High street weathers the storms of 2009

The retail sector is a saner, more rational place after a year in which the axe fell on some chains but others did surprisingly well. James Thompson reports
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The Independent Online

So how was Christmas for you? That is the question many retailers are now asking each other because despite claims to the contrary, the performance of the high street this festive season has been patchy – and not just because of the cold weather.

While many retailers claim to have done better than expected, few figures are yet available. The statistics that have been published are mostly worrying, suggesting declines in footfall on the high street on most days last week. Even before and after the big freeze, shopper numbers were down, and economic data on savings and borrowing suggests that Britons have been more inclined to pay off debt and put money by in recent months than to spend it in the shops.

Indeed, 2009 seems to be ending as it began for the retail trade. The year kicked off with the dreadful sight of Woolworths, which had been on the high street for 99 years, shutting its doors for the final time; and almost 12 months later, Borders UK, the 45-store bookseller, did the same on Christmas Eve.

It has not been all misery, despite the most enduring recession of the modern age. There have been well-run retailers that grew profits as consumer spending proved more resilient than expected. On Boxing Day there were a fifth more shoppers on the look out for bargains.

Still, this has been a year that will shape the high street's future. For instance, the Icelandic investment empire of Baugur, which controlled retailers from the toy specialist Hamleys to the department store House of Fraser, crumbled under a mountain of debt; and Marks & Spencer hired a new chief executive to replace Sir Stuart Rose. We have also had a few surprises, such as Waitrose emerging as the fastest growing grocer, leaving its bigger supermarket rivals, as well as the discounters Aldi and Lidl, trailing in its wake at the year end.

This year will also be remembered as ushering in a growing acceptance of the company voluntary arrangement (CVA), a more palatable insolvency procedure than administration. Retailers typically use CVAs to agree with landlords compensation to ditch unprofitable stores, and the procedure enabled three struggling players, JJB Sports, Focus DIY and Blacks Leisure, to fight another day. The property sector also compromised by allowing many retailers to pay monthly rents, instead of quarterly in advance, to ease their cash flow woes.

JJB, which now has 253 stores, was able to shed 140 unprofitable stores by completing a CVA in the spring, but even leaving that aside, the sports equipment retailer has had a busy time, with a series of restructuring measures taken by Sir David Jones, its chairman and the rescuer of the fashion chain Next in the late 1980s. Even before the CVA, JJB had sold its fitness clubs for £83.4m to Dave Whelan, the retailer's founder, and then staged a rights issue to raise £94m in October. It has used some of the funds to pay off its debts, but the rest will be used for working capital, notably restocking its empty shelves from February 2010.

While he was feted for saving JJB, the judgement of Sir David was called into question over a £1.5m loan received in 2007 from Mike Ashley, the colourful founder of rival Sports Direct and owner of Newcastle United. An unedifying series of claims and counter-claims was played out before it emerged that Sir David had repaid the loan. Relations between the two rivals soured further when JJB turned whistleblower in September over alleged price-fixing allegations. JJB and Sports Direct, which both deny any wrongdoing, have said they are co-operating fully with the ongoing Office of Fair Trading and Serious Fraud Office investigations.

Another retail giant will remember 2009 for altogether different reasons. Primark's founder, Arthur Ryan, ended years of speculation by stepping back from the day-to-day running of the discount fashion retailer in September. The secretive Irishman, who hasn't given an interview for decades, remains chairman, but he handed the chief executive baton to Paul Marchant, formerly Primark's chief operating officer. In 2009, the fashion retailer, which now has 196 stores, opened its first shops in Germany, Portugal and Belgium, and is thought to have other countries. including Poland and Russia in its long-term sights.

While the handover to Mr Marchant went smoothly, the same could not be said of M&S's search for a new chief executive, but the company finally unveiled Marc Bolland, who held the same role at Morrisons, in November. Speculation about who would take over from Sir Stuart, who will remain as chairman until July 2011 at the latest, continued throughout the year, with Asda's Andy Bond and Sainsbury's Justin King seen as the hot contenders.

In October, the M&S succession circus rolled up at an investor day, dubbed a "Britain's Got Talent-style of competition" by its chairman, and the leading internal candidates put on a show. But City analysts were underwhelmed by the performances of John Dixon, the executive director of food, Ian Dyson, the finance director, and Kate Bostock, the executive director of general merchandise, and M&S eventually opted for Morrisons' flying Dutchman.

