High Street retailers battle for survival

By Rupert Steiner for the Daily Mail
Updated: 04:56 EDT, 10 May 2011

It's a matter of survival of the fittest for retailers as consumers focus spending on essential items. City Focus by Rupert Steiner.

Hard times: Consumer climate has changed as VAT rise and austerity drive hit spending

The story is becoming all too familiar. As shoppers feel the squeeze in their pockets it's the retailers who are bearing the brunt.

A host of High Street names have issued profit warnings blaming tax hikes and fears over job security for driving consumers from the tills.

From music chain HMV to sports group JJB, and even babywear seller Mothercare, all have raised the alert over the gloom engulfing Britain's shopping centres.

But for others the misery sweeping the land finally tipped them over the edge. Wine merchant Oddbins and home improvement chain Focus DIY both recently collapsed into administration, while fashion house AllSaints was brought back from the brink by private equity.

Latest figures from the Insolvency Service show administrations have soared. Over the first quarter there was a 70% spike in the number of failed wholesale and retail companies, rising to 99 from the 58 seen in the fourth quarter of 2010.

So why now, after surviving the downturn for more than two years, are more retailers than ever before pulling down their shutters? And how come it's the private equity boys who are the winners when it comes to hoovering up the carcasses?

The answer is a mixture of timing, the impact of these more straitened economic times, and a flight to quality. To put it more plainly, it's the survival of the fittest.

Retailers have been battling the downturn helped by low interest rates, lenient landlords and concessions from creditors.

But for those who have not been able to get their houses in order the goodwill is beginning to run out and many have used up what financial reserves they might have had to bolster their businesses.

On top of this the consumer climate has changed. The increase in VAT has begun to hurt sales and people no longer feel secure in their jobs so they are in survival mode, sourcing cheaper items elsewhere.

David Hudson, a partner at accountants Baker Tilly, says the recent increase in commodity prices has not helped: 'Inflation is being driven by essential items such as food, cotton, and fuel. Shoppers' outgoings are being used up on items they actually need.

'On top of this you have to factor in the effect big conglomerates like Tesco are having on smaller rivals. Their purchasing power means they are able to buy stock cheaper and undercut on price. Times are only going to get tougher for the retailers.'

Waiting in the wings are the buyout houses. They already own some of the best known stars of the High Street. From Alliance Boots to New Look, Pets at Home, Fat Face, Paperchase, Jack Wills and Cath Kidston - all have sold sizeable stakes to private equity houses.

They bring expertise, having poached managers from trade rivals, and crucially have the funds at a time when industry players are struggling to secure bank debt.

Mark Kelly, partner at HIG Europe, which last weekend rescued Britain's biggest bed-maker Silentnight, said: 'Access to capital for some companies is very difficult. The people we put into these businesses also have a lot of industry experience and are not just financial technicians.

'Our management teams can focus entirely on the core business while firms that are bought by trade buyers rarely become part of the core in certain sectors.'

Also, away from the public gaze private equity firms argue they are better equipped to take a more radical approach to turning a business around. One source said: 'We are prepared to take the risk as long as we feel there is the upside to justify it.'

However, investors who piled into debt-laden Debenhams when it was floated by its private equity backers are still raw from their ride.

But given the current state of the High Street, Britain's troubled retailers are in no position to shop about for their white knight.