Distressed Retail in Spain
2014 was the first year in which the number of insolvency proceedings filed by Spanish companies fell each month since 2004, the year when the last bankruptcy reforms were enacted. Last year, a total of 6,508 insolvency proceedings were initiated in Spain, a reduction of 26.2% when compared to 2013, which was a record year when 8,823 cases were filed. As a result, in 2014, the streak of consecutive years of increase in the number of insolvency filings ended.
It remains to be seen if this trend will continue in 2015: in January 2015, 579 insolvency proceedings were commenced, the first time in nine years that the number of such proceedings has not grown for the same month in previous years. The February 2015 figures are also the lowest since 2011 and a long way from the historic record of February 2013, when a total of 1,029 insolvency cases were filed.
One of the reasons for the decrease in the overall number of insolvency proceedings is the fact that many companies have drastically limited their activity. In addition, the creation of new companies has slowed down significantly during the global financial crisis. With the exception of the manufacturing industry, all sectors of the Spanish economy have seen reductions in the number of new companies created, with the retail sector being the most impacted.
It should be noted that, despite clear improvements, the number of insolvency proceedings remains high in Spain.
When the financial crisis began in 2007, the construction sector was the sector with the largest number of insolvency filings. In the latter half of 2014, however,companies in the retail sector started leading the numbers of companies filing for bankruptcy. In the last quarter of 2014, a total of 153 companies in the wholesale and retail trade and vehicle sales were forced to file insolvency proceedings as they failed to pay their debts. Currently, one in five companies in an insolvency proceeding is in the retail sector.
Why is this the case? In spite of a slight increase in domestic consumption levels, consumer demand in Spain is still insufficient for many retail companies to survive. The increase in consumption simply has not been sufficient to prevent companies in the retail sector to face severe financial difficulties.
In conclusion, while there are fewer insolvency proceedings than this time last year, until domestic consumption increases, Spain will not see a significant reduction in the number of bankruptcy proceedings. It is expected, however, that the Spanish Government’s next round of tax cuts will result in more money for consumers to spend and larger deductions for small and medium companies, which will hopefully have a positive effect on demand.