Retailers and franchises continue to face tough market conditions due to ongoing mortgage stress and the knock-on effects of reduced consumer spending.
The announcement this week that Brisbane franchise business The Outdoor Furniture Specialists is entering voluntary administration follows hot on the heels this month of other homegrown brands Maggie T and Diana Ferrari having to go down the same path.
And experts in the field warn that more will follow unless they urgently address the issues of non-payment and shore up their cashflow.
The early part of the year is traditionally slower for retailers as Australians come down off the retail high of the Christmas period. The post-Christmas period sees a spike in insolvencies and retailers need to have an outstanding seasonal sales period to avoid financial difficulty during the loss-making first quarter of the year.
Mark Hoppe, managing director ANZ, Atradius, said, “Mortgage stress is causing Australian consumers to spend less money on retail items like clothes and furniture. Australia’s private debt is amongst the highest in the world and, as banks keep issuing more and higher mortgages, the impact on the retail market will be felt even more keenly…it’s crucial retailers and franchises protect themselves.”
Andrew Spring, Partner at Jirsch Sutherland emphasised the additional pressures that the franchise sector face in a tough retail climate.
“The challenge is a question of balance,” Spring said. “All franchise models must find the right balance between the cost structure established by the franchisor and the support expectations of the franchisees. If the franchise relationship cannot find its equilibrium then the model will impede the success of both franchisor and franchisee.
“This, coupled with the difficulties associated with an already challenging retail environment, is likely to continue to mean that we will see further insolvencies in the franchising sector,” Spring cautioned.
Hoppe highlighted the knock-on effect of a retail slowdown on businesses throughout the supply chain, many of whom are SMEs.
“As retailers struggle, so too do their suppliers, Hoppe said. “Selling to retailers on credit terms means suppliers risk not being paid for their goods in a timely fashion or, sometimes, not being paid at all. Alternatively, retailers may review their approach to inventory and decide to stock fewer products, which can also leave suppliers out of pocket as previously-reliable orders dwindle.”
Hoppe offered some advice to retailers that might help them ride out the storm.
“Securing cashflow with a strategy like credit insurance means retailers can innovate to stay ahead of the competition and remain viable even as the market tightens.
“Retail suppliers should also consider trade credit insurance to protect them from following their retail customers out of business. An insurance policy lets businesses trade with confidence because it reduces risk and can significantly decrease uncollectible account expenses.”
Hoppe explained that trade credit insurance covers losses that aren’t the customer’s fault but still result in non-payment.
“By making up the shortfall, it lets businesses continue to service their own debts,” he said. “It can also lower the cost of borrowing, which can keep cash flowing. And, the due diligence done by trade credit insurers can help businesses avoid being stung by customers that have a history of non-payment.
When businesses can identify at-risk buyers, they can focus their energies on more valuable customers. They can trade more safely through better information and strategic planning.”
