As the 6.30pm train to York pulled out of London’s King’s Cross station on
Friday evening Steve Johnson had a rare opportunity to pause for breath.
For the first time in more than three weeks the Woolworths chief executive was
able to make the trip back to the Yorkshire village of Lower Dunsforth to
see his wife and children. But his mood was hardly one of relief – his
company had gone bust.
The previous 10 days had been a whirlwind of tense meetings and frantic phone
calls during which Johnson spent 15-hour days at Woolworths’ imposing 1950s
Marylebone headquarters before flopping into bed in the early hours at his
flat in northwest London.
At times it looked as though Johnson – parachuted in to save the stricken
business only three months ago – would succeed in keeping the plates
spinning as he tried to engineer a complex three-way break-up of the
business.
Under his plan the group’s chain of iconic high-street stores would be sold
for a nominal £1 to restructuring expert Hilco, which would assume more than
£300m of the group’s £385m debt mountain; a £115m deal would be struck with
the BBC to dispose of a 40% share in a DVD publishing joint venture called 2
Entertain; and Woolworths’ bank lenders would be persuaded to keep hold of
Entertainment UK (EUK), its wholesale distribution business.
But by last Tuesday night the chances of pulling off the transaction looked
increasingly slim.
An army of accountants, lawyers and businessmen played out the drama at
Woolworths’ HQ sustained by Marks & Spencer tuna and chicken
sandwiches and the company’s famous own pic‘n’mix sweets. Johnson yo-yoed
between hope and despair, but by Wednesday lunchtime the game was up.
Trying to get an agreement between the consortium of eight banks that
controlled £350m of Woolworths’ debts – not to mention two American funds,
ADM and DK Partners, which held the other £35m – had proved impossible.
The spinning plates came crashing to earth and Woolies’ 99-year reign as the
nation’s favourite variety store was over.
The group’s 815 stores and its distribution arm collapsed into administration.
Shares in the company, which had slumped to 1.25p, were suspended.
The ramifications were immediate. That morning a lorry had left Universal
Music’s warehouse in Milton Keynes with a cargo of 200,000 copies of Take
That’s new CD, The Circus, one of the most hotly anticipated albums of the
year.
Just over an hour into the journey to Hayes in Middlesex, the driver’s phone
rang. The message he received was simple: pull over and don’t make the
delivery to a depot operated by EUK.
“If they had gone through that gate there would have been a problem,” said an
industry source. The lorry, carrying thousands of Christmas stocking
fillers, returned to base – just as EUK and its piles of stock were put in
the hands of the administrators.
EUK served several big retailers, including WH Smith, J Sainsbury and Zavvi.
This weekend they were scrabbling to find an alternative supplier of CDs and
DVDs for the lucrative Christmas market.
For Johnson, Woolworths’ demise meant missing out on an incentive package that
could have made him very rich. Now he must depend on the largesse of the
administrator for his December pay cheque – along with the rest of the
group’s 30,000 employees. And the retailer that started out in America in
1878 and opened its first British store in 1909 looks all but dead.
Arguably the rot set in at Woolworths the moment it was demerged from the
Kingfisher group in the summer of 2001. Its freehold stores were sold off to
the property tycoons Ian and Richard Livingstone in a £614m deal and cash
was returned to shareholders. But it was a deal that was ultimately to
cripple the chain.
It saddled the business with a spiralling rent bill that gnawed away at
profits. Worse, the business model was bust. While rivals bowed out of the
low-margin entertainment business, Woolworths kept plugging away, even
though the supermarkets were selling chart-topping CDs and DVDs as loss
leaders at bargain-basement prices.
Chief executive Trevor Bish-Jones had built up EUK to supply entertainment
products to rival chains as well as Woolworths’ own stores. But the rivals
then undercut Woolworths on price and stole its customers.
Woolworths’ sales carried on falling and profits turned to losses. Fixed costs
from rent and interest payments proved unbearable millstones. As trading
deteriorated, credit insurers began to withdraw cover to Woolworths’
suppliers, who increasingly demanded immediate cash payments for their
goods.
But cash was starting to be in short supply and the business began a desperate
search for a buyer for its divisions.
This weekend City sources said that Woolworths had amassed an estimated £280m
inventory of back-catalogue games, videos and CDs. “It beggars belief,” said
one retail rival. “If you have huge cash-flow problems and are about to go
bankrupt, what are you doing with so much cash tied up in a mountain of
stock?”
In the coming weeks the Woolworths carcass will be picked over by predators
eager to snap up what is potentially the biggest bargain on the high street.
Shoppers have already started. The stores are staying open until Christmas and
in the past few days consumers have been piling through the doors. On
Thursday, sales were up by 20% compared with a year ago.
Meanwhile, the corporate ghouls are circling. A team from Deloitte, the
administrator, will spend the next few days holed up in the office of
Woolworths’ chairman Richard North trying to find a buyer.
Deloitte claimed this weekend it was “confident” a purchaser could be found so
the Woolworths name will not disappear from the high street. But the chances
look slim.
It is thought that members of the existing management team, including Tony
Page, head of its stores arm, are working on a deal to salvage the 400
stores that are still profitable.
The cast of characters is potentially long and colourful. Theo Paphitis, star
of the BBC television reality show Dragons’ Den, was spotted coming out of
Woolies’ headquarters at the end of last week. There is some private-equity
and hedge-fund interest, and Ardeshir Naghshineh, Woolworths’ biggest
shareholder, wants to buy the whole business and transform it into a John
Lewis-style company owned by its employees. Naghshineh may be smart and he
is working hard to line up some powerful backers this weekend, but,
unfortunately, the City thinks he is dreaming.
