Dissecting opportunities from distressed retail businesses

The retail industry has arguably been one of the worst hit sectors by the global recession that has gripped the last six years.

Essentially there has been an attack on two fronts; on the one hand the economic downturn has curtailed consumers’ spending habits while, simultaneously, the very nature of the market has changed in the light on new technologies. Whether it’s through a website or an app, the way consumers wish to browse and purchase goods has irrevocably shifted away from the traditional in-store, over-the-till method.

When you put these two factors together it is somewhat unsurprising that the administration and insolvency figures involving retail businesses read the way they do. For example, Wilkins Kennedy revealed this past month that 1,287 companies in this sector were made insolvent last year, that’s up 12 per cent on the year before.

The Business Sale Report’s own research mirrors this trend, with there being a steady rise in the number of retail-related businesses listed on the site as having entered administration. A combination of decreased consumer spending and fiercer competition across digital channels has meant that those not able to adapt over recent years have been forced into extinction.

Furniture retailer Paul Simon is one such example – the company cited cheaper online alternatives to its own products as the main factor in its downfall. Women’s fashion seller Jane Norman, meanwhile, entered administration for a second time in three years in June 2014, stating that challenging high street conditions had led to a sharp dip in revenue.

This might paint a gloomy picture but there are still rays of opportunity shining through this difficult landscape. Specifically, there is a plethora of opportunities afforded to individuals or businesses looking to capitalise on the struggling fortunes of retailers through acquisition.

First and foremost, retail companies typically possess a great deal of stock. From closing down sales through to liquidators and administrators attempting to sell off assets, there can be a huge amount of goods available at knockdown prices. Assuming the products fit into a business’ own offerings or can complement them in some way then this is an obvious chance to profit.

The acquisition of premises from a distressed retail businesses is another key area in which people could benefit; retail companies often demand high quality buildings in prime locations. Again, as their hands are forced by failing account books, the opportunistic businessperson could find a great trading spot for a lower-than-usual price. Alternatively, as few retail businesses own their premises outright, there is the option to take on attractive lease deals from these companies.

As successful buyers will know, it is key to remain vigilant by thoroughly assessing the viability of these options. Firstly, when seeking out avenues for inorganic growth you must ask yourself if you could take a failing business’ assets and turn its fortunes around. What is it that would mean that you could succeed where previous owners failed?

Perhaps you already have a strong brand or product within the marketplace and a new business premises or a wider range of goods would help enhance the company. Could items tie in within existing packages or deals? Or you might have a wider distribution network that would benefit from another retailer’s goods, thus allowing you to turn around a quick profit on certain items. These are all realistic ways of benefiting from failing retail businesses.

Nevertheless, further practical considerations must also be made before taking on someone else’s liquidated stock. Most obviously, do you have the necessary space in which to store it? Also, are the items truly relevant to your business model and do they have the longevity to hold value should you struggle to sell them straightaway?

There is undeniably light at the end of the tunnel for the retail industry – the economy is showing clear signs of recovery and this will naturally filter down to consumers before too long. And while there is still a wide range of opportunities for capitalising on failing retailers through acquisition, making it an option well worth exploring, it is can be worthwhile looking beyond the most obvious ones.

Buying distressed businesses on the assumption you can rebuild them and make them leaner might not always be the optimal approach. Instead, honing in on a specific area or asset of a failing company and aligning it within your existing business model could prove easier and more profitable.

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