Jeremy Warner: Retailers face up to a slimline future

Outlook First housebuilding, now retailers. After banking, these are the industries in the front line of the deepening economic and financial crisis, though there are plenty of others fast following up the rear. Perhaps oddly, no major housebuilder has yet gone bust, but in retailing they are already dropping like flies. Woolies may be the biggest and most iconic name to have bitten the dust so far, but it is only the outsized tip of the iceberg. Scores of smaller retail chains have been forced to quit the high street over the past year.

Unfortunately, the process is far from over. To the contrary, the number of retail insolvencies is expected to climb sharply in the immediate aftermath of Christmas.

The reason it is possible to be precise about the timing is that the post-Christmas period is when retailers are traditionally at their most cash rich, with the tills swelled by seasonal shopping but before the money is depleted by quarterly rent payments, which are usually made in late January or early February, or payments to those that have supplied the Christmas fare. So if bankers are going to pull the plug, this is the time to do it. Never mind other creditors, it is their own interests that bankers look after first. Insolvency is a cynical business.

Woolworth's didn't conform to this pattern because the cash position in the run-up to Christmas had been reversed. Everyone knew the skids were under the company, which meant that suppliers couldn't get credit insurance and therefore demanded cash up front. Bankers were faced with a situation where there was a cash outflow as the season of goodwill drew near, rather than the usual inflow.

With half-year results to announce, John Browett, chief executive of DSG International, the Dixons, PC World and Currys electricals retailer, was forced to spend most of yesterday trying to convince the City and the financial press that he wasn't about to go the same way. As with Woolies, credit insurers are said to be nervous about underwriting suppliers to DSG, while sales in the group's British, Spanish, Italian and central European operations seem to be falling like a stone.

A major electricals retailer in the US, Circuit City, has already suffered the same fate as Woolies in the UK. Worries about the company's solvency have caused credit insurance to dry up, forcing the company to pay cash for supplies and driving the company into Chapter 11 bankruptcy protection. Might not DSG find itself in a similar bind?

Absolutely not, insists Mr Browett. Unlike either Woolies or Circuit City, DSG is relatively ungeared and is in market leading positions in most of the countries it operates in. The dividend has been axed to save cash, but however bad things get in the core British business, the group's wide geographical spread with strong and highly profitable businesses in Scandinavia should enable the company to see out the recession relatively unscathed.

Yet whatever Mr Browett says, it is easy to see why investors are running scared. Woolies was a special case with serious issues around structure and format, but in general the retailers hit hardest by the downturn are those such as DSG selling relatively big ticket items heavily dependent on credit card or consumer credit.

What's more, unlike almost every other area of retailing, which is downsizing fast to cope with the ever shrinking market, capacity in electricals is set to expand with the arrival on these shores of Best Buy from the US determined to eat DSG's lunch. We'll see.

The bottom line is that across the retailing sector as a whole, we are into a period of massive consolidation in which the number of high street outlets is likely to shrink dramatically. Strange to recall that less than two years ago, virtually every retailer worthy of the name had hugely ambitious plans for expansion. Even at the time, it was hard to see how the debt-laden British consumer could possibly accommodate all this extra space, but today the plans of yesteryear look like complete lunacy.

For years, Britons have been living beyond their means on the back of an unsustainable credit boom. Retailing expanded to match. If we have, on average, been spending roughly 10 per cent more per year than we were earning, which if anything is probably an underestimate, then retail space will have to shrink by at least that amount to come back in line with means, and that's before taking account of the hit to demand from rising unemployment. That's quite an adjustment, much of which is still to come.

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