City watchers believe that a break-up of the store chain is the most likely
option. Rival retailers will cherry-pick the best sites. The rest will
close. A raft of retailers including Poundland, the acquisitive discount
chain, and supermarket giants Tesco, Asda, The Cooperative, Iceland and J
Sainsbury are expected to be among the interested buyers. Endless, a
Leeds-based turnaround investor, has expressed interest in the profitable
stores.
The fate of the wider Woolworths Group remains unclear. The only asset not in
administration is its 40% stake in 2 Entertain. Last week the BBC thought it
had agreed to buy the stake for £115m, but the deal fell apart when the
lenders failed to agree with the Woolworths management over the group’s
debt. With half of the 2 Entertain business reliant on EUK, the BBC is now
expected to seek a cut-price deal. THE demise of Woolworths will no doubt be
mourned by the 4m customers who have passed through its doors each week.
Even those who haven’t set foot in a shop for 20 years will probably feel as
though a little bit of their past has died.
For swaths of Britons it was the shop where they bought their first vinyl
single or gorged on bags of penny pic‘n’mix sweets. In the 1960s
and early 1970s Woolies was a cornerstone of British life.
But those days are long gone. The dowdy, run-down stores are stuffed with CDS
and DVDs that can be bought more cheaply in Tesco. The remaining hodgepodge
of household goods – from batteries to soup bowls to balloons – are more
easily acquired in the supermarkets or by shopping online than by sifting
through the muddle of Woolworths’ poorly stocked shelves.
This weekend internet message boards were jammed with sarcastic swipes at
Woolies, including: “Where are youngsters going to go to hone their
shoplifting skills from now on?” and “Just imagine a world bereft of those
alphabet fridge magnets.” Perhaps most damning – and most apposite: “It just
felt like they didn’t really care or have any enthusiasm for what they did.”
The recriminations over Woolworths’ failure will no doubt continue for
weeks. This weekend many in the City were pointing the finger of blame not
at the lending banks for failing to agree a deal, but at the credit insurers
who withdrew insurance cover for Woolworths’ suppliers.
“They are like umbrella salesmen who ask for their umbrella back when it
starts raining or a home insurance salesman who withdraws cover if your
house catches fire,” said one City watcher.
Understandably, the credit insurers disagree. Fabrice Desnos, UK chief
executive of Euler Hermes, said: “Yes, we have become more cautious and that
is absolutely the right thing to do. There is no other solution in trying to
protect our clients. The risks themselves have increased massively. The
number of companies placed in administration or receivership has increased
by 64% year on year.
“People don’t realise that we have no interest in precipitating problems that
we are insuring against. There is no upside for us in doing that."
For the departing boss, those arguments will be of little comfort. Tonight
Johnson will take the train back to London for another week of trying to
ensure that something is salvaged from the wreckage of a once great chain.
Additional reporting by James Ashton, Ben Marlow and Kate Walsh.
American retailers head for a red Christmas
AT 5.30am last Friday Alex Chung joined the queue outside the Union Square
branch of Circuit City in Manhattan, writes Dominic Rushe. Four hours later
he was heading out of the door with a 32-inch flat-screen Samsung TV he had
snapped up for $499 (£325). The same set sells for as much as $756 at other
retailers.
“It was worth the wait,” the 19-year-old New York student said. “There’s not
much of a queue now but there were a lot of people here earlier.”
Yvette Maldorando, 41, was in and out in 15 minutes after buying an iPod Nano.
“I thought it was going to be busy but there’s not much of a crowd,” she
said.
Considering that Friday, the day after Thanksgiving, is supposed to be one of
the busiest shopping days of the year, it was eerily quiet in Union Square.
Next door, in the Virgin Megastore, Radiohead’s In Rainbows CD was selling
for $7, DVDs were $10 and there was a 50%-off sale on “clearance lines”. The
shop appeared to be clearing a lot of lines but, despite all the bargains,
there were no queues at the tills.
“Black Friday” is supposed to be the turning point for retailers, the day when
losses turn to profits – putting bottom-line figures into the black – as
consumers get into the Christmas spirit. Christmas shopping can account for
50% or more of a retailer’s profits. But with the economy in meltdown,
retailers fear they are in for the worst sort of red Christmas.
Record slumps in consumer spending and confidence have already claimed
high-profile victims, including Circuit City. The national electronics chain
is now trading in bankruptcy.
Heavy discounting still seemed to be drawing big crowds across America on
Friday, with shoppers looking for bargains. Tragically, a security guard was
killed on Friday when a throng of shoppers surged into a store on Long
Island, New York.
Despite the bargain hunters, most analysts expect sales to be down this year.
The National Retail Federation forecasts that holiday sales will rise only
2.2% for 2008, the weakest sales gain in six years. The average spent on
holiday gifts this year will be $616, down 29% from a year ago, according to
a Gallup poll – which is more bad news for the American economy, where
consumer spending accounts for 70% of GDP.
It’s too early to tell whether Black Friday was really as bleak as it seemed
in Manhattan but early indications do not look good. On Friday the NPD
research firm estimated that instore traffic was down 25% from last year.
Even online sales are flat after years of growth.
Comscore, a digital technology monitoring company, expects online retail
spending for November and December to be flat compared with the same two
months in 2007. Last year’s growth rate for the equivalent period was 19%.
And in Union Square, the Christmas buzz was sorely lacking. “I was looking at
TVs,” said an empty-handed Tim Mahoney, 33, outside Circuit City. “They
don’t seem that much cheaper here than they are online. I’m going to wait
because I think there are going to be better deals nearer to Christmas.”
