Despite all attempts at revival, Woolies finally fell into administration last week. George MacDonald assesses the reasons for its demise and asks if the iconic retail name has taken its last gasp.

As recently as the start of this year directors of variety store group Woolworths were feeling pretty chipper.

Business had been tough for some time but the future – if not so bright as to need shades – looked sunnier. A£385 million refinancing had been pulled off in January and in April Woolies reported a return to profitability at its core retail division.

But last week, 10 years after making a record profit of £105.1 million and seven years after its demerger from Kingfisher, Woolworths was in the hands of administrators.

The scale of 800-store Woolworths’ collapse, threatening 30,000 jobs, and the speed of its final demise shocked the stores sector.

So what happened to the wonder of Woolies? How did almost a century as a high street institution come to such a bloody end?

The impact of the credit crunch and consumer recession were the final blow to Woolworths, but many believe the retailer’s fortunes were in fact decided in the run-up to Woolworths’ demerger from Kingfisher in August 2001. And opinion is sharply divided about whether the seeds planted then were of failure or success.

Those who believe Woolworths was fatally undermined at that time point to the onerous lease obligations the retailer was saddled with. Kingfisher sold 182 leases for£614 million and returned the cash to its shareholders.

Woolies, however, was locked in to lease payments that rose 2.5 per cent a year. The retailer’s rent bill is understood to have climbed from£70 million 10 years ago to£160 million. The fact that Woolworths has more than 700 landlords means that it was extremely difficult to negotiate better terms.

But the retail property world has changed in the intervening years. Valuations and demand have fallen and landlords’ relationships with retailers reflects that. One source close to Woolworths says its problems were exacerbated by the treatment of property at demerger. He argues: “When life got tough, Woolworths had no fixed assets to fall back on in the way other retailers do. Kingfisher effectively sold the management a hospital pass.”

But the effect of Woolies’ property arrangements is regarded as a red herring by others. They argue that, although the point of demerger and associated property sales was to deliver value for Kingfisher shareholders, the standalone Woolworths business was not hamstrung.

The built-in rent increase was actually calculated as less than the average review rise in the five years preceding the demerger, they maintain, and point out that in the years since, many retailers’ property costs will have risen by a similar proportion to Woolworths’.

Kingfisher had been created by former chief executive Sir Geoff Mulcahy, using Woolworths as the springboard, out of the landmark 1982 Paternoster deal. Mulcahy believes the Woolworths that he demerged was positioned to thrive in the future. Alongside the established operation, he had laid the foundations of three growth businesses – hypermarkets, with the Big W format; a convenience arm including food and pharmacy under the Woolworths General Store fascia; and a multichannel presence with Streets Online.

Gerald Corbett, chairman of Woolies at the time of its demerger, said then that the new formats were key factors in making the retailer “well placed for long-term growth”. But all three were soon discontinued.

Mulcahy argues those innovations were in keeping with the changes occurring in retail. He says: “These initiatives were launched while Tesco – and other supermarkets – was in the early stages of developing its hypermarket and convenience store formats, and its internet offers.”
Instead, Woolies focused on its traditional strength in categories such as confectionery, toys and entertainment while admitting that it had to make itself more distinctive in shoppers’ eyes.

In the following years Woolworths refreshed its stores, tweaking formats to better suit locations. But at the same time, as well as competing against traditional rivals such as Argos, the retailer was under assault from the big grocers that were barrelling into the non-food market. And rivals such as Wilkinson and single-price specialist Poundland increasingly attracted traditional Woolworths customers.

“The days when you went to Woolworths for kids’ toys or Easter eggs have been replaced by the weekly supermarket shop,” says one retail adviser. “Woolworths’ price points are higher than Tesco’s, it’s ranging isn’t that good and it’s not that convenient.”

Initiatives such as the introduction of the Worth It! value own-label and a renewed attempt to create a multichannel business with the launch of the Big Red Book were all tried. But Woolworths continued to face difficulties.

The variety store chain was led since 2002 until August this year by Trevor Bish-Jones. He won praise for his efforts as chief executive, but is blamed by others for not changing Woolworths enough.

One source close to Woolworths says: “He did all the right things early on but ran out of ideas about what to do with Woolworths Retail, other than cutting costs and putting prices up. That doesn’t work in the long term.”

But Bish-Jones’ supporters believe such criticism is unfair. One says Bish-Jones built two excellent businesses for Woolworths – entertainment wholesaler EUK and the 2 Entertain joint venture with BBC Worldwide – as well as organising a refinancing that some thought would have been impossible. They also point out that as recently as September, when Woolworths posted interims, it was optimistic it still had a future in retail.

But in recent months the credit crunch moved up a gear and events unfolded at a speed few would have imagined. A source familiar with Woolworths’ predicament says the extent to which banks had become fearful about the future of loans to any hard-pressed businesses and, above all, the cutting of credit insurance cover to suppliers, dealt the retailer a hammer-blow from which it proved impossible to recover. “I’m not sure people are aware of the impact the credit insurers can have or the speed at which they can change their minds [about providing cover],” he says.

As a cash flow crisis loomed, attempts were made to do a deal with retail restructuring specialist Hilco, which was prepared to buy Woolies’ retail arm for a nominal sum and shoulder up to£300 million of its debt. However, that proved unacceptable to the retailer’s lenders, led by Burdale and GMAC.

Since no deal could be done, Woolworths’ retail division and entertainment arm EUK were put into administration – astonishingly, in the eyes of many, ahead of the peak Christmas period.

One chapter in Woolworths’ existence is now over, bar the shouting, but the retailer might not disappear altogether. There have been about 10 serious expressions of interest in the retail division and many more in parcels of stores that are likely to be sold.

A profitable Woolworths could yet be recreated under new ownership and on a smaller scale. There was faith in the power of the brand at the time of its demerger and right up to and beyond the appointment of Steve Johnson as new chief executive with a turnaround brief in August. There was faith on the part of venture capitalist Apax, which considered an £837 million bid just three years ago, and on the part of retail entrepreneur Malcolm Walker, who was willing to pay £50 million for the business this summer.

It is possible that someone else will have sufficient faith in Woolies to try again, after buying the retail arm out of administration. But it will have to be a very different Woolies before management is able to feel chipper again.