The invisible Hand blog is rapidly becoming an obituary for failed UK companies. Part of me feels guilty for chronicling the demise of the British economy, as I think it is acts as a self fulfilling prophecy. The more people are bombarded with negative news, the less confidence they will have in the economy.

Economics is largely is based on psychology. Of course economists have come up with a vast amount of theories to explain how economies work but most have failed. Throughout the 20th century the UK has followed, Keynesianism, New classical economics, New Keynesian economics, Post-Keynesian economics amongst others. Each one working for a while but then failing in some way. There has been recession, crashes, mass unemployment, inflation, deflation, stagflation amongst others. Regardless of the policy a particular government these economic disasters still took place. It’s impossible to create a general rule for how the economy works: it is too large and dependent on too many factors. The simplest way to understand economics is basic human psychology which is why negative coverage may be very damaging indeed.

Today furniture chain Land of Leather has gone into administration, putting the jobs of its 850 staff into jeopardy. Land of Leather has been hit hard by the downturn in housing market. With less people moving house, the demand for new furniture has decreased. The downturn in the housing market has already claimed the scalps of MFI, The Pier, ScS Upholstery, Ilva and Floors 2 Go. Last week Sofa warehouse announced its attention to call in administrators.

Land of Leather has been in difficulty for some time. Athough the company is debt free, because of the lack of liquidity in the market, they were unable to secure funding to cover the losses it made in January  Like Woolworths, Land of Leather refused a buy out package last year in November. The plan was rejected because it was deemed ‘insufficient value to shareholders’.

Ironically, in August Woolworths rejected an offer by Baugar, the company behind Iceland that now owns 50 former Woolworths stores. In both cases, the major concern was for the shareholders’ return on their investments. By putting their own interests above that of the companies, these shareholders effectively doomed these companies to failure. It is a great example of cutting off your nose to spite your face.

As the company is debt free, there is some hope it may find a buyer. Here’s hoping, just so I can put some good news up here for once.

Guardian

A week after Woolworths closed its 200 stores, there is some good news as Iceland the frozen food retailer has announced that it has bought 51 of Woolworths stores. This move will create 2,500 jobs.

Woolworths closed 815 of its stores last week. The purchase of the 51 stores represents a small percentage of Woolworths’ remaining assets but the promise of new jobs being created is great news for the ailing economy. It is a symbolic move as well because surely the only retailers to prosper during a recession will be low cost retailers such as Iceland. Iceland and shops of their ilk represent how the new recession-era British high street will look.

The face of the high street is set to irrevocably change. The hardest hit high streets will be those in so-called clone towns. As the name suggests, clone towns are those with a proliferation of chain-stores and lack specialist shops such as butchers and fish mongers as well as independently run shops. They look like a hundred other high streets and lack any unique character.

A good example of a clone town is Wimbledon. Wimbledon is of course famous for tennis but it has the dubious honour of being named as Britain’s most cloned town centre in a 2005 report from the New Economics Foundation (NEF). Wimbledon’s Local Guardian reports that the recession could turn Wimbledon into a ghost town. The research group, Experian predicts that one in 10 high street stores across the country will lie empty by the end of the month. If a high street is predominantly made up of these chain shops, many premises could be vacated leading to a situation that the Wimbledon Local Guardian predicts.

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Woolworths still limps on but its days are numbered. The Woolworths in Camden Town is still open but the shelves have been stripped bare. It looks like a Russian supermarket in the late 80’s. You can still grab some sweets from the Pick n’ Mix section which is fitting as for many the only point of Woolworths was its sweet isle. When the last Pick n’ Mix is sold then, Woolworths will truly be no more.

This is what happens when companies go into administration during a recession. There was neither the inclination or the money to save a shop as symbolic as Woolworths so it is bad news for Adams, Whittards and Zavvi which have all gone into administration in the last two weeks.

It is easy to understand why a company like Whittards and Adams are having problems. Whittards is a luxury tea retailer while Adams purely sells children’s clothes. Their core business is provided by other retailers. It is possible to buy luxury teas and coffees from super markets and department stores. There is little reason to make a separate visit to a specialist tea retailer when you can buy similar products when you do your weekly shop. The same applies for children’s clothes which can be bought in super markets or in cheap clothes retailers like TK Max or Primark. Most importantly during a recession people spend less on luxuries like luxury teas and children’s clothes.

