be conservative, particularly
where the off balance sheet rent roll is significant."
Strategies to counter the downturn
Retailers are also the least likely to have explored the potential for raising capital from alternative funding providers to support their growth strategies. However, opportunities do exist,
especially from within the ranks of private equity backers both in the UK and internationally, as seen across a range of deals over the last few months.
Hansell explains: "Private equity has been a consistent supporter of the retail sector and has reaped huge rewards from backing high quality businesses in the past. More recently, however,
the record has been somewhat mixed, with the double-whammy of the consumer recession and over-leveraged businesses leading to some high-profile failures. Notwithstanding this, we have seen
significant private equity interest in the sector, focussed on businesses with robust propositions, typically those in a unique market position such as HobbyCraft."
"Funding for retail deals continues to be challenging, and presenting well-thought-through business plans that will stand up to the rigours of lender credit committees is more important than
ever. The winners – both investors and businesses - will emerge from those who are willing to embrace innovation and technology in their business model as well as their approach to the
consumer." Hansell concludes.