Woolies’ descent into administration poses the classic chicken and egg question.
Which came first in its demise: the chicken, in the form of a business fundamentally unsuited to today’s retail environment and so destined for the pot, or the egg, in the shape of vice-tight credit conditions that undermined a viable business?
Although critics maintain Woolies got off on a weak footing when demerged from Kingfisher seven years ago, hobbled by onerous leases and already looking tired, it’s too simple to pin blame for its collapse on decisions made then.
Woolies quickly paid down the£200 million debt it carried when exiting Kingfisher and in subsequent years managed highs as well as lows. It featured not only on analysts’ buy notes but on private equity shopping lists too.
Nobody would dispute that Woolworths’ stores business did not change enough in the years following its demerger. But had economic conditions not transformed so dramatically over the past 18 months, surely it would not have gone skint? Less than a year ago, lenders were willing to arrange£385 million financing for the retailer on a four-year basis with an option for a fifth year.
That decision, given the speed of Woolies’ descent into administration, raises as many questions as anything in the whole saga. It throws up questions about the responsibility displayed when financing was arranged – and withdrawn – and reflects badly on the loan providers, Burdale and GMAC.
Equally opaque is the role played by insurers that cut coverage for Woolies’ suppliers. It would be fatuous to argue that they should shoulder excessive risk but, once again, what is not clear is on what basis decisions were made. Speaking to those close to the retailer’s downfall, there is anger and some incomprehension at why, and how fast, cover disappeared.
The chicken and egg question will probably never be answered. But the City had become increasingly sceptical about Woolworths – to the extent that one analyst earlier this year ascribed zero value to its retail operation.
Of course many big investors had never been interested in the retailer. The whole point of its demerger was to deliver value to Kingfisher shareholders and big institutions did not want to hold Woolworths shares after it went its own way.
That was probably a sign that Woolies’ future would have been best served had it been in private hands, where it could have been dramatically restructured out of the public company spotlight. Perhaps that will still happen.
George MacDonald is deputy editor of Retail Week