Whereas Adams and Whittards are too specialised, Woolworths did have enough of a defined identity to keep people coming back. Woolworths sold products that any other high street shop did, but without the range of specialised retailers. Woolworths also could match its competitors on prices. A company like Argos is able to sell every product under the sun while at the same time offering its customers a huge number of items within each range. It is also really cheap. How could Woolworths possibly compete?

Zavvi is an interesting case. Theoretically a shop selling CDs, DVDs, game consoles, games and other home entertainment items should be doing really well. These are reasonably expensive must have items. Everyone, from every age and walk of life likes music, films and games.  Even during a recession, people still buy these items because they are more likely to stay at home to save money and so invest in their home entertainment. However the music and movie market has taken a hit in recent years because more and more people are getting such items online from companies such as Amazon and Play.com. These sites do not have the overheads of a high street retailer and so are able to pass on the costs to their customers. Plus they can sell items high street shops with limited space cannot afford to stock. Buying online is becoming more and more popular as the populace become more web-savvy. Many online retailers offer free delivery and are often able to deliver an item within 24 hours of its being ordered. Illegal downloads mean that many people have stopped buying music and films altogether. Both scenarios are serious threats to off-line home entertainment retailers like Zavvi.

The coming year will be a difficult time for many retailers. It seems as only those with the most robust business models will be able to weather the economic down turn. Companies in precarious situations like Adams, Whittards, Zavvi may follow the same undignified fate of Woolworths.

If recent research from consumer watchdog Talk Talk is anything to go by over £2 billion worth of Christmas gifts will be returned this year. That works out as each of us getting at least one present we’ll want to return to the shop.

The research also puts the average price of unwanted gifts at around £65.

And the reward for the most returned gift? Unsurprisingly it’s clothes. Of those asked, 19% said they would never wear the clothes they were given. The second most exchanged gift was cosmetics with a return rate of 9%. Home accessories came in next with 8%, perfume had 7% and food stuffs had a bounce back rate of 5%.

It’s not as bad as the survey makes out, though. Out of the £2 billion worth of unwanted gifts only a meagre £330 million will actually make it back to the shop - down in most part to us being too embarrassed to ask for a receipt.

It’s a strange thing when you think about all the sales in full swing on the high street at the moment. Bargains are thrust before us every day tempting us into spend our money and things are discounted so much that it would be a crime not to get spending while the goings good.

Nothing sums up the shopping mood at the moment more than the success Selfridges have had with their Sale. On Boxing Day, between 12pm and 1pm, they turned over almost £1 million — the most successful hour in the store’s 100-year history. Most of the high street retailers started their January sales on Christmas Eve for the first time this year.

By spending so much we’re supporting the economy but only in the short term. Retail groups predict that the Christmas sales will go on until February at least in an attempt to keep us spending in store.

After that time - who knows? Prices will return to normal - the shops can’t keep it up. Come February we’ll be spoilt by all the bargains and unwilling to part with our cash unless we get the big discounts.

We splurge for the thrill and in the cold light of the day we realise our mistake and try to undo the damage.

It’s like shopping bulimia.

Look at this sad sight. The once full and bursting shelves of Woolworths are now barren. Where once there was stationery, home wares, lurid kids clothes and bad CDs now there is nothing. As in retail all things must return to dust.

The picture was taken in Camden Town today. Give it a month the branch will be taken over by a Star Bucks, All Saints or American Apparell, any one of those ubiquitous high street shops.

Today Woolworths is finally closing down. The beleaguered high street chain was unable to find itself a buyer despite being taken into administration by Deloitte. The process of selling off its assets and its stock has begun with its closing down sale. The sale is offering 50% off on the price of goods.

The high street has seen many similar price fluctuations in the run up to Christmas. As part of the financial stimulus package, Gordon Brown announced that there would be a reduction in VAT from 17.5% to a historic low of 15%, cutting prices across the board. Even before December the 1st, Amazon, Currys, Dixons and Argos all reduced their VAT to 15%.

The reduction in VAT is designed to encourage consumers to keep spending. The aim of continued spending is to keep the economy healthy. Reducing VAT is a courageous move but there are some high level voices of dissent. The German finance minister, Peer Steinbruck criticised the government’s move in an interview with Newsweek.

‘Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90?’ he said.

‘All this will do is raise Britain’s debt to a level that will take a whole generation to work off.’

