The variety store group’s collapse angered and shocked many but why did it fail, should the administrator have done more and what can be learned from its demise? George MacDonald investigates.

November 26, 2008, will be recalled as one of the most traumatic days in retail history.

That day, a year ago yesterday, the death warrant of once-proud high street pioneer Woolworths was signed when administrator Deloitte was called in by the variety store group’s directors.

Within weeks its shops stood empty after the biggest closing down Sale in memory came to an end. At close of business on January 6 this year – the day the last shops shut – almost 30,000 staff were destined for the dole queue and Woolworths, after occupying the UK high street for 99 years and two months, was no more.

Along with the core retail chain of 800 shops, stablemate business entertainment distributor EUK was lost and the value of 2 Entertain, a joint venture with the BBC, was decimated.

While Woolworths’ unsecured creditors were left out of pocket the retailer’s lenders, headed by Bank of Ireland’s Burdale division and GMAC, received their money back in full. The taxpayer bore the cost of Woolworths’ redundancies and pension costs.

It is no surprise that a shock on such a scale provoked strong reaction among many of those involved with Woolworths, who remain furious to this day about its ignominious end.

A year on, the debate boils down to three points. What went wrong at Woolworths? Could a viable business have been salvaged from the wreckage? And what are the lessons to be learned from its sad demise?

On the first point, there is little argument. Woolworths’ reputation for value had been eroded over years as grocers piled into the general merchandise market, established rivals such as Argos sustained a strong performance and shoppers chased low prices both online and in the stores of an emergent generation of value retailers such as Poundland and Wilkinson.

Papering the cracks

Trevor Bish-Jones – chief executive of Woolworths from 2002, soon after its demerger from Kingfisher, until last summer, when he was replaced by Steve Johnson – tried a variety of approaches to regain ground. Despite Woolworths’ travails, his perennial optimism convinced many in the City and the media that the business would somehow muddle on – after almost a century as a high street staple it couldn’t just disappear, could it?

Acquisition interest from private equity funds such as Apax and, as late as last summer, Iceland tycoon Malcolm Walker, although unconsummated, showed outsiders were convinced that the business had a future.

Even in its last financial year, when the credit crunch was in full swing, Woolworths’ retail arm managed to return to profit – although some analysts questioned how it was achieved. In January 2008 the retailer was able to agree borrowings of £385m from lenders led by Burdale and GMAC.

Bish-Jones hailed that refinancing – secured on business assets including stock – as a great day for the business, but it was to have deadly repercussions.

As the year wore on, Woolworths, like other retailers, had credit insurance cut, forcing it to pay suppliers upfront and taking cash out of the business.

In September, Bish-Jones’s replacement Johnson set about trying to enact a radical restructuring but time ran out and in November it went down in the most controversial of circumstances – controversial because many believe that Woolworths could have been rescued, albeit in a radically different form, and because of the process at the end.

Woolworths’ lenders called in Deloitte to advise them, and the advice was not to support restructuring plans. Deloitte partner Neville Kahn subsequently became Woolworths’ administrator, earning the firm almost £4m in fees from the liquidation and raising questions in the minds of some about a potential conflict of interest – claims refuted vigorously by Deloitte.

Such questions added urgency to the question of whether Woolworths could have been saved and there is a long list of those who think it could have been, even if some sort of insolvency measures had to be enacted. Johnson had wanted to offload the stores arm to restructuring specialist Hilco, sell the stake in 2 Entertain to the BBC and retain EUK. Johnson says that as far as he was concerned he had a restructuring proposal for the banks that was “signed sealed and delivered”.

Johnson, who had hoped to recast Woolworths before collapse, recalls: “I went into Woolworths at 10 to midnight and I went in with my eyes open but even when you do that things can be worse than they look. The financial position was more pressing than was apparent and that foreshortened the time we had to take radical action. My sole objective was to ensure the banks were satisfied, a decent business came out the other side and the interests of wider stakeholders were reflected.

“It was always going to be a radical restructure of the retail business, but I fully expected a smaller, 250- to 350-store business would have emerged at the end of the process.”

Sir Geoff Mulcahy, the former Kingfisher chief executive who built the retail powerhouse on the foundation stone of Woolworths, is convinced a viable stores business could have been emerged from the Woolworths wreckage post-administration.

He envisaged a smaller chain of perhaps as many as 600 shops, and hoped to convince the administrator of the viability of that idea. He says this would have necessitated financing, such as a debt for equity swap by lenders, time, and the right management expertise. In those circumstances, he believes, the banks would have recouped their money and the interests of other stakeholders, such as suppliers and staff would also have been better served.

“I think that was realistic,” he says. “What neither the administrator nor the banks understood or believed was that you could transform cash flow by getting the retail disciplines right. It’s difficult for accountants and bankers to accept that.”

Mulcahy thinks the decision to launch into a closing-down Sale was wrong because it was “guaranteed to make a lower return and make a refinancing impossible”.

