There was some positive news for UK retailers last Friday. A closely watched consumer confidence index rose more than expected in August.
Ironically, this followed the collapse of high street stalwart Wilko. The family-owned discount chain was put into administration earlier in the month.
What went wrong? And what does it mean for other value retailers? I’m thinking in particular of FTSE 100 member — and big Wilko rival — B&M European Value Retail.
Culmination of problems
Wilko’s collapse came as no surprise to industry watchers. It had been teetering on the brink for many months.
Its fate in recent years hadn’t been helped by the pandemic, post-pandemic supply chain issues, and inflationary pressures. However, these are things its rivals also had to deal with.
In truth, a £37.6m operating loss in Wilko’s last reported financial year (2021/22) was the culmination of problems that extended back to well before the pandemic. It made a loss in pre-pandemic 2018/19. And in the three of the last five years it managed an operating profit, its margins were abysmal at between 0.1% and 0.5%.
By contrast, B&M was highly profitable in each of the same five years, boasting operating margins of between 7.9% and 13.1%.
Retail is detail
Industry analysts have put forward a number of reasons for Wilko’s longstanding struggles. Increasing competition from the expansion of value rivals — including B&M, Home Bargains, and Poundland — is one suggestion. Too many, too large stores with long leases in expensive high-street locations is another.
However, Lisa Wilkinson (granddaughter of Wilko’s founder), who headed the company until recently, told The Times: “When people are looking at how this happened, they want it to be a single big thing that was seismic, and it wasn’t … It’s a whole load of things that have just added up to a seismic thing over time.”
British retail entrepreneur James Gulliver once famously said “retail is detail”. It seems Wilko got too many details wrong for too long. B&M’s profit margins over many years suggest it’s getting an awful lot right.
What next for Wilko?
As I’m writing, the ultimate fate of Wilko remains up in the air. Bids to rescue the company — and its 400 stores and 12,000 jobs — as a going concern have been mooted. However, if no deal is forthcoming, the administrators may end up having to sell off the business’s assets piecemeal.
When Woolworths collapsed 15 years ago — partly due to competition from the likes of Wilko — no rescue deal materialised. The administrators announced the closure of all 800 stores, with 27,000 job losses.
Individual stores and leases were put up for sale, many being picked up by other discount retailers, including Wilko, B&M, Home Bargains, and Poundland.
History repeats
Where Wilko once picked over the carcass of Woolworths, its own demise would be food to its remaining rivals. A big drop in competition, and the availability of some potentially choice stores to select from, could boost the growth of B&M and others.
Even if Wilko were to be saved as a going concern, it would likely need to close dozens of stores (reducing competition in those areas), and take many years to turn the business around.
Positive sector news
Last Friday’s news of an uptick in shopper sentiment, following a downtick — and fall in retail sales in rain-soaked July — is a positive. Prior to July’s drop, consumer confidence had been at its strongest for 17 months and had risen for five months in a row.
Another positive that crossed my desk in August was an article in Retail Gazette. This summarised an analysis by data and analytics company GlobalData.
It said: “The UK value, discount, variety stores and general merchandise retail channel is set to grow by 5% per year … the recent collapse of Wilko should be seen as an outlier in the sector.”
B&M well positioned
In its annual results in May, B&M said it expects to grow sales and profits in its current financial year. And it reported “strong profitable trading momentum” in a first-quarter update in June.
In the longer term, management believes the company “has many years of profitable growth ahead.” And it said this before the collapse of Wilko.
B&M now appears even better positioned to deliver growth and income for its shareholders.
I have to say, though, it’ll be a sad day for Wilko’s many loyal customers and staff, if the near-100-year-old business disappears, punching another hole in Britain’s ailing high street.
