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News - 29 November 2008

Woolworths. When did it all go wrong?

Contrary to popular opinion it wasn’t the banks that finished off the iconic High Street store, nor the looming recession and faltering consumer spending. It was just poor management over a long period of time.

This week the fight to save 800 stores and the company’s wholesale distribution arm came to an end when they were placed into administration with debts of £385m. At the time of its collapse on Thursday the stores alone still had a gross turnover of £1.7bn p.a. leaving aside the distribution arm which remains profitable.

The problems started seven years ago when Woolworths demerger from the Kingfisher Group included a disasterous sale-and-leaseback of its property portfolio. This gave a short term injection of about £615m in cash but left the chain at the mercy of rising rents and onerous lease terms like upward-only rent reviews. At the time of the demerger its rent bill was £70m and by the time it went under this week it had increased to £160m. Mired in debt and with its suppliers unable to get insurance against default, its bankers declined to extend the already stretched credit line any further.

In the end the company succumbed to the straw that breaks the back of many businesses…. cash flow or more precisely, the lack of it.

The increase in the cost of rents was only one element of the stores demise however. Its business practices had hardly changed in 20 years although the Woolworths "concept" had gone through several evolutions searching for a model that worked. It carried too much stock in its warehouse and not enough on its shelves and it always seemed to end up selling the same things that people could get cheaper somewhere else, especially at the supermarkets.

Competing with the supermarkets was never a good plan but when Wal Mart bought Asda in 1999 discounting of the very same general merchandise that Woolworths sold suddenly became intense and Woolworths couldn’t match Wal Mart’s might. It was at this time that cleverer (although almost as desperate) retailers like W H Smith abandoned all efforts to compete and returned to their core markets. Sadly Woolworths didn’t know what its core market was any more.

At the end of last year Woolworths’ gross turnover was £1.7bn but the operating margin for the High Street stores was just 0.2 per cent and it was at this time that one analyst pronounced the retail arm of the business “worthless”.

Now the names of a bewildering range of potential suitors is swirling around in the press including Dragon's Den star Theo Paphitis and Arcadia's Sir Philip Green but none of them will want to keep 800 stores. At best, if Woolies survives, it will be slimmed down to between 250 and 400 shops in the best locations.

Even if the recession hadn’t come along at the tail end of 2008, Woolworths in its current format would still have been unlikely to see the tail end of 2009.

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