Rapid changes, fickle consumers and high capital costs make retail a sector prone to distress and bankruptcies when recessionary conditions arise. And this time around looks no different.
For those that survived the disruption of the pandemic, or even thrived through quickly adapting to e-commerce and omnichannel selling, 2023 brought further uncertainty. While retail sales grew steadily, they still trailed the year-on-year (Y-o-Y) inflation trend. Interestingly, while essential items tended to ride the growth wave, sales of discretionary goods and big-ticket items remained depressed.
As pandemic support measures eased, inflation and economic uncertainty dampened consumer sentiment, with higher prices deterring discretionary purchases during the recent holiday season. This presented a further challenge for retailers in managing working capital and operational standards. Categories such as home decor and electronics, which had flourished during lockdown, lost momentum as people prioritized dining and leisure activities.
On the supply side, restricted capital availability, along with tightened fiscal measures, pressurized highly indebted retail firms causing a surge in bankruptcies, with North America witnessing several high-profile insolvencies. High post-Covid inventories have driven up operating costs and working capital requirements across the sector, calling for significant discounts to clear stock, reducing margins and hitting profits. Legacy retailers, along with niche startups and direct-to-consumer brands, were among the hardest hit.
The volatility (and resulting underperformance) in consumer markets sector is evident in our KPMG Financial Performance Index (FPI) score. The index, which bases the scores out of 100 (and wherein higher score indicates financial stability), reflected that the sector declined to a score of 93.91 in 4Q23 (3Q23: 94.49). Holiday season had an impact on regional sector performance, especially in North America and Africa region. Retail markets in Europe had a muted 4Q23 as the region continues to be face the brunt of geopolitical crisis. Other regions, South America and Asia witnessed a Q-o-Q decline in their respective FPI scores owing to macroeconomic headwinds. Singapore registered the steepest 9 percent Q-o-Q decline in sector performance, whereas Canada was on the opposite side of the growth spectrum (recording a 9 percent Q-o-Q growth).
The market ought to expect elevated default activity in the next 2 years, influenced by both liquidity shortages and refinancing risk as debt maturities approach. Retailers have upheld favorable liquidity profiles and financial flexibility, thanks to sufficient cash reserves, financial investments, and unsecured credit card receivables. Nevertheless, a substantial amount of debt is maturing in 2024 and 2025 and will require refinancing, causing repayment concerns.