Retail Bankruptcies Increase Due to COVID-19 Pandemic

The COVID-19 pandemic has altered nearly every aspect of life. Areas that have been hit especially hard are retail businesses, restaurants, and the hospitality industry. During the course of the pandemic, many retailers have found themselves filing bankruptcies or undergoing significant restructuring. This includes large organizations such as Lord & Taylor, DavidsTea, Pier 1 Imports, Neiman Marcus, Mendocino, Reitmans, Aldo, and more. Even Starbucks announced that it would be closing hundreds of locations across Canada.

While some of these businesses may return in a different capacity following restructuring, the effects of the pandemic on businesses – especially retailers – can be clearly seen.

In the United States, there have already been more retail bankruptcies this year than in the past eight years, according to S&P Global, while in Canada, business bankruptcies hit a record level In the second quarter of 2020.

Unfortunately, the wave of business bankruptcies and financial troubles don’t stop with large corporations. Small businesses are also feeling significant financial pressures, even as governments attempt to support them through commercial rent relief and other actions. In many cases, a lot of small businesses are unsure if they will survive the pandemic.

A Canadian Federation of Independent Businesses (CFIB) survey in late May showed that 40 percent of the one million small businesses in Canada have experienced revenue drops of 70 percent or more. In Ontario alone, small businesses have taken on almost $50 billion in debt, according to the CFIB.

What is Causing Retail Bankruptcies, Financial Struggles & Restructuring?

The most obvious reason why many businesses are struggling is that people are staying at home due to COVID-19 pandemic. Lockdowns designed to protect public health meant that, for many months, retailers and other businesses were required to close. Even as businesses were allowed to reopen, many were required to adjust to severe restrictions in the interest of health and safety. This had a significant financial impact on many retailers, restaurants, bars, and other such businesses.

Many restrictions are still in place, even in regions where the economy has been allowed to reopen.  Once the restrictions are lifted, businesses still face smaller than usual crowds and a significant decrease in sales.

One reason why is that the economy overall is hurting in Canada. StatsCan recently announced that economic activity is 15 percent below pre-pandemic levels. If people are having to tighten their budgets to deal with the new economic reality, they’ll be much less likely to shop at stores or eat out at restaurants.

Consumer habits have also changed during this time. While many may have gone out for lunch during their workday or stopped at a clothing store on the way home before the pandemic, this isn’t the case while a significant portion of the population continues working from home. If people aren’t going outside as much, this means they won’t be making these trips and spending money at these businesses.

The Effect of Retail Bankruptcies and Business Restructuring

When a business files for bankruptcy or goes through a restructuring, it means probable financial difficulties for the organization’s owners. However, it also likely means job losses for employees. As people lose their jobs, they’re much less likely to have the financial resources to shop, and that means other businesses could potentially be hurt as well. The more that businesses lay off employees, the more that people reduce spending, which means more businesses could be hurt due to decreased business.

Job losses can also cause individuals to take on debt to make ends meet, which can result in significant financial troubles for people. These increased debt loads mean less financial flexibility and could even cause people to turn to insolvency processes such as bankruptcy. Not only does this have a financial impact on the individuals who are dealing with debt, but it also negatively affects many retailers and other businesses that count on these people for sales.

Help for Businesses Hurt by COVID-19

There are resources available for businesses that are struggling due to the COVID-19 pandemic. For instance, the Government of Canada is offering financial support, access to credit, and loans during this time. These options include:

• CEBA (Canada Emergency Business Account)
  • Interest-free loans for small businesses and not-for-profits
• CEWS (Canada Emergency Wage Subsidy)
  • Help for businesses to keep or re-hire employees
• CECRA (Canada Emergency Commercial Rent Assistance)
  • Forgivable loans for commercial property owners

Many provincial and territorial governments are also providing assistance. For example, in Ontario, businesses can receive five months of interest and penalty relief to file and make payments for the majority of provincially administered taxes. The province is also temporarily halting or reversing evictions of commercial tenants and protecting them from being locked out or having their assets seized during COVID-19.

However, even with these options being available, many businesses continue to struggle, especially small businesses. Many smaller retailers and restaurants are dealing with the fact that they don’t qualify for much of the support that is available, and this makes staying in business incredibly difficult.