How the energy crisis is impacting UK retail businesses
The retail sector has faced a lot of challenges in the last few years. Many retailers were forced to close down their physical stores or forced to work with considerable restrictions as a result of government measures to prevent the spread of covid-19. As a result, business growth was brought to a stand still for many retailers.
Although businesses have been able to operate without covid restrictions since mid way through 2021, a number of other major challenges have ensued, and many of them can be linked directly to rising energy costs.
Rising energy bills
Higher energy bills have affected everyone. The costs of gas and electricity have been considerably inflated to the point where many retail businesses are seeing their already tight budgets squeezed to the brink. With so many businesses still recovering from the effects of the pandemic, including paying back the loans that helped them to survive during this time, the expectation that the energy crisis will continue throughout the year will place a huge strain on businesses.
In addition to the direct implications of increased energy bills, businesses across all sections of retail are also experiencing falling sales. Just like businesses, consumers are greatly affected by energy inflation, meaning that they have less disposable income, so purchases are fewer and far between.
A further worry for retailers is the potential for power outages, which could massively affect productivity, preventing stores from opening.
In addition to certain goods being more difficult to source due to supply chain disruptions, particularly as a result of Brexit, increased supply costs can also be linked to rising energy costs. Triggered by gas and electricity inflation, the cost of transport has increased, so retailers must now spend considerably more to obtain the goods they need to operate their business.
Businesses in all sectors are working hard to recover from the effects of covid through growth, however, increased energy costs are stifling this growth considerably. In addition to repaying covid related loans, many retail businesses are being forced to secure more financial help to counter the costs of running a business, in particular, rising energy costs. FRP Advisory’s report found that 21% of retail businesses took on new debt last year, whilst 68% of businesses responding to the report expected to seek increased support from lenders in 2023.
Even businesses who are not seeking extra finances through lending are finding that when resources are limited, it is a necessity to commit financial resources to keeping electricity and heating on rather than investing in growth initiatives. FRP Advisory’s report found that 60% of retailers specified increased energy costs as the biggest pressure on their profit margins.
Retail business insolvency
With the extensive challenges faced by businesses in the retail sector in recent times, the number of company insolvencies are expected to see a steep rise. In 2023, a large percentage of retailers expect increased pressure from creditors. For example, 72% of retail businesses anticipated CCJs or winding up petitions this year. Just over a fifth of retail businesses in the report expected pressure from creditors to be ‘extreme’.
Whilst some caps have been put on energy costs for households, this is not the case for businesses. As debts build, energy companies, along with other creditors affected by energy costs, will be putting pressure on debtors in order for debts to be repaid. Many retailers expect that they will face insolvency as a result of building costs and debts.
For businesses that are experiencing financial difficulties or facing insolvency as a result of factors linked to energy inflation, it’s important to seek independent advice at the earliest opportunity possible. As licensed insolvency practitioners, we help businesses to find the best options going forward.