The tortuous tale of MFI’s fall from grace has more to do with the company than the industry. Woolworths, on the other hand, demonstrates how the high street is changing.
Any business the size of Woolworths will be dealing with a wide range of counterparties. Suppliers generally insure themselves against default by their customers – even ones as big and well known as Woolworths. But in recent weeks, gaining such protection has become prohibitively expensive, if it is available at all. The only alternative for a retailer is to pay cash up front for the goods needed to stock the shelves. This needs cash. When the providers of that cash say enough is enough, you really have run out of road.
This cash shortage will be hampering the previous natural rescuers of a chain such as Woolworths. Private equity would find the challenge of breaking up an underperforming business such as this right up their street – except the very conditions that made Woolies’ lenders pull the rug is preventing them from financing a deal.
The message for investors is less clear. No one in their right mind is backing retailers to any significant extent just now but the fact is that the more the competition thins, the better time the well managed stores will have. Analysts have long been factoring borrowing levels into their assessment of companies so there are no real lessons to be learned there either. Perhaps the way in which markets brushed aside the passing of a household name into administration says more about the way power has shifted than suggesting that some sort of a bottom was reached.
But bottoms were under discussion last week. Less than two weeks ago, at the end of a particularly bloody week for equity investors, we hit a new recent low – down more than 43 per cent in little more than a year. On Friday, November 21, the FTSE 100 index was heading towards 3,700. The Monday following a weekend of reflection on the parlous state of the world economy, it gained almost sufficient to reverse a full week of losses and while wild swings were evident, a more bullish tone persisted.
Market shift or dead cat bounce? Only time will tell but at least governments are four square behind measures to defeat the enemy of deflation.
Brian Tora (firstname.lastname@example.org) is principal of the Tora Partnership