Even with that distraction, M&S's top brass delivered an improved sales performance, albeit a gradual one, over the year. Its performance in many ways epitomised 2009 for much of the sector. Retailers with manageable levels of debt and a decent range of products weathered the economic storm by keeping a tight grip on costs and stock levels. As a result, companies such as Next, Morrisons and B&Q owner Kingfisher issued profit upgrades, as their worst fears on consumer spending did not materialise. Next actually upgraded profit forecasts four times in six months.

However, for a number of the sector's long-suffering patients, 2009 was the year that the banks finally put them out of their misery. Threshers' owner, First Quench Retailing, called in the administrators in October, and Borders UK followed the next month. FQR, which has more than 1,200 shops, including Wine Rack, The Local, Haddows and Victoria Wine, was just the latest owner of Threshers that failed to combat the big supermarkets on the high street, although the withdrawal of credit insurance to suppliers left its shelves bereft of stock and sealed its fate.

Borders also suffered from severe pressure on its cash flow from a lack of credit insurance and fierce competition from the grocers. It was also unable to stem the tide of book sales migrating into the grateful arms of Amazon on the internet. The bookseller, which launched in the UK in 1997, had also dug its own grave by running into the ground the once-popular Books Etc chain and paying too much for stores on out-of-town retail parks – only to find that British consumers did not want to drive there for books.

However, as 2009 draws to a close, the retail sector is a saner, more rational place, which has left behind some of the excesses of the past. This is largely because of the exit of Baugur, whose retail empire included the toy retailer Hamleys, the frozen food chain Iceland, the department store House of Fraser, and the coffee and tea specialist Whittard of Chelsea.

In the wake of the Icelandic banking crisis, Baugur and its debt-fuelled retail model – often referred to as a pack of cards waiting to collapse – was put into administration in February 2009. In reality, nearly all of its chains carried on trading after Baugur's shareholdings ended up in the hands of administrators. The key group of Mosaic Fashions, which operated Karen Millen, Coast, Oasis and Warehouse, had to go through a pre-pack administration and re-emerge under a different ownership structure with less debt.

Still, the UK's biggest grocers suffered no such problems, and Tesco, Asda, Sainsbury's and Morrisons all turned in strong performances in 2009. The market leader, Tesco, which operates in 14 countries, delivered pre-tax profits of more than £3bn. But Tesco's underlying UK sales growth trailed its biggest three rivals for much of the year, despite a massive investment in its Clubcard loyalty scheme. The power of the big four dampened the growth of the discounters Aldi and Lidl, as shoppers reverting to pre-recession habits also helped. But it was Waitrose, the John Lewis Partnership-owned grocer, that ended the year with the strongest sales momentum after the hugely successful launch of its Essentials value range in March.

The year ahead What's in store?

We will start the new year as we are ending the old one: retailers are not quite sure what lies in store in 2010 but most expect a tough year of trading, held back by the uncertainty over the election, tax rises, stubbornly high unemployment and a potential turn for the worse in the economy and housing market.

The year will not start on a positive note, as VAT goes back to 17.5 per cent on 1 January 2010. The jury remains out on whether the reduction in VAT to 15 per cent in November 2008 had any impact on stimulating consumer spend, but it is likely to subdue purchases of big ticket items early in the new year. A far bigger concern for retailers is that the next government may hike VAT up to 20 per cent or introduce a new special 5 per cent rate on food, which is currently exempt.

Certainly no one is expecting a deluge of the big administrations seen around the end of 2008, but such tax rises will not help struggling store groups in 2010.

Still, the England football team could give the sector a major boost with a strong performance in the football World Cup in South Africa that kicks off in June. Of all the UK's struggling retailers, JJB Sports will be hoping that Wayne Rooney and his team mates deliver the goods. The other big winners from the World Cup could be the grocers, particularly if the weather plays ball with a barbecue summer.

Among the grocers, the big talking point in early 2010 will be the successor to Marc Bolland as the new chief executive of Morrisons.

In the electricals sector, spring will see the eagerly anticipated – and delayed – launch of Best Buy in the UK through its retail joint venture with Carphone Warehouse. Best Buy has said it will open between four and five UK stores in quick succession, but it could be years before the US electrical giant's store estate reaches a scale to challenge DSGi's Currys and Kesa's Comet chains – unless it makes an acquisition.

What is more certain is that some of the sector's rising stars, including the fashion retailer New Look and the online grocer Ocado, will float on the stock market in 2010. But overall, the excitement of IPOs will only offer a brief respite from what is expected to be tough year of trading in 2010 whoever forms the next government.