Suppliers to the retail sector are being urged to monitor payment risk closely as businesses enter the critical Christmas trading period against a backdrop of weak consumer confidence and rising costs.
Trade credit insurer Atradius says the golden quarter could expose a growing divide between resilient retailers, who are able to keep investing, and those facing greater financial pressure.
Atradius’ latest claims data shows claims received from insured UK businesses rose nearly 13% MoM in September, with retail among the sectors recording an increase.
This comes as wider industry indicators point to challenging trading conditions ahead of the golden quarter. GfK’s UK Consumer Confidence Index fell 11 points to -24 in October, the sharpest monthly fall since April 2020. UK retail footfall fell 2.9% YoY in September, a sharper decline than the 1.7% fall recorded in August.
Meanwhile, the CBI’s September Distributive Trades Survey found that retailers had cut orders placed with suppliers at the fastest rate since the survey began in 1983.
Atradius says the headline picture masks significant differences across the retail sector: "Businesses selling higher-value discretionary products remain particularly exposed to cautious consumer spending, including areas such as furniture, home furnishings and major domestic appliances. Fashion businesses have also faced pressure from intense competition and changing consumer behaviour.
"Being online does not in itself insulate a business from financial pressure. The rapid expansion of ecommerce since the Covid-19 pandemic has created both opportunities and challenges for businesses, with factors including debt levels, operating costs, access to finance and the ability to generate cash becoming increasingly important.
"The final quarter is particularly significant as retailers build stock ahead of Black Friday and Christmas, meaning suppliers can increase their exposure as they extend more credit during the seasonal peak. This can lead to an increase in requests for trade credit cover, as suppliers seek protection against the risk of customers failing to pay."
Ruby Hartery, retail senior underwriter at Atradius, comments: “Retail is entering the most important trading period of the year against a difficult backdrop. The next few weeks, including Black Friday and the run-up to Christmas, will be a major test of consumer demand. But strong sales alone do not necessarily mean strong cashflow.
“Businesses such as Next and M&S continue to perform strongly despite the wider pressures on the sector, having invested heavily over recent years in stores, customer experience and online. What tends to distinguish the stronger performers is their ability to generate cash, continue investing and adapt to changing consumer behaviour.
“Retailers do not necessarily fail because they are loss-making. Cashflow is often the critical issue. A business can be profitable but still come under significant pressure if the cash coming in isn’t enough to meet its financial commitments.
“For suppliers, changes in payment behaviour can provide an early warning that a customer is under pressure. Requests to extend payment terms, persistent late payment or unusual changes in ordering behaviour should all prompt closer scrutiny.
“The golden quarter can provide an important boost, but suppliers also need to think beyond Christmas. A retailer still needs sufficient liquidity to enter the new year in a strong position once the seasonal peak has passed.”
