Business valuers have stood their corners against changes in valuation methods based on economic crises. Any valuer who worked through the 2008 recession has the advantage of a long view of the economic impact of COVID-19.
Even by that standard, a new analysis by Alvarez & Marsal (A&M), along with Retail Economics, should give cause. While nearly everyone agrees retail is among the industries the crisis has most damaged, the new study concludes:
Modelling by A&M and Retail Economics shows that a 10 percent reduction in sales would have resulted in over two-thirds of major U.K. retailers falling into negative cash flow. But sales are forecasted to have dropped as much as 70 percent since the lockdown was introduced on 23rd March, tipping every retailer sampled into immediate negative cash flow.
Retail was not healthy pre-COVID-19; in fact, A&M found that five of the 34 major retailers already had negative cash flow before the virus struck. Fortunately, the government support programmes have provided enough liquidity so that most of these firms should be able to manage their affairs until at least the end of the initial lockdown period. Erin Brookes, A&M’s managing director and head of retail, Europe, is quoted in the study about what will occur as the lockdown enters the summer, lacking further intervention.
It has already become clear that the high street will take on a very different form once the pandemic is over. Weaker players will, unfortunately, cease to exist, leaving behind a smaller but more resilient sector comprising operators that acted fast. The survivors will benefit from strong trust in their brands, underpinned by fewer experiential stores that drive customer engagement and multi-channel sales.
A&M continues to publish perspectives on valuation issues that will be helpful to most BVWire—UK readers. Besides this analysis of the large retailers, the firm also released Key Concepts in Franchise Restaurant Workouts this month, with leadership input from managing director Jonathan Tibus.
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