Richard King, chairman of Woolworths supplier Character Group, which took a £1m hit on its exposure, also questions whether there were not other options for the retailer.

He says: “My feeling is that there were alternatives that would have been better for the world at large. The approach it [the administrator] took was to get the money back for the banks – I don’t believe they got maximum value for the greater good. Part of the business could have been saved but that would have involved more risk about whether they [the banks] got paid.”

Mulcahy is concerned that Deloitte’s roles as adviser to Woolworths’ lenders and later as administrator raises questions. He would like to know why Deloitte concluded that Woolworths should not be supported further by the banks. He asks: “Does the administrator accept that whatever his motivations, the background to his appointment, the revenues earned by Deloitte and the consequences of his subsequent actions raise a very genuine public concern about his role as a partner in Deloitte and his statutory responsibilities as an administrator of Woolworths?”

Johnson and Richard North, Woolworths’ chairman at the time of its collapse, have also questioned whether it is satisfactory that bankers’ advisers in such situations can then become administrators of the affected company.

Kahn and Deloitte “absolutely” reject any question of a conflict of interest. They point out it was Woolworths’ directors who appointed Deloitte. Kahn says: “There was no conflict of interest. We often advise banks in many situations on what their options are.

“In the vast majority of situations where we are brought in by lenders we recommend support and even new money. We are never driven by the fees available but simply by the pure economics of the options for creditors.”

A Deloitte spokesman says: “We were appointed by the banks to review the company’s financial position as there were concerns about trading performance, liquidity requirements and the reliability of Woolworths’ own forecasts.”

Woolworths’ problems also meant that EUK, formerly seen as a successful part of the business, stopped trading within days – again, in the minds of many, a result of a short-sighted approach that destroyed value.

One former senior executive at Woolworths says: “It is incredible how much money was lost in terms of what could have been recouped – EUK now doesn’t exist, when it was valued at more
than £200m.”

However, Kahn says it was widely acknowledged that EUK’s problem was its working capital requirement and existing arrangements with suppliers and customers. Its circumstances put it in a precarious position. “We did everything we could to save it,” he says.

Mulcahy says Woolworths’ fall raises wider questions of corporate governance. To his mind, the retailer’s board should have removed Bish-Jones and Woolworths’ former chairman Gerald Corbett “much earlier”.

Bish-Jones did not want to comment. However, it is understood he stands by his record of having built up EUK and 2 Entertain, and leaving the stores business profitable.

Mulcahy says the corporate governance lesson from Woolworths’ fall is: “Treat management spin for poor performance sceptically. Replace failing management quickly.”

Another lesson, he says, is that when banks ask for an independent financial report there should be no potential conflict of interest. And he further advises retailers: “Choose your bankers carefully, ensure that they and their advisers understand the business.”

King says insolvency procedures would have probably led to the same result at Woolworths, whether or not the administrator had any connection to the banks. “A receiver will always look to pay off the preferred creditors,” he maintains. He would like changes to the insolvency system to give wider considerations more importance.

The Office of Fair Trading has just begun a market study into corporate insolvency that will look into factors including “the appointment process for insolvency practitioners and any features in the market that could result in harm, such as lower recovery rates for certain groups of creditors”.

Johnson says that “nothing suggests Deloitte did anything other than the job required of them” and observes: “The situation with Woolworths wouldn’t have been helped by a different set of regulations. The reality was it was a difficult situation that had been going on for some time and in the worst banking crisis the world had ever seen.”

Lessons to be learned

However, as a general point not specific to Woolworths, Johnson thinks that stakeholders in companies should take a much more active role if things go wrong. “Directors are charged with being responsible and there’s a perfectly good set of laws in place that provide the opportunity to hold directors to account if they haven’t acted properly. Stakeholders should be much more active on that front. People need to be more active in using the existing laws.”

While the original Woolworths has gone, a raft of other retailers has taken its place. Whether it be entrepreneurs such as the founders of Wellworths and Alworths or big businesses such as Shop Direct, which bought the Woolworths name, launched it online and may franchise stores, Woolworths and its spirit live on. In many ways retailers such as Poundland, 99p Stores and Wilkinson became Woolworths when the original lost direction.

So could Woolworths, or part of it, have been saved? Burdale and GMAC declined to comment. Kahn says Woolworths collapse resulted from it running out of money and management failures.

Johnson says: “There were plenty of people who could see the potential for a homewares based, good value business on the high street. The number of retailers that moved into Woolworths’ stores proved the opportunity was there.”

Woolies in numbers

  •    Founded in the US by FW Woolworth, who opened his first store in the US in 1879
  •    First UK store opened in 1909
  •    Last UK store closed on January 6, 2009
  • Final full-year group sales: £2.97bn
  • Final full-year profit: £11.7m
  • Number of UK stores at collapse: 807