Thursday, 27 November 2008

Demise of Woolworth : Analysis by Robert Peston

By Robert Peston

The manner of Woolworth's demise as a going concern was almost as shocking as the fact of its collapse into administration.
Although Woolworth had been one of the UK's weaker retailers for years - propped up by a decade of benign, debt-fuelled trading conditions which we now know to have been unsustainable - it was done in by a sudden deterioration both in the real economy and in financial markets that took hold four weeks ago.
And it's the suddenness of how everything turned bad that shocks - and means Woolies will not be the last casualty.
Up till then, Woolies sales had been broadly flat. Then, on an underlying or like-for-like basis, sales dropped off a cliff, falling by double-digit amounts in percentage terms.
Around the same time, many of its suppliers found they could no longer insure against the risk that Woolies would no be able to pay its bills. So Woolies was forced to pay suppliers in cash for all that important Christmas stock.
In the process Woolies maxed out its borrowing facility: its debt rose to the £385m limit imposed by its lenders, led by GMAC and Burdale (part of Bank of Ireland).
Perhaps unsurprisingly, GMAC and Burdale - each of which is owed around £70m - yesterday decided enough was enough, and pulled the plug. Other financial creditors include Bank of America, Barclays, GE, Wachovia and KBC, with GE owed the most of this bunch, or £50m.
Now what's significant is that Woolies is far from being the only retailer pummelled by the sharp contraction in Britain's economy and also by a sharp and painful rationing of credit insurance.
Many thousands of British businesses have had their insurance cover withdrawn for supplies to companies perceived by insurers as poor risks - and that's causing havoc on the high street.
Unless something can be done to persuade the big providers of credit insurance to reinstate cover - and that would probably require taxpayers to provide some kind of guarantee - Woolies will not be the last substantial victim.
Also, just because Woolies has been something of a lame duck for years, that does not mean its demise is somehow a self-contained episode, with little consequence for the broader economy.
The inevitable loss of jobs, perhaps 20,000 of them, will cause misery and hardship in itself.
There's a hole in the pension fund of £100m, so the Pension Protection Fund will have to pick up the bill for some of the group's pension liabilities - which drains the resources provided to the official protection scheme by other pension funds.
And then there's the knock-on to companies that supply Woolies stores with more than £1.5bn of goods every year. At a time when the UK economy is shrinking fast, the loss of these orders will be painful for hundreds of businesses.
Also Woolies owns a substantial wholesaler of books, music, games and DVDs, Entertainment UK, whose turnover is well over £1bn. Entertainment UK has also gone into administration, which has raised the alarming prospect for some big supermarkets and high street stores that they won't be able to get hold of vital stock during the all-important Christmas selling period.
The corollary is that publishers and music businesses are anxious they won't be able to get their stock on the supermarkets' shelves.
What's more, as Richard Fletcher points out this morning in the Telegraph (and on Tuesday night he made the correct call that neither Woolies or MFI could avoid administration), Woolies' collapse will probably spark a price war - since the administrators will probably keep the stores open for the next few weeks, and slash prices to shift all the stock.
That would be good news for shoppers, very bad news for weak competitors.
So perhaps we should all weep for poor, lost Woolies. As it happens, I love its eclectic mix of light bulbs, pic'n'mix and gadgets you never knew you wanted. And for many kids, it's a treasure chest.
But even if you wrote it off years ago as an anachronism, you can't be wholly insulated from the indirect damage inflicted by the manner of its end.

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