2012 saw a record number of retail failures and 2013 has started badly. At the same time we have seen modest growth in both value and volume of retail sales and some retailers have reported outstanding results. And Mintel research shows that consumer confidence has been slowly but steadily recovering for the last 18 months.

Dangerous to generalise

One can’t generalise about retail failures. The saying that “Retail is Detail” is as true as ever. A successful retailer has to succeed in many different aspects of its business. Failure in one area can mean the failure of the whole business. That means in practice that every retail failure tends to be different and all retail success stories look remarkably similar.

Even so, if one looks at the administrations of the last few months there are a couple of common threads.

Changing technology – or keeping up with the market

HMV, Jessops, Blockbuster all failed because they failed to adapt to changing technology.

Hindsight is easy, but HMV should have taken passion of the online music market back in the late 1990s. There were people around at the time who were saying it, but the HMV board took no notice until it was too late. At much the same time Jessops handle the transition from analogue to digital cameras really well, but it was then left standing as mobile phones took a big share of the snapshot market. It could see the problems approaching, like a rabbit in the headlights, but did not know what to do. Blockbuster struggled to adapt to the decline of the rental market and completely failed to spot the potential in video streaming. Its problem was its commitment to stores when the market was moving online.

Lack of cash – the spiral of decline

All these companies were also caught up with the familiar problem of what to do when profitability falls and the business runs short of cash. That is also what happened to Comet – failure to invest in the good times left the company ill placed when Dixons staged its recovery so that with demand generally weak, Comet did not have the cash it needed to be able to invest. Falling investment led to shoddy stores and a downward, self-feeding spiral.

Those are the classic death throes of any retail business. Whatever starts the decline, that is how it finishes.

Shortage of cash can be the problem from the start. That is what happened to Peacocks. It indulged in an expensive MBO at the top of the market and then when the recession struck and profitability weakened it did not have enough money to service its MBO debt. Peacocks is not alone in that. It could be that that is one of the main problems for the administration of Republic. Although there may be more to the story than that. TPG (a private equity group) bought the business for £300 million in 2010, but then profits fell 86% in 2011 to just £3.7 million, a long way short of what would be needed to finance the cost of the acquisition. TPG presumably decided that it should just write of the debt rather than pouring any more cash in.

That does not explain the profits collapse in 2011, though the need to justify the price paid for the business may well have been an important factor.

And what about the recession?

The underlying cause for so many retail failures has also been the recession.

  • Retail sales may have held up remarkably well, but there has been a shift to buying online and while the majority of online business is transacted by multi-channel retailers, the growth of pure plays has taken some business from the high street.

  • Consumers have been more cautious about what and how they buy. They may have shopped around more, but they have bought from the retailers who are serving them best – hence the success of Ted Baker, Next and John Lewis and the failure of French Connection (in terms of its results, we’re not saying that French Connection is the next to go into administration) and Republic. In difficult times consumers do not give second best a second chance.

Lessons for 2013

January saw major failures because there was no point in putting the businesses into administration in the run up to the most profitable trading period of the year. The writing was on the wall for many of these businesses it was really just a question of the best time to pull the plug. In that respect it is a little surprising that Comet was closed down when it was.

Who next is the regular question, especially from the media, but it is hard to come up with an answer (even privately – it’s not the sort of thing one puts in print). The obvious candidates have gone. HMV has not disappeared yet and it may be that some place on the high street may be rescued for it. But if HMV has gone because of changing technology, will it be possible to save a retailer like Waterstones? We will see.

2013 is not going to be an easy year for retailers, but it should be better than 2012. The pressures will still be on retailers and there will be more failures, but we hope that there will not be as many as in 2012.

The silver lining

The recession has been hard and many ‘household names’ have disappeared. But in the longer term the retail scene that emerges will be much stronger. Weak retailers that could struggle on in good times have been cleared out, as have those which made major strategic mistakes in the boom times. But they will make room for new retailers with new ideas. We have had the biggest clear out of weak retailers since the war, a clear out such as we didn’t get in the relatively shallow recession of the 1990s. It has been a painful process, but ultimately the retail scene will be better off for it.

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