Blair Nimmo, head of Restructuring at KPMG in the UK comments on industries facing stress in 2019.
With the latest corporate insolvency data signalling that the number of companies entering into administration is starting to rise after a prolonged period of benign activity, KPMG’s Restructuring practice shines a light on five key sectors which it believes will come under significant pressure in 2019 – retail, casual dining, small domestic energy suppliers, logistics and automotive.
According to the latest analysis of notices published in the London Gazette, the number of companies entering into insolvency during October 2018 was the largest monthly total (131) for almost five years - since February 2014 which saw 145 insolvencies.
This follows the most recent quarterly data published by the Insolvency Service which showed a similar rising trend in the total number of corporate insolvencies, with Q3 2018 up on both the previous quarter, and the same quarter in 2017.
Blair Nimmo, head of Restructuring at KPMG in the UK, says: “For a long time now, we have witnessed relatively low corporate attrition rates as companies – and lenders – adjusted to business as usual following the last financial crisis. However, we now may see the needle on the dial starting to shift once more, as a confluence of factors including mounting political and economic uncertainty, fragile consumer confidence, rising wage and raw material costs, and the threat of a potential working capital crunch start to loom large.
“While no sector is immune from these factors, there are five industries which we believe may feel these pinch points most acutely as we head into 2019.”
Retail and Casual Dining
Blair Nimmo explained: “The travails of the retail and casual dining sectors over the last 12 months have been well publicised, and there’s no doubt that all eyes will be on those Christmas trading figures published in January. It is undeniable that consumer attitudes towards spending are materially changing, whether it be the trend towards shopping online, continued uncertainty around Brexit or workers still feeling squeezed on their wages. For any company operating on the high street, increased costs as a result of the living wage, business rates and rising raw material costs have turned these pressures into something of a perfect storm.
“In 2018, a number of retail and casual dining chains survived through the implementation of successful CVAs or via pre-pack administrations, and I certainly expect this to continue into the New Year.”
Domestic Energy Suppliers
Blair Nimmo continued: “The last few months of 2018 saw a sudden spike in the number of smaller domestic energy suppliers falling into administration, including Spark Energy.
“Opening up competition in the energy supply sector is undoubtedly a good thing – the ever-increasing market share of independent suppliers versus the ‘big 6’ over recent years has offered customers more choice, and significant savings on their bills.
“However, the fact remains that a majority of challenger suppliers are relatively young, and need to reach a critical mass of customer numbers within a relatively short period of time in order to be financially viable. Some of these companies have been selling at a low or even loss-making margin to attract customers via switching sites, hoping that they will stay once an initial contract expires and rates are increased. But at the end of the day, the size of the market for domestic energy supply is limited by the number of households in the UK, so competing solely on the best price is a zero-sum game.
“While there have been some notable successes, trading can be challenging – these are regulated businesses which are operationally and technologically complex. High sales, appropriate hedging and significant capital backing are ingredients for stability and success, but not always possible.
“Additionally, the renewables obligation certificate (ROC) payment due at the end of October was a struggle for some companies, leaving them short of cash reserves for winter, or worse, facing a liquidity crisis. Those companies which were not able to the make the payment in time, now face the uncertainly of potential sanctions. As a result, we predict further consolidation across the energy supply sector in the year ahead, with some insolvencies inevitable.”
Blair Nimmo said: “The logistics and parcel sector is another that is in a period of unprecedented disruption. The rise of the gig economy, arrival of new entrants and ever-greater consumer demands continue to create sustained operational and financial pressures. Companies in this space are now in a perpetual race to identify cost efficiencies whilst ensuring deliveries are dependable and sustainable.
“There are also other issues at play. Rising fuel and tyre costs continue to squeeze margins, and the industry faces people challenges too – the industry employs a significant volume of non-UK employees who may be impacted by Brexit, plus its workforce is ageing - the average age of drivers is 54 years old.
“All of these factors are leading to a period of sector consolidation and the reorganisation of various operating models. This is particularly prevalent in the mid-market where establishing a strong USP is more difficult and opportunities for scale efficiencies are less available. Non-core services are therefore likely to be divested or mothballed as firms double-down on specialist areas.”
Blair Nimmo said: “Companies who operate and supply into the automotive sector – which itself is undergoing a significant period of change and disruption - will also be feeling the impact of fragile consumer sentiment.
“The increased take-up of electric vehicles and the move away from diesel is undoubtedly changing the sales mix – although arguably this may in the short-term generate a greater market opportunity for dealers of second hand vehicles. Over the longer term however, the use of autonomous vehicles and mobility as a service is likely to lead to overall significantly lower volumes of car sales.
He continued: “Over the coming years, we therefore expect there to be a significant amount of consolidation in the market, which may in turn start to feed through into the number of insolvencies. In particular, motor dealerships, but particularly those smaller family-owned businesses or those in the mid-market sector, should now start considering their longer term strategies and business plans.”
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About KPMG in the UK
KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 16,300 partners and staff. The UK firm recorded a revenue of £2.338 billion in the year ended 30 September 2018. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 154 countries and has 200,000 professionals working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.