Bracing ourselves for a series of retail business failures?

A bold (perhaps reckless) prediction in the Sunday Times today. “Up to 15 national retail chains are predicted to go bust before the middle of January 2009”...

You can read about the warning here.

It will be interesting to keep track of just how many “national retail chains” do indeed enter insolvency procedures, joining the likes of Woolworths. Roseby’s and MFI. I’m sure this weekend’s sales statistics will be very closely scrutinised by retail management and bankers alike to identify whether the cash flows generated from the traditional strong Christmas period are enough to meet the next quarterly rent payment (due on Christmas Eve) and to pay suppliers in January for the stocks bought up to Christmas.

Should we worry if the dire prediction comes true? Stakeholders such as employees, the local community and suppliers will certainly be keeping their fingers crossed that retailers find a way to survive. A closure of substantial numbers of retail outlets has an immediate impact on local employment. High streets that were buzzing with activity just a year ago might soon become dominated by empty shop windows, discount clearance outlets taking advantage of short-term lets and maybe an increase in charity shops.

However, part of me feels that the failure of retail chains in an economic downturn is simply an invitable process of the marketplace sorting out the wheat from the chaff. If a national retailer is so dependent for its survival on the gross profits generated by a narrow sales period at the end of 2008, perhaps the viability of the business is in question anyway. Perhaps the owners of the business shouldn’t have burdened the retail chain with so much debt in order to grow rapidly. Sound, profitable retail businesses maintain a buffer of retained profits and cash precisely so they can weather a financial storm like Winter 2008.