Rising insolvencies as fiscal support expired
The UK consumer durables market recorded solid growth in 2021, as retail stores value added increased by 7.6%. While demand was up during the holiday season, retailers had to struggle with higher input costs and supply chain bottlenecks (e.g. consumer electronics affected by delayed deliveries from China). As a result, some larger retailers issued profit warnings.
We expect consumer durable sales to decrease this year, as a sharp increase of energy, fuel and food prices curbs discretionary spending. Catch-up effects after the expiry of lockdowns and lifting of travel restrictions have spurred consumer spending on services (e.g. hospitality, travel). This also affects spending on big-ticket items (furniture, domestic appliances) in times of decreasing household purchasing power. We forecast domestic appliances value added to shrink by 3.5% in 2021.
We expect the profit margins of consumer durable retailers to deteriorate in 2022. Between lower demand and strong competition, retailers face serious difficulties in passing on higher input costs for commodities, energy and labour to end-customers. This affects mainly smaller retailers, lacking access to funding and favourable credit terms compared to larger players. While footfall has recovered, brick-and-mortar retailers have to find new ways of enticing consumers into stores and to improve their online offering, because shopping patterns have decisively shifted towards online purchases during the pandemic. Competition between online and offline retailers remains fiercest in the clothing/fashion segment, where during the past couple of years several well-known high-street fashion brands fell into administration.
Payments in the industry take about 60 days on average, and we expect both payment delays and insolvencies to increase in the coming twelve months. Along with higher costs and lower demand, retailers also have to cope with the recent expiry of pandemic-related government support for businesses (a job retention scheme, business rate reliefs, tax deferrals and rent moratoriums). Business failures could increase by up to 50% year-on-year, mainly affecting smaller brick-and-mortar retailers. Therefore, our underwriting stance is currently restrictive, for domestic appliances and furniture retailers in particular.