Overview: everything must go in retail sector

There is carnage on the high street. Consumer spending has fallen off a cliff and UK retailers are facing the toughest trading conditions in decades. In response, retailers have been slashing prices in an attempt to attract customers and clear the mountains of stock bought for the crucial Christmas trading period.

As the list of high-profile retail administrations grows finance directors in the sector face a grim year.

What’s happened?

Woolworths has been the highest profile retail casualty of the economic downturn so far, with its final stores closing earlier this week.

A string of other retailers have gone into administration over the past few months including Adams, the childrenswear chain, Zavvi, the entertainment chain, and The Officers Club, the menswear retailer.

What’s going to happen?

More retailers are expected to go bust this year. Retail experts say finance directors have little option other than discounting stock even thought this will hit profit margins and is likely to increase company pension deficits.

Pension shortfalls are a worry for staff if a company goes under; they can also scare off possible buyers when a company goes into administration.

FDs face being caught in a pincer movement between pension trustees demanding more money for company pension schemes and company boards and shareholders demanding a boost to sales.

‘There’s going to be further pressure to address those deficits,’ says Kate Heseltine, retail analyst at Seymour Pierce.

And as banks tighten or withdraw their lending to businesses they will come under greater pressure to remain within their banking covenants.

‘In October and November sales dropped off quite sharply, which led to retailers using heavy discounts to entice people through their doors, but it’s taking time for the discounts to feed through,’ she says.

A squeeze on trade credit insurance ­ which protects companies from suppliers not paying their bills — will also add to pressure on embattled retailers. Trade credit insurers are reported to be pulling cover from entire business sectors.