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Thursday, 27 November 2008

Collapse of Woolworths and what the government can do!

So Woolworths has collapsed...to be honest it’s not that surprising. In these tough times it was one of those stores that were definitely going to struggle. Although these stores have dominate many UK and international high streets for about a century anyone who has been into one lately will have realised that the store format was thoroughly dated and fading fast. It seems almost inevitable that without a substantial change Woollies would fade and die.

Some might argue that recessions are good for this sort of thing, doing away with those businesses that have fallen behind the times and are no longer efficient or desirable in a modern economy. In many ways this is true, however, the size of Woolworths could have a much wider adverse impact in the current market.

In the long run customers will forget Woolworths, spending will move to other stores and the old Woolworths space will be filled. However, in the short run other successfully run companies may not be able to cope with the transition caused by the collapse. For example Woollies had a substantial supply chain across the country supplying a variety of products.

In more normal times these supplies may have been able to rely on debt whilst they wait for demand to come from the other stores that pick up the custom from Woolworths. However without the credit markets supplies cannot get the debt to make this happen. Therefore this part of the supply chain is likely to fail.

Also of worry is the problems faced by many retails that are unable to get credit insurance. This is one of the problems that led to the sudden collapse of Woolworths. With a lack of debt and liquidity in the economy, insurers are unable or unwilling to provide suppliers with credit insurance. In normal times, retailers buy goods from supplies on credit and pay them back as they sell the goods, and the retailers take out credit insurance to protect against the retailer going bust. Without this insurance the supply has to demand upfront payment from retailers which runs down retailer's available cash and can leave them without available funds to continue trading.

Unless something is done able available credit insurance other retailers will go bust, retailers that are far better prepared for the current market downturn than Woolworths. If more retailers go bust then more suppliers will go bust and the efficient retail supply chain that has been constructed will break down.

This is again an example of where the government should have acted rather than cutting VAT and the other broad brush measures announced in the pre-budget report. The current downturn required targeted solutions, not crude populist announcements.

The French government announced this week that they were actively considering providing guarantees for supplier credit insurance. This is an excellent idea that should be high on the Treasury's agenda. If not more retailers will fail, unemployment will rise rapidly and the high street will lose some much loved stores in a years time.

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Friday, 18 January 2008

Belt tightening at Christmas

The Office of National Statistics today produced the December retail sales providing further evidence that the United Kingdom is entering a significant slowdown. These figures add further evidence to suggest that 2008 will be a tough year across the whole economy, not just financial services.

The figures showed that despite it being Christmas and prices being slashed, people have been either unwilling or unable to spend their money either at the shops or online. As a result sales volumes in the three months to December rose by only 0.4 per cent compared to the previous three months and between November and December sales volumes actually fell by 0.4 per cent – mainly in the non-food sector.

Even though many will not have felt the pinch of higher interest rates, lower house prices or higher unemployment, most believe it is coming. Therefore consumers are tightening their belts in anticipation of a rough year. Many people will be looking at their savings (or more likely debt) and wondering how they will be able to pay their mortgage when it is set at a higher rate, or how they would survive if they lost their jobs.

Economic slowdowns are created as a result of both fundamental problems with the economy and people reacting to them. Without this reaction economic activity can receive a significant boost making a downturn less severe. However, without these reactions the economy is merely making the problem worse in the long run. Economic fundamentals become ever more stretched – such as savings, debt and household budgets – and eventually a significant correction is required. This correction could come as a short, sharp shock or it could be a sustained period of below average growth. Either way, this will be painful process for many.

In many ways the UK economy has been putting off a slowdown for too long. Economic fundamentals are looking unbalanced and in need of correction. The extent and timing of the correction is still not clear, however, it seems certain that it will begin in 2008 and will be unpleasant for many.

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