Worst still to come for Europe's retailers

The pain for Europe's retailers has only just begun, as a deepening consumer downturn, rising costs and banks' reluctance to lend are set to drive thousands out of business and put tens of thousands of staff out of work.

Credit insurer Euler Hermes estimates that around 35,000 western European retail businesses could go insolvent next year, up about 17 per cent on 2008 and making it the second worst hit sector behind manufacturing.

Britain, with its sliding currency, sinking house prices and high personal debt, is likely to suffer most, while smaller retailers, those selling discretionary items and those with high borrowings will be especially vulnerable, analysts said.

"Undoubtedly it will be even tougher to do retailing next year than it has been this year, I would say almost universally across Europe," said Richard Lloyd-Owen, head of consumer business at consultants Deloitte.

The retail industry employs around 11 million people in the EU and generates about €223 billion of wealth, according to statistics agency Eurostat.

The sector has already been hit hard by a drop in consumer spending following a banking crisis which has plunged the world's top economies into recession and fuelled unemployment.

Euler Hermes chief economist Karine Berger estimates that about 30,000 western European retailers went insolvent this year.

Casualties have included such long-standing businesses as British toys-to-homewares chain Woolworths, which went into administration, a form of creditor protection, last month and is holding closing down sales as it struggles to find a buyer.

With many retailers ordering stock for Christmas before the worst of the banking crisis in September, shopping streets across Europe are awash with discounts and promotions.

But if the festive season is tough, many analysts think 2009 could be even harder as consumers look to pay off credit card bills and start saving money amid worries about their jobs.

"It's a very, very clear indication of just how bad it is that you've got major retailers (like Woolworths) failing before Christmas," said Nick Hood, a partner at business rescue firm Begbies Traynor.

"That, I think, is the banks and other stakeholders saying we think it might be absolutely tragic in terms of consumer spending after Christmas."

Earlier last week a survey of 2,700 people by Boston Consulting showed that about 56 per cent of consumers in Germany, France, the UK, Italy and Spain plan to cut discretionary spending next year by an average 12 per cent. Alongside weaker demand, many retailers are facing problems getting stock as credit insurers, worried about store groups' ability to pay off debts, withdraw cover to suppliers.

For firms that run into trouble, there is also less prospect of help from banks, which are often unable, or unwilling, to lend as they try to strengthen their own businesses.

Rising costs are a problem as well with, for example, the recent strengthening of the US dollar making imported goods from China and other Asian countries more expensive.

Many European retail industries, notably in Britain, are also suffering from overcapacity, while fading food price inflation is removing a source of support for supermarket groups.

Retail researchers Verdict estimate that the combination of weaker demand and rising costs could wipe £3.6 billion off the profits of leading UK retailers next year.

Much of this bad news is already factored into shares. The DJ Stoxx European Retail Index has plunged 42 per cent this year.

But Morgan Stanley analysts think there is worse to come.

"Both food retailers (price deflation) and general retailers (overcapacity) face significant problems, which may still not be fully reflected in share prices," they wrote in a research note.

Britain, which has seen household names like furniture group MFI and homewares chain The Pier slide into administration, is likely to see the biggest rise in retail failures. With high levels of personal debt, plunging house prices and a sliding currency, the UK economy is expected to contract 1.6 per cent next year, compared with an average decline for eurozone countries of 0.8 per cent, according to Reuters polls.

"Woolworths, MFI and The Pier could potentially be the tip of the iceberg," said Jonathan de Mello, head of retail consultancy at Experian.

He expects a surge in business failures in January and February, as retailers either struggle to meet their quarterly rent payments on December 31 or are deserted by banks that propped them up over Christmas in order to sell down stock.