Businesses in Birmingham and the West Midlands face another tough year, according to Begbies Traynor’s Red Flag Alert, the UK’s leading quarterly benchmark of company distress.
John Kelly, regional managing partner at Begbies Traynor’s Birmingham office said: “After a relatively soft period for business failures in 2011 compared with previous recessions, firms across key sectors now look set to face their toughest times so far as the UK economy looks likely to experience increased business distress in the coming quarters.
“Trends evident in the Red Flag Alert demonstrate that we are likely to be approaching a crucial period for businesses large and small.
“Escalating levels of distress indicate we may be getting close to the bottom of the economic cycle, where so-called ‘zombie’ businesses, which are inherently insolvent, but have benefited from extensive support measures such as HMRC’s ‘Time to Pay’ scheme eventually fail.”
The latest national figures show a 24 per cent year on year increase of companies facing “critical” levels of financial distress in Q4 2011, compared to Q4 2010.
The Midlands region had 829 critical problems in the fourth quarter of 2011 against 547 in the same period in 2010 – up 52 per cent.
Birmingham, by contrast, had 145 critical problems in Q4 2011 against 332 in the same period in 2010 – down 56 per cent.
But Mr Kelly cautioned against reading too much into what he described as a statistical anomaly in the Birmingham figures.
“The figures for areas like Stoke and Leicester show a sharp increase and there is no reason to imagine that Birmingham is in any way immune. We would expect to see Birmingham showing a similar surge in critical problems in the first quarter of this year as the renegotiation of banking arrangements maturing loans, rental quarter days and the phasing out of Time to Pay start to impact in a big way,” he said.
Nationally, many key sectors face significant rises in critical financial distress annually, including Professional Services (up 61 per cent), Travel & Tourism (56 per cent), Property Services (30 per cent), General Retailing (26 per cent), Automotive (14 per cent) and Construction (13 per cent).
And Begbies Traynor believes the Legal Services shake up could impact further on the Professional Services sector. Legal businesses contributed to the bulk of a 61 per cent increase in the number of professional services businesses facing ‘critical’ distress compared to a year ago.
Q4 2011 saw non-legal businesses finalise plans to offer legal services in the run up to January 3, 2012, when applications for third parties to offer legal services were officially received.
But while the Legal Services Act presents opportunities for non-legal companies, most of the legal industry itself is floundering as a result of the knock-on effect on advisers as clients have sought to curb spending on Legal Services with pressure on fees strangling cash flow and putting firms under financial pressure.
Ric Traynor, executive chairman of Begbies Traynor Group, said: “The prolonged downturn in the legal sector and the change in ownership rules will change the face of the traditional partnership law firm for good and many will struggle to survive. Last year saw a significant consolidation within the UK’s mid-market firms, yet beneath this there is a layer of smaller high street firms that simply can’t compete with the economies of scale of the big household brands if they aggressively commoditise legal services at much lower prices.”
Travel and tourism sector distress climbs by a considerable 56 per cent – an Olympic “displacement” effect of the London games is likely to have serious consequences particularly on companies reliant on domestic tourism. Begbies Traynor believes there will be at least one failure of a “household” name travel company during the next quarter.
John Kelly said: “Ironically, the London Olympics is likely to have a considerable negative impact on parts of UK tourism with some of the Capital’s West End theatres already having reported a 95 per cent fall in bookings for the period of the Olympics, suggesting that ‘displacement’ is already having a serious effect on not only the travel but also the leisure and culture industries.”
There has been further deterioration within the beleaguered retail sector, with critical distress up 26 per cent since Q4 2010 – with small/medium sized retailers particularly at risk. Although there have been a number of high profile national retail failures, the latest Red Flag Alert statistics highlights the real concern is for small and mid size regional retailers that appear to be suffering disproportionately.
Begbies Traynor anticipates considerable ongoing distress within this sector in 2012, especially at a local level as retailers fight a losing battle for the public’s falling disposable income, particularly against the fierce price cutting of online retailers such as Amazon.
John Kelly said: “With so much uncertainty around the Eurozone, pressure on household incomes, concerns about job security and the imminent failure of the ‘zombie’ companies, 2012 will be a challenging year for many Midlands companies and individuals. As ever seeking early advice is the key to securing survival.”