Survival: the gift that is out of stock
Christmas trading represents the 'final throw of the dice' for some retailers, finds Simon Evans. So after Woolworths and MFI, who will be the next casualties?
Sunday 30 November 2008
Back in early September when The Independent on Sunday revealed that credit insurers had withdrawn cover to suppliers of Woolworths, the life support machine keeping the feeble but iconic retailer alive was in effect switched off.
At the time, Woolies' advisers rubbished the claims, only to perform an embarrassing U-turn days later with the admission at its half-year results that credit insurers had indeed withdrawn cover. The company also posted a £100m loss in six months of trading – one of the worst in its 99-year history.
At the same time, the banks acting as major creditors to Woolworths continued to play up the retailer's chance of surviving. "I really cannot understand why you press are so negative about Woolworths' chances; it really can be turned around, otherwise we wouldn't have backed it in January," said one banker.
But privately, as the events of the past few weeks have shown, they too had come to the conclusion that Woolworths was dead. And the decision to claw back their £385m had begun.
As Woolies was being carried away, MFI, the flatpack chain that was once the UK's biggest furniture retailer, worth more than £1bn in its 1980s heyday, was being bought by its management from its private equity backers. Less than two months later, MFI has also bitten the dust as the chances of any reversal of fortune have quickly evaporated.
Brian Roberts, research director at Planet Retail, says: "The Woolworths trading model has been broken for a long time. It was and remains a terribly vague offering. Woolworths has been a tale of under-investment and perhaps it can also be argued that poor management contributed to its demise. As for MFI, it has been under massive competitive pressure for as long as I can remember. It has never really shrugged off the stigma of poor customer service that many people received back in the 1980s. Woolies might come back in some guise. I very much doubt MFI will."
This weekend, prospective buyers are surveying the carcasses of both Woolworths and MFI. Administrators performing the carve-up operations of the companies have claimed multiple interest in both.
But the fallout from Woolies' collapse has already claimed a victim among its suppliers. Shares in Metro-dome, a company listed on the Alter-native Investment Market, lost a third in value as it disclosed it was owed over £300,000 by Woolies. Other casualties will emerge in the coming weeks.
The final failure of Woolies and MFI won't have come as a surprise to most. The timing, though, has spooked people – just ahead of the key Christmas trading period.
"Christmas is simply going to be the final throw of the dice for many retailers," says Mr Roberts. "There is going to be plenty more blood shed in the first quarter of next year."
Where that bloodletting takes place is now the macabre game being played by fund managers and analysts across the Square Mile. High on their list is the electronics retailer DSG, owner of the Dixons, Currys and PC World brands in the UK. Last week it posted a £30m loss and scrapped its dividend for at least three years. A 10-point plan instigated by chief executive John Browett seems to have had some positive effects but a poor Christmas period could see the group go under.
Suppliers to DSG recently had their credit insurance cover withdrawn from the group, with the same stance being adopted on Kesa Electricals, the owner of Comet, which has 250 stores up and down the country.
A look down the membership list of the British Retail Consortium yields little yuletide cheer for other players. Blacks Leisure, the outdoor clothing chain, is suffering badly. After posting dismal half-year losses at the end of October and scrapping its dividend, the group is seeking to restructure, attempting to pull out of key deals with the likes of surfwear brand O'Neill.
Jessops, the camera group that has seemingly lurched from one crisis to another, will unveil preliminary full -year results in the coming weeks that are once again expected to be bleak at best.
A trading update from JJB Sports is due in January that could also make grim reading, with City analyst Altium predicting that pre-tax profits could be as low as £9m for the full year – down from £34m the previous year.
Carpetright's 500-plus stores in the UK and Ireland have been hit hard in 2008 and this is expected to reflected in its results on 16 December.
"What I worry about is that through September and October the consumer felt that [the credit crunch] was a London-based problem, and so they delayed spending," says Freddie George, retail analyst at broker Seymour Pierce. "In November, people realised that this situation is actually serious, and so they are not just delaying spending but cutting it."
Signet, the jewellery chain that owns brands such as Ernest Jones and H Samuel, last week posted alarming pre-tax losses for the 13-week trading period to October of $23.6m (£15.4m), against a profit of $3.8m last year.
"Things all sound terribly grisly and ghastly at the moment," says Simon Murphy, fund manager at Old Mutual Asset Managers. "If a retailer is going to survive through this downturn, it is going to need to have plenty of cash and very little debt. There are lots of cheap companies out there but, as Woolies has shown, you can lose your shirt quite easily. I want to be able to sleep at night."
Those savvy and outspoken knights of the high street, Sir Alan Sugar and Sir Philip Green, have vast fortunes built on the consumer, but even they have been caught out by recent events. Sir Alan tried to buy a stake in Woolies, while Sir Philip was forced to abandon his attempts to take over the struggling suits group Moss Bros last week, saying it "was not the right time".
The other knight of the high street, Sir Stuart Rose, has also had a tough time of late and, if early readings are anything to go by, is set to face an even tougher Christmas. The once unthinkable scrapping of the Marks & Spencer full-year dividend and, perhaps, the scrapping of the once seemingly omnipotent Sir Stuart, could be around the corner.
It might be doom and gloom for most on the high street but some are bucking the trend. The cut-price clothing retailer Primark and the cheap-and-cheerful food groups Aldi and Lidl are prospering as consumers look to make the pound in their pocket go further. Poundland recently opened its 200th store in Britain.
"Beyond all this hysteria, you've got to remember that many firms are still turning a profit in the retail sector," says Old Mutual's Mr Murphy. "Time and time again, across all industries, it has been shown that where there are massive capacity withdrawals, the companies that are left standing prosper on the other side," he adds. "Take Woolies: its demise is going to play very well for HMV."
Last week the broker Deutsche Bank predicted that the HMV chain, which has had its fair share of problems throughout the past decade, is likely to be a Christmas success: "Growth in the games market and its low-ticket nature should make it a winner."
But winners will be few and far between. Last Friday the CBI said that 62 per cent of retailers reported lower sales in November compared with a year ago, while 37 per cent of those surveyed said they were expecting a poor Christmas.
In anticipation of a dire festive period, the discounting frenzy among retailers has already begun.
John Lewis last week became the latest to plunge headfirst into the discounting pool, slashing up to 25 per cent off some of its goods. Debenhams, the Sir Philip Green- owned BHS and Marks & Spencer have all held 20 per cent jamborees of late, with the promise of more to come.
"Once the dust has settled on the Christmas and New Year trading period, we'll find out who has survived," says Mr Roberts at Planet Retail.
The bloodiest Christmas trading battle in retail history is set to yield more casualties soon.
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