The U.K. Industry Sectors That Are Experiencing the Most Insolvency Appointments
A constant theme running through these insolvency stories is the struggle to operate on low profit margins.
Statistics published by the Insolvency Service show 4,308 company insolvency appointments were made in England and Wales between June and September 2018. This represents a 19.3 percent increase in the underlying number of corporate insolvencies compared with the same period in 2017.
Underlying numbers don't include the bulk insolvencies of personal service companies that occurred as a result of IR35 legislative changes made in 2016. This omission allows for a clearer comparison to be made between periods, and provides a more defined picture of the state of our industries today.
Industries facing significant insolvency issues
The construction industry continues to experience the highest insolvency rates, with companies operating in wholesale and retail placed second in the table of corporate insolvency events.
The published figures include compulsory liquidations, Creditors' Voluntary Liquidations, company administrations, Company Voluntary Arrangements and receiverships. But, which industry sectors are suffering the most insolvency, and why could this be the case?
The construction industry experienced a devastating blow in January 2018 when multinational construction services and facilities management company Carillion went into liquidation.
It set in motion a sequence of insolvencies involving the company's many suppliers and subcontractors. According to accountancy firm Moore Stephens, 780 construction firms entered insolvency between January and March 2018, an increase of 20 percent on the last quarter of 2017.
Given the sheer size and presence of Carillion within the industry, small and medium-sized subcontractors that received a substantial proportion of their work from the firm were unable to recoup their losses after the collapse.
Even without the fall of Carillion, however, working to tight profit margins is a particular feature of the industry. With little room for maneuver, financial decline can occur quickly, and poses a threat to construction companies even when business is good.
Wholesale and retail
The U.K. retail sector continues to face serious issues including online competition, rising business rates and unpredictable market conditions. Even though an online retailer tax is being considered by the government to help struggling brick-and-mortar businesses, companies attempting to meet the demand for online shopping face significant challenges.
These include the lower profitability levels that are generally experienced by online retail businesses, as well as the need to make strategic changes to operational models. It's also worth noting that business size is no indication of success in the current retail environment, with the decline of Poundworld, Toys 'R' Us and Maplin, demonstrating the challenging trading conditions experienced by our larger retailers.
Small and medium-sized businesses in wholesale and retail face a challenging marketplace, operating with fewer cash reserves and room for financial maneuver should they start to decline.
In addition to these general issues, wholesalers must also deal with problems unique to their sector, including exposure to fluctuations in the retail trade and operating to strict logistical demands.
Accommodation and food services
The accommodation and food services industry has experienced the third highest number of new insolvency events between July and September 2018. So, what has influenced this decline?
The hospitality sector employs a large number of lower paid workers, and with ongoing increases to the National Living Wage and the National Minimum Wage, in addition to funding pension auto enrollment, companies' financial reserves are being stretched to breaking point.
Smaller traditional hotel businesses are dealing with the impact of new competition, such as Airbnb, with national motel chains that offer value for money for those seeking low cost but comfortable accommodation, also posing an ongoing threat.
The high number of pub closures continues to threaten the food services sector. Lack of flexibility in lease arrangements, increases in alcohol duty, the ban on smoking, and a general trend toward drinking at home, are all features of a demanding business environment.
Administrative and support services
Figures published by accounting firm EY show the FTSE support services sector issued 11 profit warnings in the last quarter of 2017, with 42 profit warnings being issued in total by the sector that year.
This represented the highest number of profit warnings by all FTSE sectors, and has been attributed to contract issues, price increases and poor internal control measures under which companies were operating.
The figures for Q3 2018 show the number of profit warnings issued by FTSE companies in the support services sector has reduced to seven, but the sector remains among the highest of all FTSE sectors with regard to profit warnings.
With our looming exit from the European Union, British industry faces further unknown challenges. A constant theme running through these insolvency stories, however, is the struggle to operate on low profit margins, which is a particular issue if access to vital funding is also limited.