BusinessBusiness RecoveryOverview: everything must go in retail sector

Overview: everything must go in retail sector

Prospects: FDs in the retail sector are facing a bleak New Year

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.

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