Thursday, January 1, 2009
--conditions for mid size retailors will be challenge since they have no financial resources to tide them over. Sellers of discretionary items will face largest drought --small retailors will face threat from all sides: falling pound, rents, and taxs --the impact of internet shopping has limited role in eroding high street business Dec 30th 2008 LEEDS From The Economist print edition Amid hectic shopping more famous names on the high street face ruin PA IN THE city centre, Poundland is heaving with post-Christmas bargain hunters snapping up everything from underwear to shampoo, some of it for even less than the promised £1 ($1.46). Elsewhere in Leeds brightly coloured sale signs fill shop windows as varied as Ann Summers, a racy lingerie chain, and Harvey Nichols, a pricey department store. For most on the high street, it has been a grim few months, and Leeds is no exception. Next door to Poundland, the Officers Club, a men’s fashion chain which recently called in administrators, is selling dinner jackets for less than the price of a night out (£20.80 to be exact) and slashing 60% off much else. Nearby a sports outfitter and greetings-card shop are both holding closing-down sales, with 75% off. A branch of zavvi, a music and video store that has also collapsed, is handling queues 20 people deep at its tills as shoppers rush to snap up discounted £2.99 albums and to spend gift vouchers while they can. Nick Hood, a partner at Begbies Traynor, a corporate-rescue specialist, has not seen such “velocity and volatility” in company fortunes in 40 years. He predicts another five or ten notable insolvencies in the retail sector and at least a year of agony before things get better. That estimate does not include recent casualties, such as Woolworths, a big general store, MFI, a furniture chain, and Adams, a children’s clothing shop. The volatility includes an extraordinary 12.8% leap in retail sales in the last week of 2008 compared with the same week in 2007, according to Experian, a market monitor. The splurge was spurred by unprecedented discounts offered by retailers after sluggish pre-Christmas sales. Consumers had held back, expecting even better bargains, and their instinct paid off. Such desperate discounts may have cleared shelves but they have also cut businesses to the quick, spooking potential investors and rescuers, Mr Hood fears. On top of that, the shopping frenzy is likely to be short-lived. Rupert Eastell at auditors BDO Stoy Hayward expects a period of three to five months in which “consumers will not spend”. Conditions will be particularly tough for mid-size retail chains, with 100 to 250 branches, because few of them have the financial resources to tide them over. Sellers of discretionary goods, such as jewellery and gifts, and retailers of household furniture will face the biggest drought. Smaller high-street shops are under threat from all sides: their biggest VAT (value-added tax) bill comes at the end of January; many are reeling from their quarterly rent bill due at the end of December; in April they will be hit by a 5% rise in business rates; and the falling pound has increased the cost of imported goods. Banks feel unable to tide companies over unless they have a convincing business plan—hard in such an unforgiving economic climate. Jonathan de Mello at Experian foresees a radical restructuring of the market as consumer habits change and smaller retailers go to the wall. The winners are likely to be the big shopping centres where people go for an experience which might include a decent meal and also encourages them to shop on impulse as well as for necessities. Shops in high streets without sufficient “footfall”, however, will be among the losers. Meanwhile discounters such as Primark, for clothes, and Aldi, for groceries, are becoming more acceptable to a wider audience. So is Morrisons, a national supermarket chain which has its roots in Bradford. It recently reported that quarterly sales had risen by 8.1% compared with the same period in 2007. Statisticians are puzzling over the role in this crisis of internet shopping and how much it is eroding high-street business. Recent official figures suggest the impact has been limited. Although internet sales have been rising rapidly they still amounted to only 3.8% of all retail sales in November. Overall official figures for retail sales suggest that this downturn is no more dramatic than the one experienced in 2005 (see chart). But there is considerable scepticism about these estimates, which run counter to other surveys painting a much gloomier picture. And the finances of several retailers that overstretched themselves in the good times look shaky. A sudden fall in sales will leave them without cash at a time when bank overdrafts are hard to secure or to increase. There are few investors ready to swoop in to keep cash-strapped companies running. EPIC, a private-equity firm which rescued Whittard of Chelsea, a tea merchant that had gone into administration, is a rare exception. Retailers’ woes will spread far beyond the high street. Leeds has some 41,000 jobs tied up in retailing, accounting for about 9% of total employment, and had planned to create another 3,500 retail jobs over the next decade in part by building two big shopping developments. One of them, Trinity Quarter, is scheduled to open in spring 2010. The planning application for the other has just been deferred. Around 3m people are employed in the retail sector across the country—as many as work in manufacturing. But many of those jobs will be at risk as the retail recession bites in earnest. On December 29th the Chartered Institute for Personnel and Development, a trade body, predicted that 600,000 people might lose their jobs in 2009, of whom a third are likely to be in the retail and wholesale sector. Retailers, buoyed for so long by a protracted consumer boom, are now in the front line of a consumer bust.