SV Partners’ August 2017 Commercial Risk Outlook indicates that 1591 Australian retailers are facing a serious risk of financial failure within the next 12 months. This is up from last year’s 1200, many of which already have gone into administration. Big names such as Marcs, Herringbone, Rhodes & Beckett, Top Shop Australia, and most recently OrotonGroup threw in the towel alongside many smaller brands this year, indicating an increasingly difficult business environment for retailers of all kinds.
This forecast is difficult news for many Australian businesses, who are likely hoping to look forward to a more favourable market in the coming year. Times of financial insecurity such as this, however, also drive the changes that help innovation and entrepreneurship to thrive.
What’s bringing retailers down?
The hardships that retailers are facing aren’t simple and one sided. Instead, a series of compounding issues are driving businesses into financial ruin. While the highest profile cases are big name businesses, the largest and most overarching issues they face are shared by their smaller counterparts.
Since 2014, H&M, Uniqlo, Forever 21, Sephora, and a number of other international giants have expanded into Australia with vigor and, mostly, with resounding success. These highly recognisable low cost brands have drawn revenue away from the country’s established retailers, throwing the business environment out of balance by making the market far more competitive. In 2018, the arrival of Amazon in the country will only exacerbate this issue even more.
Failure to adapt
More competition inevitably leads to leaner times for business owners, as they try to cope with reduced revenues, and work to adapt and to attract more business. Not being able to cut costs and access financing to manage cash flows can quickly force it into a downward spiral.
A business that lacks the working capital it needs to pay its suppliers, employees, and creditors quickly impairs its own ability to continue performing well enough to generate the revenue needed to cover those same costs. Once things have reached that point, it’s very difficult to recover.
Protecting your business as an SME retailer
Small and medium sized retailers need to adapt quickly to survive in this new environment. Unlike large retailers, small businesses normally don’t have the funds to operate at a loss for months or years in hopes of an eventual recovery. What these businesses do have, however, is experience in competing with larger, better-recognisable brands than themselves. While many businesses are failing during this time, there is no reason your small business has to join them.
In lean financial times, the most critical skill to develop for any business owner is cash flow management. For retailers, that means being aware of the tools that are available, and understanding when and how to apply them to benefit their business as much as possible.
Supply Chain Finance
Supply chain finance is an invaluable tool that helps you to stabilise your supply lines while holding on to your own working capital for longer. It does this by financing supplier payments through your financial institution. If a supplier needs an invoice paid to them before it comes due, they can simply offer a discount in exchange for early payment.
Instead of paying out of your own pocket, however, the payment is drawn from a credit fund, which is provided by your financial institution’s investors. This fund doesn’t need to be paid off immediately, and makes it possible to defer payment for weeks or months after the actual due date. That means suppliers can be paid on time, or even early, stabilising them and ensuring their ability to perform, while your business can delay payment, if needed, to help manage its own cash flow issues.
Purchase the wrong stock, and you might be left with a fully stocked and insolvent store. Run into another cash flow issue, and you might simply lack the funds to restock an otherwise successful store. Both scenarios spell trouble for any retailer, and stock loans address both at the same time. Stock loans are secured against themselves, meaning that businesses that don’t have any available security to offer can still get one. This allows them to keep shelves stocked, even when times are hard. Better yet, if the stock doesn’t sell, the lender can simply recover any unpaid balance by repossessing unsold stock at the end of the loan term.
Surviving as an Australian retailer in the coming years will be a struggle for many, including hundreds of small and medium sized businesses. That does not mean, however, that this has to only be a time of hardship. By seizing this time of change as an opportunity to develop your business’ financial flexibility, and working to fill the spaces left behind by others that have failed to adapt, you can work to set your business up as a leader in the new emerging industry ecosystem.