Analysis: Wilko collapse is the Woolworths of this financial crisis

Thursday 10 August 2023 2:22 pm

By: Tom Davey

Tom Davey is Director and Co-Founder at Factor Risk Management

Wilko went into administration this morning, putting 12,000 jobs at risk

Following protracted rescue talks with a range of prospective suitors, Wilko is now in administration. The collapse of the discount retailer puts 12,000 jobs at risk, making it one of the biggest UK retail casualties since the demise of department store chain Debenhams in 2020, which saw 12,000 jobs disappear, and Woolworths in 2008, which resulted in 27,000 job losses.

In hyperbolic language, the collapse of Woolworths was described as “the first domino of physical retail Armageddon.” Although it might not justify that epithet, the collapse of Wilko provides very clear evidence of which way the wind is now blowing.

The much-anticipated perfect storm of surging prices, coupled with higher interest rates leading to higher mortgage rates, is now hitting the spending power of UK consumers. Of course, Wilko is not an isolated case. A general consensus exists that an increasing number of retailers will find it hard to survive in the current environment and that more high-profile names will need to restructure, face fire sales, or at worst, become insolvent.

Wilko’s story will therefore be mirrored by others. Heavily reliant on high street footfall, the retailer was badly hit by Covid-19 restrictions: in 2020, its high street outlets suffered a 40 per cent fall in visitor numbers. Short term, its problems were masked by the government’s pandemic-era support schemes. Over the past two years, Wilko has had to borrow £40m from restructuring specialist Hilco in its struggle to pay suppliers.

Following an equally torrid period during the pandemic, many other retailers continue to face supply chain issues while rising interest rates impact their ability to borrow or refinance their existing debt. Given these conditions, it will become impossible for them to survive in their current form. We anticipate that an increasing number of high-profile companies will need to restructure and face fire sales as a result.

Nor are these problems confined to retail. For a broad spread of companies across diverse sectors, access to cheap capital has disappeared while refinancing is often slow and fraught with difficulty since traditional lenders are reluctant to lend. Against this backdrop, there has already been a noticeable rise in both corporate and personal insolvencies over the past year, and it is widely expected that these figures will worsen over the next 12 months.

The overriding objective of the UK government and the Bank of England is to drive inflation back to the 2 per cent level. To achieve this, higher interest rates serve to choke off demand in the economy. But it’s a blunt tool as the cost of managing inflation is inevitably borne by individuals and struggling companies, many of which have survived on abnormally cheap credit since the global financial crisis.

The abnormal economic climate that has prevailed over the past 15 years is seeing a sharp reversal as interest rates revert to their long term normal. This has, and will continue to have, a damaging effect on individual consumers and high street retailers. Not quite Armageddon, but painful nonetheless.