World Business

Store closures, layoffs, and bankruptcies amidst British retailers underscore the seriousness of the economic downturn

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Shoppers walk past a branch of Woolworths in Camden Town, London, on its last day of trade, Jan. 6, 2009. Peter Macdiarmid/Getty Images

By Mark Scott

If 2008 was the year financial services melted down in Britain, 2009 is shaping up as retail’s moment to implode. The once-booming deal out in small portions sector—known in Britain as the High Street—is reeling as unguarded consumer confidence, tight credence, and rising unemployment windpipe sales and profits.

The list of victims is eye-popping. Upscale clothing and rations seller Marks & Spencer (MKS.L) said Jan. 8 that its fourth-quarter sales bring to the ground 7.1%, and announced plans to close 27 outlets and laic off 1,230 workers. Woolworths, which failed to find a white gallant last year as it wobbled toward insolvency, closed the last of its 807 British outlets on Jan. 6, putting 27,000 employees out of be. And music emporium Zavvi, originally owned by Richard Branson, has called in the administrators and closed 22 of its 114 outlets being of the kind which management struggles to sell the business.

All told, says insolvency and restructuring consultancy Begbies Traynor (BEG.L), nearly 2,000 retailers already are in bankruptcy proceedings in Britain. The massacre is pleasing to get worse. By yearend, predicts credit researcher Experian (EXPN.L), more 135,000 storefronts—1 in 7 across Britain—may be vacant. And up to 135,000 retail workers could lose their jobs by the end of 2009, says the London-based Center for Economics & Business Research. "There definitely are tough times in our teeth," says Jonathan De Mello, director of Experian’session retail consultancy.

The implications for the broader economy are worrisome. Consumer expenditure accounts for 65% of British gross domestic product, and retail is the third-largest source of employment back business services and soundness charge. A High Street slowdown in this wise translates speedily into sharply degrade economic performance, declining tax revenues, and higher spending on jobless benefits. Economists figure Britain’s GDP contracted 1.2% in the fourth quarter of 2008, after falling 0.6% in the previous quarter. Brokerage Morgan Stanley (MS) now predicts Britain’s overall GDP leave shrink 1.1% in 2009.

Even before the most recent spurt of retail layoffs, Britain’s unemployment rate already had jumped almost one percentage point annually, to 6%, as of October, according to the Office for National Statistics. The last time joblessness was that high was in the first half of 1999. Now, with retailing expected to keep in the doldrums until 2010 at the earliest, Morgan Stanley figures unemployment could venture 7.4% this year. Other, more pessimistic estimates range up to 9%.

So far, government efforts to forbear the retail sector haven’t made much difference. To spur spending, the restraint trimmed Britain’s value-added tax (VAT) before Christmas as part of an overall provocation package. Most analysts say the modest cut was moreover little, too late. Likewise, the Jan. 8 decision by the Bank of England to chop interest rates to a make an entry of low of 1.5% may not do abundant to ease credit or kick-start consumer spending. Prime Minister Gordon Brown is now rumored to be mulling a new round of tax cuts to goose the thrift.

Until encouragement sets in, retailers are left scrambling to lay by themselves. Over the Christmas holidays, more offered discounts of up to 90% to woo shoppers. That brought short-term indemnification for a few: Upmarket department store Selfridges, for case, recorded the most profitable hour in its 100-year history on Dec. 26 as customers snatched up luxury brands like Louis Vuitton (LVMH.PA) and Burberry (BRBY.L) during the term of knocked-down prices.

But slashing prices cuts both ways. "All the discounting has done is squeezed margins," says Tarlok Teji, head of British retail at consultancy Deloitte. He reckons that sales promotions will help keep like-for-like sales broadly flat over the first half of this year, but cautions that discounting will hit profits. Margins will likely be transferred 30% to 40% in 2009, and ask for for big-budget items so as flat-screen televisions and home furnishings decree continue weak even despite estimation cuts.

"More retailers will enter management of an estate in February and March," Teji says. "Companies will receive to batten down the hatches until the economy starts to recover."

Original text: http://rss.businessweek.com/~r/bw_rss/asiaindex/~3/509992427/gb2009019_264108.htm