Margins shrink, DSO deteriorates, and more bankruptcies expected in the fashion industry

The number of bankruptcies in the non-food sector is expected to further increase this year, especially among clothing and electronics stores. Margins are thinning due to significant cost increases.

Shopping streets in dire straits for a while now
Retailers have faced one crisis after another in recent years. After the coronavirus pandemic came the energy crisis, which in turn led to high inflation, resulting in increasing rental, energy, procurement, and staffing costs. Economic growth nearly ground to a halt last year, and consumers tightened their belts, causing slower sales, increased inventories, and earlier resorting to sales, further reducing already slim margins. Additionally, retailers had to repay their tax debts accumulated during the pandemic.

Tax debt averaging 86,000 euros
Research by the Dutch National Audit Office shows that the majority of accumulated tax debt is held in the wholesale and retail sector, with the average outstanding debt being approximately 86,000 euros per entrepreneur. It also reveals that many entrepreneurs who benefited from tax deferrals already had a poor financial position at the start of the pandemic.

Bankruptcy numbers on the rise
After two years with relatively few bankruptcies, 338 companies in the retail sector went bankrupt last year. This included electronics chain BCC, sports retailers Perry Sport and Aktiesport, and discount retailer Big  Bazar. In 2023, several major clothing companies went bankrupt, including Score Group and Scotch & Soda. Recently more large retailers like Ted Baker, Esprit Belgium and Matchesfashion became insolvent.

The number of bankruptcies is now almost back to the pre-corona level of 2019. The majority of bankruptcies were physical stores in the non-food sector (60%) and online stores (25%). For 2024, it is expected that the number of bankruptcies in the retail sector will increase by 38% compared to 2023, particularly in fashion.

Significantly more bankruptcies on the shopping districts
Source: CBS

Due to reduced purchasing power, consumers bought mainly less and often cheaper clothing last year. Especially mid-range fashion chains are affected by the shift towards cheaper fast fashion brands such as Primark and H&M. But also, cheap Chinese online retailers like Shein and Temu are diverting revenue. Therefore, it is expected that more clothing companies, especially in the mid-range segment, will eventually disappear from the streets, and the number of bankruptcies in the fashion industry will further increase this year.

Sources: CBS, Allianz Trade, ING
Photo: Shutterstock

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