BIRMINGHAM BUCKS ECONOMIC RESURGENCE TREND…
According to the latest Begbies Traynor Red Flag Alert for Q4 2013, which monitors the financial health of “Corporate UK”, Birmingham has bucked the national trend for falling levels of ‘Critical’ financial distress, witnessing a rise in the number of businesses experiencing problems. The figures are in contrast to the picture of improving business confidence driving strong growth across the UK’s core services sectors.
Across all sectors, UK businesses experiencing ‘Critical’ financial problems reduced 1 per cent 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 per cent, 22 per cent and 7 per cent respectively, fuelled by Christmas trading as well as increased consumer spending due to improving job security and property prices – adding to a discernible “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 per cent, 21 per cent and 4 per cent respectively.
On an annual basis, the national improvement in ‘Critical’ distress levels was more marked, decreasing some 4 per cent 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 per cent, Professional Services by 12 per cent and Support Services by 11 per cent 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 per cent, 9 per cent and 7 per cent respectively.
In Birmingham, however, ‘Critical’ distress levels rose by 9 per cent in the final quarter of 2013, whilst year on year there was a 16 per cent increase. Across the wider Midlands region the figures showed ‘Critical’ financial distress levels rising by 3 per cent in the final quarter, from 394 businesses to 407, whilst annually ‘Critical’ distress levels remained broadly flat. In Q4 2012, there were 410 businesses in the Midlands experiencing ‘Critical’ financial distress levels.
Looking at the sectors in the Midlands, Bars and Restaurants, Real Estate & Property and Retailing appear to be experiencing the greatest difficulties, with respective quarterly increases in the number of businesses in ‘Critical’ financial distress of 81 per cent, 29 per cent and 18 per cent.
That said, there were further signs of the Midlands recovering its reputation as the centre of manufacturing with a 23 per cent decrease in ‘Critical’ financial distress levels during the final three months of the year.
John Kelly, partner at Begbies Traynor Birmingham office, commented: “Whilst these local figures are a cause for concern they do demonstrate that Christmas came a little too late for some of the city’s retailers and bars and restaurants. If seen in an annual context these sectors have performed quite well, witnessing decreases in distress levels up until the final three months of the year. We think this is because many people took advantage of reliable next-day delivery services and click-and-collect services offered by online and high street retailers, and with the rise in discount grocers many consumers are choosing to eat and drink for less in comfort of their own home.”
John added: “Despite difficulties in consumer-facing sectors, there is real evidence of growing confidence in manufacturing, which is being reflected by the Midlands success story that is Jaguar Land Rover. This company’s resurgence is benefitting smaller suppliers across the region, leading to full order books. Wage increases and quality concerns in emerging economies have caused many businesses to ‘reshore’ their manufacturing operations.”
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 per cent of the total). When compared to the c. 352,300 which were incorporated during 2012 (c.13 per cent 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).
John 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 per cent to 224,579 compared to 218,128 during Q3 2013; the highest level of ‘Significant’ distress reported since at least early 2012. On a quarterly basis, ‘Significant’ distress increased across every sector apart from Print & Packaging, which decreased by 1 per cent, 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 per cent 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 per cent 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 per cent, 28 per cent, 23 per cent, 21 per cent and 20 per cent rises in ‘Significant’ distress over the past 12 months.
In Birmingham ‘Significant’ financial distress levels reflect the national increase, rising 5 per cent on a quarterly basis and 12 per cent year on year. Across the Midlands, there was a 3 per cent rise between Q3 and Q4 in 2013, whilst year on year the increase amounted to 17 per cent amongst businesses experiencing ‘Significant’ financial distress.
John Kelly 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.”
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.”
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