Against the backdrop of ongoing economic uncertainties, retailers find themselves navigating a complex landscape.

While the current cash rate offers a semblance of stability in the face of sluggish retail trade, the looming threat of potential hikes presents significant risks for retailers. Moreover, the recent measures introduced in the Victorian budget and the heightened ATO activity compound the challenges retailers face.

As the retail sector grapples with fiscal and regulatory shifts, it's important to note the additional pressures from consumer spending constraints. These are further intensified by cost-of-living pressures and subdued sentiment, leading to a surge in retail insolvencies in March 2024. This highlights the challenges businesses face in adapting to changing consumer behaviours and economic conditions.
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Economic uncertainties and cash rate dilemmas

The decision to maintain cash rates at 4.35% comes in the wake of subdued retail trade data, it provides some relief to retailers grappling as economic challenges continue to impact discretionary spending and consumer confidence. However, a possible cash rate increase poses a significant threat to discretionary retailers, particularly those operating on thin profit margins.

The release of retail trade data for March 2024 underscores the cautious consumer sentiment prevailing in the market. Despite an early Easter boost, the modest 0.8% increase compared to the previous year reflects ongoing spending restraint, particularly evident in discretionary categories such as household goods, clothing, footwear, and accessories.

The subdued performance in the retail sector clearly indicates that Australians are curtailing their spending habits. This, coupled with lingering uncertainty surrounding fiscal policy, the prospect of a prolonged slowdown in discretionary spending is a significant challenge for retailers as they navigate an uncertain economic landscape.
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The impact of the Victorian budget on retailers

The recent Victorian budget handed down on Tuesday, May 7, heralds a series of measures poised to impact retailers across the region. Mr Zahra of the Australian Retailers Association (ARA) outlined the key areas and clarified what this would mean for retailers.

• Exacerbating challenges: Several of the announced changes were likely to exacerbate existing challenges for retailers.
• ‍Value of tax relief for small businesses: Acknowledging the broader challenges posed by the budgetary measures, emphasis is placed on the value of wider tax relief initiatives, particularly for new small businesses navigating their early stages of operation. The expansion of the payroll tax-free threshold is singled out as a particularly beneficial change for these enterprises.
• ‍Phasing out of business insurance duty: The phased-out approach to business insurance duty is welcomed, highlighting the potential cost savings for retailers, amounting to over $500 million within the initial four-year period. This reduction in operational expenses could bolster the financial viability of businesses in the retail sector.‍
• Short-term benefits of stamp duty replacement: While acknowledging the short-term benefits of replacing commercial stamp duty with an annual surcharge, caution is expressed regarding the potential long-term costs for retailers. This perspective underscores the need for retailers to consider both the immediate and long-term implications of fiscal policies.‍
• Impact on growth and operations: Concern is raised over the potential impact on growth resulting from measures such as the COVID Debt Repayment Plan and the phasing out of tax-free thresholds for larger businesses. Warning of potential consequences such as increased prices or reduced staff and operational challenges for retailers are highlighted.
• Limited relief for cost of doing business: The budget has done little to alleviate the cost of doing business faced by retailers, nor has it sufficiently addressed concerns regarding consumer confidence. This sentiment reflects the retail industry's desire for more comprehensive measures to support its operational sustainability and foster a conducive business environment
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‍ATO activity: heightened debt recovery efforts

The recent activity by the Australian Taxation Office (ATO) carries significant implications for the retail industry. The ATO is actively pursuing small businesses and self-employed individuals for a staggering $34 billion in debt deferred during the COVID-19 pandemic, signalling potential financial challenges for retailers within this sector.

We have experienced a marked increase in insolvency-related matters and expect insolvencies to continue to increase.  Sectors already struggling, including construction, hospitality, and retail, are particularly vulnerable to this trend.

The ATO has intensified debt recovery efforts, implementing shorter payment deadlines, and issuing immediate notices to wind up businesses failing to meet obligations. This increased pressure could exacerbate financial strain on retailers. Directors' Penalty Notice (DPN) issuance highlights the ATO's determination to hold individuals accountable for outstanding tax liabilities, posing additional risks for business owners within the retail industry.

While emphasising support for compliant businesses, the ATO is taking decisive action against those evading their tax obligations. This dual approach underscores the need for retailers to ensure compliance with tax requirements to avoid punitive measures.

Businesses struggling with debt accrued during the pandemic are urged to explore their options, including insolvency proceedings. This advice underscores the importance of proactive financial management and seeking professional guidance to navigate challenging economic circumstances.

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Consumer spending constraints and retail insolvencies

In March 2024, retail insolvencies surged as cost-of-living pressures weighed heavily on consumer spending. In fact, the overall trend for FY24 is significantly higher than the previous two financial years. More retailers succumbed to closure as consumers tightened their budgets in response to elevated interest rates and increased living expenses. Data from ASIC revealed a stark reality: insolvencies within the retail sector more than doubled over the past two years, reflecting the profound challenges faced by businesses in this industry. While this may seem to be a growing trend, it's worth noting that the current volume of insolvencies has reverted to pre-Covid levels.
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Looking ahead, the National Retail Association advocated for support for small and medium-sized businesses in the upcoming federal budget, recognising the critical need for assistance amidst turbulent economic conditions. The prevailing sentiment among industry insiders paints a grim picture, with many acknowledging the daunting challenges facing the retail sector at present.

NAB's latest business survey forecasts a continued period of subdued consumer spending, though improvement is anticipated later in 2024. These insights underscore the need for resilience and strategic adaptation among retailers as they navigate uncertain economic waters.

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Comprehensive Support and Strategic Guidance for Retail Businesses

Cor Cordis offers comprehensive support to businesses throughout their life cycle, from investment opportunities to divestment and corporate streamlining. Our expertise extends to various facets of the consumer goods retail sector, and we provide various advisory services tailored to each client's needs.

We specialise in facilitating business turnarounds and restructuring efforts, exploring all possible avenues to deliver sound advice. Our approach focuses on stabilising businesses by pinpointing opportunities for cost reduction, enhancing capital structure efficiency, optimising resource allocation, and increasing productivity. Moreover, we excel in divesting distressed assets to fortify our clients' financial positions.

We offer tailored solutions for retailers grappling with liquidity issues, excessive leveraging, underperformance, or operational challenges. Through independent business reviews, we devise and implement innovative strategies and processes aimed at restoring profitability and averting forecasted losses proactively.

Cor Cordis safeguards the business's value as a going concern in cases requiring formal appointments such as receiverships and administrations. We are dedicated to maximising value for all stakeholders by employing strategic measures to preserve and enhance business viability.

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