UK retailers collapse under strain of credit crunch

In the week British Chancellor Alistair Darling made a bold bid to get shoppers spending again, retailing casualties are sprawled across the corporate landscape.

In the week British Chancellor Alistair Darling made a bold bid to get shoppers spending again, UK retailing casualties are sprawled across the corporate landscape.

The collapse of Woolworths and MFI have shown that a famous name is no protection against failure as the high street squeeze tipped the previously-struggling duo into the abyss.

The owner of Currys and PC World has meanwhile posted losses of almost £30m (€36m), while Kingfisher – the firm behind DIY giant B&Q – posted a near-9% fall in comparative sales.

The British Government and the Bank of England have both taken action to spur on an ailing economy – Mr Darling with a £12.5bn (€15bn) VAT give-away and the Bank by slashing interest rates to 3% since October.

But in a desperate year for retailers, the early pressure of roaring inflation hitting discretionary spending has given way to fears over job losses as the UK lurches into recession.

The question is now whether Mr Darling’s gamble and the interest rate cuts will come soon enough to help the high street.

Experts worry that a 2.5% VAT cut will have a minimal impact in the current climate. And lower interest rates typically take at least six months to filter through – but banks looking to repair battered finances are not passing on cuts in full.

Vicky Redwood, UK economist with Capital Economics, said: “The failure of Woolworths and MFI and the widespread price discounting highlight how difficult trading has been so far.

“And although we would not rule out some sort of rebound in spending over Christmas (over and above the usual seasonal boost), we think it more likely that the spending slowdown will continue to deepen.”

The British Chancellor’s attempt to put extra pounds in people’s pockets could also be offset by the weakness of the pound, which has plunged almost 25% against the dollar since the beginning of August.

One retailer – Argos and Homebase owner Home Retail Group – recently said its ability to lower customer prices in most categories “will be increasingly difficult” next year as currency effects take hold.

Keith Bowman, equities analyst with stockbroker Hargreaves Lansdown, predicts more retail victims in 2009 to follow MFI and Woolies.

“The retailers going into the downturn in relatively bad shape are feeling the effects of it first of all, but there are others on the edge of that which could get drawn in,” he said.

Price-slashing from the administrators of both MFI and Woolworths could even add to the burden as they look to clear stock at the firm and boost creditor returns.

“Cash is king and getting the stuff off the shelves is the priority,” Mr Bowman added.

Plunging house prices have been the chief catalyst behind retailers’ woes, with B&Q and Currys in the firing line as demand for white goods as well as new kitchens and bathrooms, melts away.

Major chains such as furnishings shop Rosebys have already fallen victim to this trend, with more than 1,200 redundancies.

The housing slowdown – with prices 13.9% lower than a year ago according to Nationwide building society – has hammered consumer confidence and hit spending.

Household expenditure fell at the sharpest pace for 13 years between July and September and in two successive quarters for the first time since 1992, official figures showed this week.

David Jeary, a retail analyst with Investec, warned that next year “will be at least as difficult” as 2008 is proving to be until property prices show glimmers of a recovery.

“We would need to see consumer confidence indices bottom out and housing transactions recover before considering a more positive sector stance,” he added.