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By
Reuters
Published
Jul 3, 2011
Reading time
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Retail bloodletting has only just begun

By
Reuters
Published
Jul 3, 2011

Fri Jul 1, 2011 - A string of retail failures could be the tip of the iceberg as shoppers cut back dramatically on non-essentials.

Analysts say more will go to the wall in coming months as consumers, grappling with rising prices, particularly fuel and energy, subdued wages growth, a lack of credit, job insecurity, a stagnant housing market, government austerity measures and fears of interest rate rises, further rein in spending.


The past few months have seen the collapse of a raft of well-known retail names, including wine seller Oddbins, home improvement firm Focus DIY, home furnishings retailer Habitat UK, Moben Kitchens owner Homeform, fashion retailer Jane Norman and discount department store chain TJ Hughes.

Even retailers still in business are closing outlets as demand wanes and trade shifts to the internet. Mother and baby products firm Mothercare (MTC.L), chocolatier Thorntons (THT.L), floor coverings retailer Carpetright (CATVU.L) and electricals firm Comet (KESA.L) are closing hundreds of stores between them.

That is bad news for landlords -- usually property companies and local councils -- and bad news for local communities, particularly in less affluent areas where retailers are usually first to close down stores.

The eastern England town of Harlow, where a quarter of retail properties are vacant, is a case in point.

"This used to be full of shops," says Tom Pead, a shop assistant in a model and hobby store in a Harlow shopping centre lined with empty shops.

"It is an eyesore, isn't it?" said Jon Richards, a retired mechanic surveying a market square surrounded by almost as many boarded-up stores as open ones.

"I do not know what they are going to do about it. I do not know what they can do about it."

Recent official data showed real household disposable incomes were 2.7 percent lower in the first quarter than a year earlier, the biggest annual fall since 1977.

"I would expect there to be more failures," said Lee Manning, reorganisation services partner at business advisory firm Deloitte.

He said another wave of retailer administrations could be worse than the one at the end of 2008 and early 2009 at the height of the credit crunch when a raft of household names, including Woolworths, MFI, Zavvi and Viyella were consigned to the history books.

Manning said it was likely more big names will go bust. "We are aware of one or two that are still not performing ... I would expect there to be a few more casualties," he said.

Data from the Insolvency Service showed administrations in the retail sector jumped 55 percent to 124 in the first quarter of this year from 80 in the fourth quarter of 2010.

Analysts expected the second-quarter number to be higher.

MARY PORTAS TO THE RESCUE

The government hopes retail consultant and TV personality Mary Portas can come up with answers. It has asked her to look at ways of reviving high streets where shop vacancy rates have more than doubled to 14.5 percent over the past two years, according to the Local Data Company.

However, regenerating town centres is likely to cost money the government can ill afford when it is slashing spending to reduce a record budget deficit.

Retailers that sell big-ticket discretionary goods -- large electrical items and furniture -- and those with poorly developed online offerings are the most vulnerable, particularly if carrying a high debt burden.

"Takings and margins are under pressure and yet there is very little you can do with the cost base of a retailer, because you have got to pay the employees and the rent is fixed," said Brian Green, restructuring partner at consultant KPMG.

"The ones that are not doing well, it does not take much of a reduction in sales to have a disastrous effect."

He noted that on Tuesday the founder and chief executive of Carpetright, Philip Harris, who has been selling carpets for 53 years, described the current environment as "the most difficult times we have been through".

"If he is thinking that and he has got so much experience in retail, good luck to everybody else," said Green.

The recent spate of retail administrations was linked to the end-June 'quarter day', when store rent for the third quarter became due.

The next pinch point for retail failures will likely to be the end of September when fourth-quarter rent becomes due. At that point, most retailers have their worst cash position of the year, having committed to stock for Christmas.

"The end of September is going to be an extremely tight time for cash flow," said Julie Palmer, partner at insolvency specialists Begbies Traynor.

A critical situation may be made worse by the reluctance of banks to commit additional funding to support struggling retailers.

"There is an appetite to fund good retailers, but there is a limited appetite for average retailers and they do not want to support the poorly performing ones," said KPMG's Green.

Begbies Traynor's Palmer said some weak retailers had managed to stay afloat over the past couple of years by taking up the slack of previous failures in a period when interest rates have been historically low.

Markets are not expecting the Bank of England to raise rates until the first or second quarter of 2012. If it comes any earlier, it should make matters worse.

"At some point an interest rise is going to come on the horizon. If that happens towards the end of the year then it could not really happen at a worse time for the retailers," she said.

(Editing by Chris Wickham and Dan Lalor)

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