“Feel Good” factor returns as critical business distress falls for three straight quarters

Flag Alert Report for Q4 2013

• Growing consumer debt boosting many sectors
• Entrepreneurial spirit prevails as new company incorporations at highest ever level

According to the latest Begbies Traynor Red Flag Alert for Q4 2013, which monitors the financial health of “Corporate UK”, levels of ‘Critical’ financial distress among UK businesses continued to recover during the final quarter of 2013, as improving business confidence drove strong growth across the UK’s core services sectors and encouraged growing numbers of entrepreneurs to incorporate new businesses during the past year.

Across all sectors, UK businesses experiencing ‘Critical’ financial problems reduced 1% from 2,951 in Q3 2013 to 2,933 in Q4 2013, with the Hotels, Food Retailing and General Retailing sectors experiencing seasonal reductions in ‘Critical distress, falling 24%, 22% and 7% respectively, fuelled by Christmas trading as well as increased consumer spending due to improving job security and property prices – adding to a discernable “feel good” factor. Also finishing the year in a stronger position were the UK’s important services sectors (Financial Services, Professional Services and Support Services), which experienced quarterly reductions in ‘Critical’ distress of 23%, 21% and 4% respectively.

 Red On an annual basis, the improvement in ‘Critical’ distress levels was still more marked, decreasing some 4% compared to 3,044 in Q4 2012, as the vital services sectors again experienced the largest improvements in distress levels, with the Financial Services sector reducing 21%, Professional Services by 12% and Support Services by 11% over the 12 month period. Other industries which closed the year stronger than they started it were Food Retailing, Bars & Restaurants and Automotive which saw annual reductions in ‘Critical’ distress of 31%, 9% and 7% respectively.

Julie Palmer, Partner at Begbies Traynor, commented: “Christmas came late for UK retailers in 2013, as consumers more than ever left their festive shopping to the last minute, taking advantage of the growing number of reliable next-day delivery and click-and-collect services offered by the best in class online and high-street retailers. Still, UK consumers refused to scrimp this festive season, resulting in positive increases in sales volumes among food and general retailers compared to the previous quarter. However when compared to Q4 2012, levels of ‘Critical’ distress among general retailers were actually 16 percent higher this year, as physical retail volumes struggled to keep pace with last year’s excessive spending1 resulting in heavy discounting across the high street.

“After a slow third quarter, the important UK services sectors finished the year strongly with increasing confidence, resulting in improved M&A opportunities, as well as a return of investor confidence due to an improving stock market, providing a boon to the professional and financial services sectors.

“Strengthening business and consumer confidence has also aided the UK’s automotive industry which witnessed a 7 percent decrease in year on year critical distress in Q4 2013. This improving confidence is partly due to corporates updating their fleets following a period during the recession when the average age of fleets slowly ticked up, but also burgeoning consumer sales on the back of improving confidence and the availability of attractive finance deals.”

Improving business confidence drives entrepreneurial recovery
Separate analysis of the Red Flag Alert dataset reveals that of the 2.68 million companies actively trading in the UK today, more than c. 518,000 were incorporated during 2013 (representing nearly 20% of the total). When compared to the c. 352,300 which were incorporated during 2012 (c.13% of the total), this indicates a significant and growing influx of entrepreneurial start-ups to the economy over the past 12 months as business confidence has recovered. It is also evident that the advent of the internet has enabled many individuals to start online businesses without the need for substantial capital and this, combined with unemployed people starting their own businesses, has provided a real boost to the number of start-ups. Since the start of 2014, 18,183 new businesses have already begun trading in the UK (as at 17 January 2014).

Julie Palmer, Partner at Begbies Traynor, added: “As reported in a recent Markit/CIPS study, optimism among UK businesses is currently at its highest level since March 2010, with a growing number of businesses saying they intend to increase investment in capacity, marketing and new products during the coming year. This optimism has nurtured the revival of the UK’s entrepreneurial spirit, with new start-ups now representing nearly a fifth of all companies trading in the UK today.