Peer Steinbruck may be correct in his assessment. A slight reduction in VAT may not be enough to encourage cash-strapped consumers to hit the shops. And retailers may not even pass this discount on to their customers. In fact there are some manufacturers preparing to raise their prices in the run up to Christmas which will surely impact the price in the shops.

Sony, the consumer electronics giant has announced that it is planning to raise its prices by a whopping 33%. Sony is trying to compensate for a weakening Stirling by increasing prices. A Sony spokesman told the Telegraph newspaper:

‘Sony UK can confirm that in the past 48 hours it has communicated to its trade channel that due to adverse changes in the Yen/Euro & Euro/Pound exchange rate over the last six months, and with this uncertainty set to continue into 2009, Sony will increase the trade price of a number of products over the coming months.’

‘The precise level of price increases has not yet been agreed, but it is likely that the vast majority of products affected will see increases of significantly less than 33 per cent. As these testing trading conditions continue, Sony does not believe that it will be alone in taking this form of action.’

Sony is the company behind the must have gifts this Christmas such as the Play Station 3, PSP, Bravia TVs, Cyber Shot cameras and MP3 players.  These are the items at the top of most Christmas lists.  An increase in these sorts of items will have a massive impact on the cost of Christmas for many families.

There is a schizophrenic situation on the high street. There are massive discounts to be found as with Woolworths. Many shops are offering pre-Christmas sales. Yet there are companies like Sony who are actively trying to increase their prices of their products. With the decrease in the pound against the Euro, prices of European imports are also bound to rise.

The question remains whether it is the retailers or the consumers that will absorb the price increases? To what length will retailers go to encourage people to keep on spending? Are retailers prepared to actively lose money or will there be a point where they are simply forced by the rules of economics to raise their prices?

The case of Amazon, Currys, Dixons and Play’s reaction to the VAT reduction may be indicative of how retailers may respond if manufacturers insist on price hikes. These companies were willing to implement the VAT changes before they were actually obliged. This shows their determination to attract people to buy from them even if it represents a needless loss in revenue.

However Woolworths is still a sobering reminder of what may happen if retailers ignore economic realities. Although it is not in their interest to raise prices and alienate consumers, retailers may be forced to simply to the avoid the indignity of being carved up and having their stock flogged for half the price.

What if prices do increase?

If the price of high-end electronics increases as with the case of Sony, many people may not be able to afford indispensible electronic items. Luckily most retailers offer finance schemes. Instead of paying for an item upfront, a customer can pay for the item over a period of time with regular payments of a manageable sum.

On top of the regular payments those on a finance scheme also pay interest which is a percentage of the loan amount. Most retailers offer such schemes but the best deals can always be found online.

Dixons

Dixons has a flexible finance scheme which means you can buy now and pay June 2009. This is applicable for all purchases over £599. All you need is 10% deposit and pay nothing till June. There is a typical APR of 29.5%.

Currys

Currys offers finance on all products over £115.

Dragons’ Den Theo Paphitis has withdrawn his bid to take over parts of the ailing high street retailer.  Woolworths is currently in administration by consulting firm Deloitte. Although Woolworths has collapsed, lucrative parts of the business still remain an attractive proposition for investors. Potential investors’ interest focus on Woolworth’s high street stores and its CD and DVD distribution business, Entertainment UK.

With Paphitis’ withdrawal, a rescue package for Woolworths seems less likely. However Neville Kahn from Deloitte remains confident of a Woolworth’s sale saying they have received ‘substantial expressions of interest’.

The Times

Interest rates have been cut to a mere 2%, the lowest rate in 57 years.  Lower interest rates means of course, lower credit card bills and lower mortgage repayments. When interest rates are low there is also less incentive to save, meaning people will be more inclined to spend, especially with the cut in VAT. This is in keeping with the government’s policy of financial stimulus which aims to lessen the impact of recession by encouraging people to keep spending.

For those people wishing to save, Martin Lewis from Money Saving Expert has some advice, ‘there’s an urgent window of opportunity to fix savings at the pre-rate cut levels’. Now is the time to set up a savings account before the interest rates tumble.

Following on from the pre-budget report, VAT has been reduced to 15% a 2.5% drop from the previous 17.5% level. This is part of Brown’s financial stimulus package aimed to encourage shoppers to keep spending. It’s not Dig for Victory any more, more like Spend for Victory. Do the patriotic thing and buy something today and make the most of the cheaper prices.