Tuesday, 29 May 2018 15:08

Supply Chains Feeling the Bite as Insolvency Continues to Hit

Latest official figures have confirmed what most people in business already suspected - the UK economy isn’t looking in too great a shape. Growth has stalled to a virtual standstill, just 0.1%, following the worst quarterly performance in five years in the first three months of 2018.

Confidence is low amongst both businesses and consumers, with investment and household spending both down - two factors which, of course, feed one another. In addition, the early months of 2018 have witnessed a succession of big-name company failures, from high street chains like Toys R Us and Maplin, to public sector outsourcing giant Carillion.

Heightened insolvency rates are an obvious sign of things not being well in the wider economy. But even more than that, they are indicative of a dangerous and downward spiral of decline. Low consumer spending, for example, puts retail chains under pressure. If they then go under, those problems are distributed across their supply chain and creditors, passing on cash flow difficulties and undermining investment.

Following the collapse of Toys R Us, one supplier has seen revenues fall by 15%, and profits by more than a third - a huge decline in the space of a couple of months. Maplin’s creditors, meanwhile, are expected to lose £217m - not far off a quarter of a billion pounds that is suddenly not available to invest elsewhere in the economy.

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In another example of the far-reaching effects of insolvency, shareholders in Conviviality, the off license chain which owned Bargain Booze and Wine Rack, have been told to expect no return on their shares after the company collapsed in April. Hedge funds made up a significant percentage of its shareholders.

Similarly, banking giant Santander has reported a 21% fall in its UK profits since the ignominious collapse of Carillion, a company it had a close relationship with.

The pain of insolvency is rarely confined to the unfortunate company that goes under. Suppliers, creditors, shareholders, investors all suffer. When it is not just a case of the occasional isolated failure, but a sign of endemic weakness in the economy, insolvency can soon start to have a domino effect - one collapse bringing another as the ripple of financial distress is passed along the finance and supply chains.

The more companies that go under, the more jobs that are lost and the more cash creditors cannot recover, the further confidence falls, making everyone more and more reluctant to spend. That is when growth disappears completely and we quickly enter recession.

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