The signs of trouble in the UK high street are highlighted today by the news that shares in the retailer Woolworths have been suspended as they continue with talks in an attempt to save the business. In a statement the company said that it was having discussions with a view to sell some of its 840 stores. This should come as no surprise as last week the FT ran a story indicating that Woolworths could be sold for just £1 to Hilco UK.
So what has gone wrong at Woolworths?
1) The company shows all the signs of being hit by severe business risk. If you visit one of the stores it is like stepping back in time. To be honest they are a retail business living in the 1980s. The world has moved on since then and the many Internet retailers have taken much of the market that Woolworths enjoyed in past years.
2) The company also has significant financial risk. It is a business with some £385m of debt that has to be financed in the current difficult markets.
3) Finally it is weighed down by expensive leases on several of their retail stores.
So today they are looking to raise some cash by selling some of their more profit-making businesses which include a DVD publishing joint venture with the BBC and a wholesale distribution business. If this latest move fails then Woolworths looks set for a further painful period ahead. This Xmas it is not a good time to be a retailer in the UK.
Nov 26, 2008
Woolies under pressure
Subscribe to:
Post Comments (Atom)
Posts
6 comments:
Dear Kevin
Although the Woolworths has been on the newspapers a lot lately and I didn't really until how serious the problems were until I read your blog... (And of course in the Finance Lecture learned bit more about it in depth) It is quite scary how such a big retailer like Woolworths went into administration after operating such a longtime in the industry!
But it seems like Woolworths isn't the only business that fell into administration.
It said in the Financial Times today that MFI, Kitchen seller went into administration after it failed to obtain sufficient backing from its banks. And now that the Businesses have started to fell into administration, who knows what more, there is to come. !
Dear Kevin,
if I may comment on that.
With Woolworths going into administration it is just one single case of a business leaving thousands of employees without a job. According to the Ministry of Justice the "company winding up petitions" figure has increased by 9% to the last quarter up to 3,184 businesses, which had to terminate their trading activities (http://www.justice.gov.uk/docs/stats-mortgage-land-quarter-3--2008.pdf). Those are not all listed but it just shows the immense impact of the financial and economic crisis. The massive fall in consumer spending reuslted in a decrease in aggregate demand and forced the government to act immediately. Hopefully the changes made in the Pre-Budget Report will be able to soften up the economy, but this is in my opinion not going to happen until autumn next year. Let's see how the Christmas shopping will look like - since especially retailers are making between 40-50% of their total revenue during this period, it is likely to expect further bad figures in the next fiscal year.
With kind regards,
Felix
I was recently listening to a radio debate on the Woolworths crisis on LBC 97.3FM, and a very interesting point was made that seemed to outline Woolies flawed business model. Woolworths did not have a competitive edge over any of its competitors in terms of price, product selection etc. For example for general produce such as household goods one would generally say Wilkinsons was a cheaper alternative while not lacking in choice, Argos would be a better choice for bigger household goods such as TV's due to their far better delivery service and many out-of-town locations. For CD's, DVD's and Games etc many people would look towards more HMV, Gamestation etc rather than woolies . I wouldn't say woolworth's business model had deteriated over time,rather woolies executives failed to or acted to late to accomodate customers ever changing preferences. One thing Woolworths did have was a household brand name, which many people will be sad to see go.
Nathan Dyke
Dear Kevin
This is sad but bound to happen sooner or later. They were being squeezed by everyone including the pound shops, online shopping, WH Smiths and the rise of the MP3 player. Woolies was in a very competitive sector, the same as MFI, but they just did not seem to compete well. I am surprised they lasted so long as they lost their core competence a long time ago. Hopefully the reductions in price for Xmas will boost them up a bit but I still don't think it will be enough to cover the amount of debt as it is highly geared. At the same time many individuals who are insecure about their jobs, and there is many of them, are not likely to spend over these holidays or even in the long-run. Overall it will be a great loss!!
Ornela Cenmurati
As you said in the lecture last week, Woolworths’ failure is a consequence of management’s wrong decision making rather than the credit crunch crisis. According to the article “Seeds of Woolworths’ demise sown long ago”, www.ft.com (2/12/2008), it is very clear that Woollies failure has started since 2001 with the process of selling and leasing back 182 of its stores in return for £614m of cash, paid back to Kingfisher shareholders during the demerger process. As you have mentioned in the analysis of the article 17 in your book regarding Sainsbury’s case, sale and lease back is a good transaction used by outsiders but not a good idea for the owners of the business because it will be followed by irreversible damages. And that is exactly what happened to Woolworths. The downfall started. Crippled with debts as a consequence of not keeping up with lease payments made Woolworth unable to make new investments necessary to make the business viable. Although Woolworths is a 100 years old home brand, now that it has gone into administration more bidders (interested before) are deciding not to pursue their deals to buy the brand, like Icelandic investment group or Dragon’s Den judge Theo Paphitis, who owns Ryman – stationary store and is still indecisive. It looks like Woolworths brand has more chances of fading away rather than finding a new owner and 30,0000 employees might be left in a double cold amid this wintery days, like my husband is left from MFI awaiting MCR administrators final notice. And a big irony added to this is the government's introduction of the Welfare Reform Bill on the Queen's Speech yesterday aiming to put people into sustained employment and discourage them from being on benefits. I wonder how they are going to achieve that when businesses are announcing job cuts everyday throughout the country.
High street is hit by news of Woolworth’s stores being closed down. The store did not have the best quality goods, but they compete on prices. They were one of the best and cheapest shops to buy kids toys. Woolworths was exposed to financial crisis and tighten condition on the market, which led to its closure. To get any cash flowing into the business they reduced their prices over the Christmas period. Many people rush to the shops to get the best deal. There were more retailers closing down in this period, e.g. Pier, Adams.
Post a Comment