Conor McElhinney from McGrathNicol talks about recent retail failures.

Recent failures have highlighted how much retailers - especially apparel - are suffering in a changing consumer environment. The last 18 months has seen the insolvencies of Postie, Shanton, Identity, Jean Jones, Catherine's Fashionwear and Cooper Watkinson, profit warnings from Pumpkin Patch and Kathmandu, and the Kirkcaldie & Stains restructuring. Based on our experience, below are the top 10 risks retailers should be aware of to avoid failure.

1. Integrated, omnichannel offering

Retailers need to have an integrated, omnichannel offering, with bricks and mortar stores and an easy-to-use online offering, supported by a real-time stock system. Retailers with young target demographics also need functional mobile sites. BNZ reports that online sales were up 13% in July 2015 compared to July 2014, with sales at international sites up 25% on last year compared with just 5% for local merchants.

2. Understanding your 4P's


You cannot differentiate without a clear understanding of your product, price and positioning in the market and customers won't know you exist without promotion. It is also important to evolve with your customers and not lose sight of your USPs. Shanton appears to have struggled to define its offering sufficiently to engage customers, leading to more than one insolvency in the last three years. The marketing budget is also usually the first area cut in times of financial distress, which can accelerate declining revenue.

3. Sacrificing quality for margins

An example of losing sight of your 4P's is chasing margin by reducing quality, which only works in the short term. Eventually customers will perceive your product as lower-quality and your premium brand will be damaged. Consumer feedback suggests this may have happened to Pumpkin Patch since listing in 2004.

4. Supply chain disruption

Mismanaging your supply chain could also result in too much stock sitting in the warehouse and/or too little stock, or the wrong stock, sitting in stores. The use of air freight to cover inadequate planning can quickly erode already thin margins. Postie quoted supply chain issues from transitioning to a 3PL as one of the key causes of its failure.

5. Unprofitable stores

Retailers often try to grow their way to profitability, assuming that opening enough stores will eventually cover overheads. But what seemed like the ideal site at the time can become an anchor dragging down profitable stores today. A restructuring tool such as a voluntary administration or creditors compromise may be necessary to restructure the lease portfolio and exit unprofitable sites. Postie closed 22% of its stores during the voluntary administration in order to achieve a going concern sale.

6. Understanding and using KPIs


Footfall (and web traffic), conversion rates, basket size, repeat customers are all valuable key performance indicators (KPIs) that can be measured and analysed both in store and online. Without this data, you cannot measure the relative performance of sales staff, customer buying habits, and the impact of promotional spend (did it bring in new customers or existing?). Lack of good management information is one of the most common causes of business failure we see across all industries.

Conor McElhinney.
Conor McElhinney.

7. Overburdened cost structure

Businesses often expand their head office too far on the assumption of future growth, or operate from unnecessarily lavish offices. Briscoe's head office sits above their St Lukes store and is best described as functional. Briscoe's focus on cost efficiency seems to pervade throughout the business, no doubt contributing to its success.

8. Lack of reinvestment

A portion of profits should be set aside for reinvestment in brand and product development, customer research, store refresh, systems and expansion. Stripping cash to pay for lifestyle or maintain dividends will eventually catch up with a business. We note that Postie paid $0.8 million of dividends in FY12 and FY13 (declared FY11 and FY12) despite years of negligible profits, including a loss of $13.2 million in FY13, before entering voluntary administration in FY14.

9. The big project


All businesses including retailers risk spreading themselves too thin when pursing the next big project. For New Zealand retailers, this is often expanding overseas or expanding a store footprint too far or too fast. A lack of understanding of your target market and/or investing too much capital and management time can be precursors to failure. Pumpkin Patch wrote off considerable investments in the US and UK after failed attempts to globalise and Kathmandu recently announced the exit of its UK stores.

10. External factors

Retailers should be aware of consumer confidence and spending trends, regulatory changes, and potential abnormal weather patterns and plan for the possible impact on their business. For example, rural retailers may need to cut overheads now and reassess expansion plans in preparation for declining rural spending following the $3.85/kg dairy pay-out announcement. Apparel retailers could plan for a long dry summer given the El Niño weather pattern that was forecast back in May 2015. However, management should not be allowed to blame underperformance solely on these external factors.

Restructuring retailers

Reassessing your 4P's, remedying supply chain issues, and ensuring the business has good information to make informed decisions is the first critical step. Retailers already in distress may need to consider more drastic measures. Rationalising store footprint is likely to provide the quickest solution, perhaps using a voluntary administration or creditors compromise. Formal restructurings appear to have little (if any) long-term reputational impact: Whitcoulls, Feltex, Nandos, Postie and many others have all been restructured in the past without any apparent ongoing brand damage.

About McGrathNicol

McGrathNicol is an independent advisory firm specialising in Corporate Advisory, Forensic, Transactions, Restructuring and Insolvency. It is a market leader in New Zealand and Australia, with more than 30 Partners and 300 people across the region.


McGrathNicol was founded by a group of Partners and staff from Big 4 accounting firms who believed a high-quality specialist firm could thrive when freed of audit independence constraints. Since then, McGrathNicol has grown strongly, earning a reputation for achieving innovative, high quality results by providing technical excellence, responsive advice and sound execution capability.