If Steve Johnson wondered what he had let himself in for by agreeing to be the new chief executive of Woolworths, it was laid bare yesterday. According to one City analyst, he has no choice but to rip up the group's tried-and-tested model and become a bucket shop.

Poundland and Wilkinsons, two privately owned discount retailers, were held up as glowing examples of what Woolworths should aspire to be as the City digested the weekend's takeover bid for the chain's 815 stores.

Woolworths reiterated yesterday its rejection of the undisclosed offer from Malcolm Walker, founder of the Iceland frozen-food chain, but analysts echoed the concerns of the group's biggest shareholders in urging the board to turn the business round quickly.

John Stevenson, retail analyst for Shore Capital, said that Mr Johnson, who takes charge on September 1, had to close about 100 stores and sell the group's estimated £200 million stake in its video publishing joint venture with the BBC.

He added: “We see little hope for Woolworths to deliver in its current incarnation. It needs to break out of depending on Christmas for its sales and get customers through the door all year round. If you look at Poundland and Home & Bargains, they are doing this quite successfully.”

Shares in Woolworths rose by more than 11 per cent yesterday to 7.39p amid hopes that Mr Walker and Baugur, the Icelandic investment group and Woolworths' shareholder, will return with an improved offer. The initial approach, backed by Baugur, would have required Woolworths to wipe out most of the store division's debt and cover its pension liabilities, estimated to be the majority of the £48.2 million shortfall in the company's retirement fund. Woolworths called the conditions “unacceptable”.

Experts said that Baugur's support for Mr Walker reflected its mounting frustration at the way in which the Woolworths business has been run in recent years. One executive said: “The Woolworths retail business has been horrible over a long period of time, absolutely terrible. Taking the stores private would enable Malcolm to concentrate on the restructuring rather than worry about shareholders, analysts and you guys [the press] all the time.”

Founded in 1909, Woolworths generates more than £1.6 billion of sales from its stores, yet profits are negligible given low margins and its “something for everyone” approach leaves it vulnerable to supermarkets and online rivals. A profit warning last month revealed that sales at the stores had fallen by 6.7 per cent on a like-for-like basis in the six weeks to July 25. Sales at EUK, its wholesale book, CD and DVD supplier, also fell by 1 per cent.

Analysts believe that over the current financial year Woolworths could fall nearly £10 million into the red.

Nick Coulter, a Numis analyst, said that there was no reason to own Woolworths shares and that the board may regret turning Mr Walker away. “The chain trading performance and the terms of Mr Walker's approach support the view that the retail chain is a net liability,” he said.

“While Steve Johnson has the opportunity to deliver greater value, he faces the stiffest of challenges ... Woolworths may rue a lost opportunity this time next year.”

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive