Closures in retail expected

More retail closures could be in store following the rash of holiday receiverships.

Several retailers were declared insolvent in January, including 10 Stax fashion stores, electronics store Eastern Hi Fi and Christchurch cycle shop Bike HQ.

Three Wellington Mitre 10 stores were put into receivership shortly before Christmas.

PricewaterhouseCoopers partner John Fisk said businesses that had struggled all year often capitulated in the face of holiday wage costs and a slowdown in turnover.

Some retailers were thriving but many had been forced to swallow large rent increases, and there were likely to be some smaller ones hanging on and waiting for their leases to expire so they could close.

Each insolvency was different – in the case of the Mitre 10 stores poor property investments by the owner were blamed – but a common cause was purchasing the wrong stock and being forced to discount it. "That puts pressure on the margins and it can be a slippery slope."

KPMG head of restructuring and insolvency Shaun Adams said the holiday season was traditionally crunch time for struggling retailers.

There had been clusters of retail insolvencies since the downturn began in late 2007.

"Last year there were waves of retail insolvencies that came through after Christmas. I wouldn't say there's been a huge number.

"Last year there were probably three or four key ones but they were nowhere near the size of the Sounds receivership."

Sounds was New Zealand's biggest music store chain when it went into receivership in November 2007.

Retailers acquired a lot of stock on credit in the lead-up to Christmas, and failure to move it during the holiday sales season and pay off creditors prompted managers and funders to make some hard decisions.

Leases often came up for renewal over the summer holidays, meaning retailers could shed some of their long term liabilities before declaring insolvency, he said.

The post-sales period was a good time for banks to pull the plug on underperforming retailers as sale proceeds usually went some way to paying off their overdraft, reducing the banks' exposure.

Mr Fisk said people holding vouchers for insolvent retailers were at the mercy of the receiver or liquidator, who could choose to honour them or render them worthless by classing voucher holders as unsecured creditors.

Retailers teetering on the brink of insolvency might be tempted to trade through the sales season but there were dangers to this and directors should seek professional advice. Businesses could sell stock below its value, give preference to some creditors ahead of others and directors could be held personally liable for reckless trading – for example, for incurring debts without a reasonable chance of being able to repay them.

Retailing was easy to get into.

"Those who are undercapitalised are more affected by the downturn in demand, and those are the ones who will be falling out."

The Dominion Post