Natural selection looms large on the high street

As fears of a UK recession intensify, smaller chains on the high street seem to be first in the line of fire.

Already, several household names have collapsed since the turn of the year as centuries of retail tradition face being confined to history - along with hundreds of jobs.

Base menswear and Elvi, the plus-sized women's fashion specialist, last week brought the year's tally of relatively high-profile failures to five. They follow shoe chains Dolcis and Stead and Simpson, and The Works, the country's largest bargain book chain.

Retail failures - typically clustered around quarterly ends when rents are due - are forecast to increase 8 per cent in the year to the end of September, according to BDO Stoy Hayward. High-profile collapses last year included Fopp and Music Zone, the music chains.

However, some industry observers say the total may, in fact, be less than it could otherwise be. Restructuring experts say the outlook for 2008 has been so bad that many struggling retailers have managed to avoid administration because they have taken steps to protect themselves in advance.

"They are more inclined to try to solve the problem earlier," says Roger Bayly, KPMG restructuring partner.

Several have had to be more "realistic" about their expectations than they have been in years gone by, says Mike Jervis, a business recovery partner at PwC. "Pessimism has pervaded the sector. This is a difficult time of year. They've had Christmas; they've had to pay their suppliers and they should have paid their rent by now."

Stephen Springham, retail research partner at King Sturge, property consultants, notes that many have benefited from a more relaxed rent regime. "Values of commercial portfolios are getting a hammering. Landlords would rather have an occupier than a void. Some are being more understanding to retailers than they might otherwise be.

"It's not Armageddon out there, but it hasn't reached its nadir yet."

Several have put store expansion and modernisation on hold and ScS Upholstery last month even scrapped its dividend.

Improved forecasting tools and a greater tendency to use mathematical modelling has also helped executives spot stores that are likely to run into trouble in advance.

Furthermore, the complexity of debts that many owe means they have had to turn to professional advice earlier than usual. "It's not a simple conversation with a bank," says Mr Bayly. "It's a complex set of discussions with a large number of financial stakeholders."

Better-than-expected figures from the British Retail Consortium released this week showed like-for-like UK sales rose 2.6 per cent in January. However, that masks the pressure facing smaller retailers in particular market segments. Robin Knight, restructuring expert at Kroll, notes the victims so far this year have shared several characteristics.

Most have been squeezed by better-quality rivals - Works by Waterstone's, for example - and also by supermarkets branching into non-food goods, such as shoes.

Rupert Eastell, BDO Stoy Hayward retail partner, says those at particular risk include those backed by private equity. Dolcis and Elvi, for instance, both lost their private equity backers.

One of the advantages of administration is that it allows some protection from creditors demanding immediate payment. In some cases, the previous owner will return. John Kinnaird is thought to be lining up a rescue bid to buy back the Dolcis brand and several stores.

Yet even if administration per se can be avoided, consolidation and restructuring is likely to be on the rise in the coming year.

Mr Knight says: "Some have seen what's coming and have battened down the hatches, but even some of those are going find themselves in trouble. A process of natural selection is going to take place."

Five down

Retailers that have gone into administration this year:

* Dolcis, the 145-year-old shoe chain, became the first victim of the year after it was unable to pay £2.5m in rent demands

* Stead and Simpson was acquired immediately by Shoe Zone under a "pre-pack" administration agreement

* The Works, the country's biggest bargain book chain, which employs 1,600 staff, fell into serious cash flow difficulties

* Elvi, the plus-size women's fashion retailer, joined the list of failures last week when it appointed Baker Tilly as administrators

* Base Menswear, founded more than a century ago, took the tally to five

Sounding alarm

Five warning signs noted by restructuring experts:

* Frequent changes of management

* High footfall but low spending - particularly acute in big-ticket retailers such as those selling electrical goods

* Store location - poor choice may reduce efficiency or even cannibalise sales

* Store refreshment - too little will put off consumers but too much may be a sign that strategies are not working

* Inability to attract credit from suppliers