A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history. Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices. On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth £30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities. According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.In September 2008, British bank Bradford & Bingley's £20billion savings business was acquired by Spanish bank Grupo Santander. While its retail deposit business along with its branch network will be sold to Santander. The mortgage book, personal loan book, headquarters, treasury assets and its wholesale liabilities will be taken into public ownership. By November 2008, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.From the 1st of December 2008, the UK Government made the decision to cut VAT from 17.5% to 15% for 13 months in an attempt to encourage a big spend from UK shoppers before Christmas. On 4 December 2008, the Bank of England cut interest rates from 3% to 2%, which amounts to the lowest level since 1951.
The above incidents helped shape the future of Woolworth’s Early on 19 November 2008, The Times first reported that the Woolworths' retail business was a target for restructuring specialist Hilco, who would buy the retail arm for a nominal £1; this was confirmed later the same day. This deal would have left Woolworths Group with its profitable distribution and publishing businesses and a reduced debt load. The group's banks, GMAC and Burdale, rejected the deal and recalled their loans, forcing the group to place the retail business and Entertainment UK Ltd into administration. Neville Kahn, Dan Butters and Nick Dargan of Deloitte & Touche LLP were appointed joint administrators. When the company entered administration it had a debt of £385 million. The administrators announced that they aim to keep the company as a going concern over the crucial Christmas period, although analysts fear that any heavy discounting would create a domino effect and drag down other high street retailers. Deloitte later announced they had received "substantial interest" in Woolworths. When news about Woolworths being placed into administration became widely publicised, National Lottery operator Camelot Group immediately suspended Woolworths from selling their lottery tickets and scratch cards, as well as preventing claimants from redeeming prizes at the stores. On 5 December Woolworths both recorded their greatest single day takings of £27 million, and axed 450 head office and support staff jobs. Woolworths is also to remain open beyond the Christmas period. The administrators announced on the 10 December that they were struggling to sell the company as a going concern and as a result some stores may close before the end of the month. They also announced the start of a closing-down sale on the following day (11 December). Talks were still progressing to sell individual stores and leases to a number of retailers, said to include the supermarket chains Tesco, Asda, Sainsbury's, The Co-operative and the discount chain Poundland. On 17 December 2008, Administrators announced that all 807 Woolworths stores would close by the 5 January 2009 resulting in 27,000 job losses, unless a buyer is found. Deloitte's Neville Kahn also said that it was unclear how much of Woolworths' debts would be paid.
Proposed Methodology
The method proposed for this research is case study and analytical and statistical analysis. By obtaining pertinent financial information using records from the companies house and online financial indexes, and using economic snapshots of England provided by the national bureau of economical research and statistics we can point out the factors that led to closing down of the Woolworths stores and predict the possible outcomes and effects of this closure on the political, economical and social situation of the country.
For the suggested methodology to work, we will need to analyze details of at least 4 to 6 quarters of financial standing for the company and the 3 to 4 years of the financial situation of England and the world. We also need to relate the current scenario with previous economic recessions in the past 50 years.
It is hoped that the deductions made will be consistent with the incidents of such nature in the past and be accurate enough to depict the scenario of the current economic environment and the eventual effect of the closure on the economy.
Example of a case study as per the proposed methodology
The following details have been obtained from the Woolworths’ corporate website. The are considered to be accurate and any references made to them are substantiated with further references to major financial organisations with similar data or statistics.
- Group sales down 3.0 per cent to £1,107.0 million
- Woolworths Retail like-for-like sales down 3.2 per cent
- Woolworths Retail gross margin down by 112 basis points
- Half-year adjusted loss excluding profits from property transactions £90.8 million (£64.3 million in first half 2007/8)
- Profits from property transactions £15.8 million (£5.1 million in first half 2007/8)
- Loss before taxation of £99.7 million (£63.8 million in first half 2007/8)
- No interim dividend
- Woolworths Retail launch of Price Drop campaign
- EUK renewed contract to supply Wm Morrison
- Integration of former THE business into EUK and Bertram completed
- Developments since 2 August
- Woolworths Retail like-for-like sales first six weeks of H2 up 0.4 per cent
- Deterioration in the credit insurance market may increase the Group’s working capital requirements but the Board believes that the Group can continue to operate within its existing borrowing facilities
- Steve Johnson, new CEO, appointed 1 September 2008 – strategic review of Woolworths Retail already underway
Many people believe that Woolworths' problems – which resulted yesterday in the group collapsing into administration – stem directly from the demerger. The split from Kingfisher – argue former Woolworths executives and City analysts – left a retailer saddled with huge debts and a leasehold property portfolio that included hundreds of stores let on onerous terms. More than 180 Woolworths stores were sold by Kingfisher just days before the break-up of the group in August 2001. The sale and leaseback deal raised £614m for Kingfisher – but committed Woolworths to 25-year leases with a minimum annual rent rise of 2.5pc a year. Even if rents are falling, Woolworths' £160m annual rent bill on the stores continues to rise. The combination of onerous leases and huge debts was just about manageable when times were good, however it has proved lethal as sales have plummeted amid faltering consumer confidence. Woolworths may be the most high-profile victim to date of the downturn – but few expect it to be the last. The lethal combination of huge debts and stores let on onerous leases is not unique to Woolworths. Attracted by the combination of strong cash flow (and in many cases an undervalued freehold property portfolio) retail was a favourite target of the private equity industry during the leveraged buy-out boom. But that frenzy has left many of the UK's best-known high street names saddled with huge debts and leasehold portfolios let on expensive rents. Nervous suppliers, landlords and investors have all drawn up lists of the most leveraged retailers. But for now – in the immediate aftermath of Woolworths collapse – rival retailers and investors have to calculate what effect the failure of one of the UK's biggest retailers could have on an already fragile high street. Fears are growing that in an attempt to extract as much cash as possible – and avoid being left with piles of unsold stock – the group's administrators could discount heavily in the run up to Christmas. Great news for consumers – but a further headache for retailers, which have already been forced to slash prices in an attempt to engineer some Christmas trade. In a note to clients last week, Sanjay Vidyarthi, retail analyst at Dresdner Kleinwort, warned: "Were Woolworths Retail to be put into administration, the consequences for the rest of the high street could be significant, given Woolworths has sales of £1.7bn."Short term, if the business is run for cash, this could adversely impact the likes of Game, WH Smith and HMV. Longer term, with some capacity exiting the market, it could benefit these three.
Possible Issues with the proposed methodology
The methodology does not take into account the prevalent socio-economic conditions of the current environment. While these factors do not directly influence the current situation, they are indirectly affecting the outcome. The war in Iraq while not considered in this situation, does affect the present economic situation and hence might contribute to the closing down of Woolworths’ stores. Hence the predictions made by this research might not be as accurate as originally hoped for.
References
1. Three penny and six penny sweets, Woolworths Virtual Museum, woolworths.co.uk. Article retrieved 2007-03-13.
2. "Samluke777", Photographic evidence that at least some Woolworths stores are trialling a second-hand service. Image uploaded and retrieved on 2006-12-13.
3. The Group's Businesses, Woolworths Group plc website. Article retrieved 2007-01-13.
4. "Store stays put", Linlithgow Today website (linlithgowtoday.co.uk). Comments attributed to Andrew Moodie; "These developments are enabling Woolworths to challenge market leader Argos said Mr Moodie". Article dated 2006-12-22, retrieved 2007-01-13.