“While this emerging trend is good news for UK innovation and competition, if these fledgling businesses are not supported they could easily hold back the economy’s current growth trajectory. It is notoriously difficult for young companies with limited trading history to secure credit to support the next stage of their development, as financial institutions prefer to lend to businesses with a proven track record. Key to their survival will be appropriate and fair access to finance and the removal of tax and regulatory obstacles that could trip them at the first hurdle.”

Earlier stage ‘Significant’ distress levels at a record high, particularly among SME’s
During the fourth quarter of 2013, the number of UK businesses experiencing earlier stage ‘Significant’ levels of financial distress increased by 3% to 224,579 compared to 218,128 during Q3 2013; the highest level of ‘Significant’ distress reported since at least early 20112. On a quarterly basis, ‘Significant’ distress increased across every sector apart from Print & Packaging, which decreased by 1%, and Real Estate, which remained flat in the three month period.

On an annual basis, the increase in distress was even more significant, rising 16% from a base of 193,592 during Q4 2012, with increases across every sector covered by the research, except construction, which saw a small 3% decrease in ‘Significant’ distress. The sectors experiencing the largest increases over the past year were Real Estate, Hotels, Sports & Recreation, Leisure and Media, which saw 32%, 28%, 23%, 21% and 20% rises in ‘Significant’ distress over the past 12 months.

Julie Palmer commented: “With earlier stage ‘Significant’ distress across all sectors reaching record highs this quarter, we are seeing growing fragility particularly among the small businesses community, as smaller and newer companies struggle to keep up as the economic recovery gathers pace. As is common at this stage of any recovery process, businesses with inexperienced management teams or limited credit availability are simply unprepared to step up a gear and fund and execute the business strategies required to remain competitive in a growing market. Such businesses will need to take urgent action to avoid slipping into more critical distress and to ensure they are well placed to take advantage of the economic recovery.

“Our data shows that independent hotels and gyms are particularly at risk in the current economic climate as ambitious larger chains continue to slash prices and develop lower cost models, forcing smaller independent players to compete through price and operate at unsustainably low margins. With hotel occupancy levels and revenue per room in the last quarter of 2013 falling, the hotels sector is in a difficult position as it enters the lean Q1 trading period. However, while consumer interest groups continue to berate the gym industry over rigid long term contractual commitments, we should see the sector’s fortunes improve, at least in the short term, as people renew their memberships to work off last month’s seasonal overindulgence.

“In addition, the structural and technological changes within the media sector continue to take their toll on many businesses. The switch to digital and online marketing campaigns has severely impacted this sector, as seen recently with Trinity Mirror closing the Liverpool Daily Post. Media firms without a credible digital offering are particularly vulnerable, as more and more marketing budgets are being invested in search engine optimisation rather than print advertising.”

Regional recovery remains patchy
Comparing ‘Critical’ financial problems by region on a yearly basis, almost all regions across the UK experienced a reduction in distress levels with the North West, North East and East of England seeing the most significant reductions, falling 16%, 15% and 13% respectively. On the other end of the scale, Scotland, Yorkshire & Humberside and Wales saw levels of ‘Critical’ distress increase year on year, rising 65%, 12% and 11% respectively.

When comparing regions on a quarterly basis, the research reveals a mixed picture, with the South West, London and Wales all experiencing reductions in ‘Critical’ distress of 10%, 9% and 13% respectively during the final three months of the year. Meanwhile difficult trading conditions in Northern Ireland, the North East, Yorkshire & Humberside and Scotland saw distress levels in these regions increase by 37%, 21%, 12% and 8% respectively during the fourth quarter.

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “As we welcome in the New Year, this quarter’s Red Flag statistics show that the economy is still moving in the right direction, as ‘Critical’ distress levels are down for the third quarter running, across almost all regions of the UK. With businesses feeling more confident about their outlook for 2014, so too are consumers, thanks to strengthening property prices, improving job security and wage inflation.

“While this positive sentiment is encouraging, we cannot overlook the fact that a large population of businesses continue to suffer from ‘Significant’ distress resulting from funding, management or accumulated debt issues. The next year will be a key period for these businesses to either sort out their problems and prosper or finally reach the end of the road.”