Barely a week into 2015 and Bank has already gone into administration, setting a dour tone for what will be a trying year for retail.

After the frenzied excitement of Black Friday, Panic Saturday and Manic Monday the hangover for UK retail has already begun. It started at the beginning of the week with the news that clothing retailer Bank had gone into administration, barely two months after it was sold by JD Sports to a private equity firm, Hilco Capital.

In the scale of things this was relatively minor, but more was to follow. On Wednesday Sainsbury’s reported a like-for-like sales fall (excluding fuel) of 1.7% for the third quarter of 2014, despite a strong Christmas period. This has been followed by steeper declines from Tesco and Marks & Spencer (M&S), with all three mainstream retailers reporting a tough year ahead.

A baptism of fire

Tesco, which is continuing to suffer from the loss of trust caused by an accounting black hole late last year, reported that group like-for-like sales (excluding fuel) shrank by 3.8% in the third quarter of last year. For Tesco this decline was seen as a positive. UK sales fell by 4.2%, but this improved on previous quarters and exceeded market expectations. Pre-Christmas sales, buoyed by the scenes on Black Friday, were only down by 0.3% year on year and online sales saw stronger growth.

Dave Lewis, the new CEO at Tesco, used the interim statement to ring in some changes, which could signal a much larger clear-out as he offloads some of the clutter acquired by his predecessors. Measures announced include the sale of Tesco’s Blinkbox and broadband businesses, as well as a consultation on its Dunhumby consultancy arm. The firm is consolidating its headquarters into one location in Welwyn Garden City, closing its sprawling Cheshunt complex in the process. In addition, 43 stores are to close and plans for a further 49 stores have been shelved. Meanwhile, payroll has been frozen and the company defined benefit pension scheme is set to close.

The savings made will go into reducing prices, notably on Tesco’s 1,000 bestselling lines, in a bid to meet the rising challenge from discount retail. All of this will be overseen by the new UK CEO Matt Davies, who oversaw a strategic refocus as CEO of Halfords. The market has responded positively, despite the news that no final dividend would be paid, and Tesco reiterated its year-end profit guidance of “no more than” £1.4bn (US$2.1bn). Staff morale on the other hand will be less buoyant with employees bearing the brunt of the cutbacks. This may make it difficult for Mr Lewis to deliver better customer service.

More of the same for M&S

The CEO of M&S, Marc Bolland, may be grateful that Tesco is making the headlines, as M&S continues to slide. The M&S clothing division has now seen 14 consecutive quarters of like-for-like decline and the general merchandise division saw decline by 5.8% in the third quarter. Food sales rose marginally, continuing to reflect the fact that M&S may have more of a future in this category than in clothes. The situation was no better internationally, where problems in the Middle East and Russia have also weighed on sales.

Mr Bolland pointed to unseasonable weather conditions as a key factor in sales weakness, warehousing problems have also dented sales. But excuses are running out and did little to assuage investors, with share prices continuing to fall.

Little room for optimism

With Morrisons reporting its Christmas sales next week and WalMart Asda set to report in February, the disruptive influence of online, and particularly discounters, is unlikely to abate any time soon. The first working week of January has set a depressing tone for UK retail in 2015. One silver lining could be that the rapid rise of discounters may begin to see them overreaching, especially as incomes recover and online sales continue to grow. Another is that retailers will emerge from 2015 as meaner and leaner propositions more suited to the cut throat landscape they find themselves in. At this stage, however, surviving and consolidating is the way forward.

  • Jon Copestake, Chief Retail Analyst at The Economist Intelligence Unit