European retail and consumer goods companies are suffering the highest level of distress since the global financial crisis, according to Weil Gotshal & Manges’ latest European Distress Index.

The pain for retailers comes amid wider strains for European companies, with distress rising across all major economies in the region and seven out of 10 industry groups now worse off than a year ago, with industrials following retail and consumer goods as the second most distressed sector.

Weil says the deterioration in Europe has been more severe than projected at the start of the year, driven by tighter lending conditions, inflation and weaker consumer demand, which is impacting revenues. 

This is also being exacerbated by geopolitical volatility, trade disruption and tighter fiscal policy, which are all weighing on confidence and slowing investment. Taken together, businesses have less capacity to absorb shocks, raising concerns around corporate resilience, Weil says.

Andrew Wilkinson, partner and co-head of Weil’s London restructuring practice, said: “This quarter’s data confirms a deepening of corporate distress across Europe. Retail’s position is a warning sign: rising costs and falling confidence are pushing firms to their limits. In a more fragile macro environment, businesses are more vulnerable to shocks – whether that’s a cyber-attack, a trade disruption or a tightening of credit.

“Resilience is being tested not just by one-off events, but by the accumulation of stress. That’s why building resilience into business models is more important than ever – both operationally and financially – to withstand a prolonged period of volatility.”

The stress in the retail and consumer goods sector is being driven by a mix of rising input costs, margin pressure and subdued consumer demand, with UK-based companies particularly impacted given weak discretionary spending. Trade uncertainty is also impacting exporters.

The UK is the second-most distressed market in Europe after Germany, even after the UK saw its economy grow in the first quarter. This has been driven by deteriorating investment, sentiment and valuation metrics coupled with cost-of-living pressures and government policy uncertainty dampening business confidence.

In Germany, subdued manufacturing output and exports means the economy is now projected to contract for a third consecutive year, with corporate distress levels in the country back to near where they were during the pandemic.

Neil Devaney, partner and co-head of Weil’s London restructuring practice alongside Wilkinson, said: “While the direction of travel was anticipated, given recent geopolitical events, the increase in signs of distress across Europe is nevertheless striking… In the current operating environment, businesses are having to adjust to multiple challenges – from interest rates and input costs to geopolitical and trade disruption – and we’re seeing fragilities surface across the board.”