Comet's crash landing

Last week's collapse of the electrical goods retailer, one of the best-known brands in the country, is the sort of event to put the fear of God into shopkeepers. When names like Woolworths, MFI and Zavvi were pulled under in the early days of the economic crisis, no-one talked of Comet being next in line. It was the second-top answer after Currys when Family Fortunes contestants were asked to "name an electrical shop" , the mainstay of out-of-town retail parks, the one with the pink delivery vans that tried to make a marketing virtue of having staff that knew things about the products.

Yet down it has come, the latest in a long line of retail dominoes that has lately included Game, Barratts, JJB Sports, Oddbins and Habitat. With more than 20 stores disappearing around the country each month, according to PricewaterhouseCoopers and Local Data Company, the sound of ringing tills is becoming ever fainter.

Comet's very un-intergalactic roots were in Hull, where it launched as Comet Battery Stores in 1933. It opened its first superstore in the Humberside city 35 years later, before following Dixons and Currys into orbit to become one of the great British temples of all things electrical.

Like most retailers it took a beating in the wake of the credit crunch, enduring a three-quarters drop in profits to £10 million in 2008-09 and scarce improvement the following year. But fears for the firm's future only really took hold when rumours began circulating that owner, Kesa, was looking for a buyer.

Kesa, which had been created as a holding company following Comet's demerger from Kingfisher group (B&Q, Screwfix) in 2003, then announced a sell-off deal to private equity firm OpCapita late last year. It didn't look pretty.

The takeover price was £2, likely to be less than any items on sale in the stores, plus Kesa had to throw in a £50m investment, keep the pension fund and inject more cash to back up customers' extended warranties. Kesa appeared willing to agree to anything to get Comet off its hands, in other words.

"It was an interesting deal to say the least," says Patrick O'Brien, a retail analyst at Verdict Research. "When a private equity firm buys a retailer, you can never be too shocked about what happens after that."

OpCapita, something of a specialist in struggling retailers, embarked on a severe cost-slashing exercise to reverse what were now clearly not waning profits but losses. Overseen by former Dixons boss John Clare, it outsourced chunks of the business and removed 1500 jobs, including some on the front line.

Only a few months ago it claimed to be turning the corner, but in the end its hand was forced by nervous credit insurers. They refused to grant suppliers insurance in the event of Comet going bust, a catastrophe for any retailer in an industry that relies so heavily on trade credit. At the end of last week, the administrators were called in. The remaining 7000 staff across 240 stores, including around 700 in 34 stores in Scotland, are waiting to learn their fate.

The reasons why Comet crash-landed are complex. The recession may not be helping anyone, but retail sales still grew at 1.5% in the UK (1.1% in Scotland) in the year to September. The electrical sector is also having a pretty good year, with companies like Dixons and John Lewis producing better figures than expected.

The trouble, as Patrick O'Brien explains, is that they are doing well off small consumer electronics items like smartphones, tablets and e-readers. Comet decided a number of years ago to focus on big-ticket items like washing machines, fridges and televisions.

"Those goods have had a particularly bad time of it in the last couple of years," he says. "Think about the lack of house-selling transactions, which generate the replacement of freezers, washing machines and, to some extent, televisions. And people have switched to flat-screen panels in the last 10 years and now there isn't much reason to upgrade. 3D televisions haven't generated sufficient interest. Panasonic announced yesterday that they are cutting back their global shipments of televisions by a quarter."

The problem for Comet is that many of the customers who drove to their stores to pick up these big-ticket items have stopped coming. Comet's cost-cutting programme, plus Currys' stated strategy of prioritising investment in adjacent stores, has exacerbated the problem.

Add to this the fact that Comet, like Currys, made a good deal of its money for a long time by selling extended warranties to customers. This market has been severely curtailed after the Office of Fair Trading raised serious concerns about these warranties earlier this year and introduced new rules to clean up the sector. While profits and sales went south, Comet's long leases on stores prevented it from closing them quickly enough to stay competitive.

And all of that is before anyone talks about the internet. Comet was late to grasp the importance of e-commerce. It then spent heavily to catch up, but the damage has been done anyway. The company has fallen prey to the pastime known as "showrooming", where customers visit stores to talk to staff about products only to then go and buy them cheaper on the internet. In a sector where nearly 40% of all sales are online, which is among the highest of all categories, this has helped Amazon to rocket into fifth place. It could yet overtake Comet for the first time without a shop in sight.

With Comet gift vouchers now suspended by the administrators, and uncertainty ahead for customers who have goods on order, there may be no songs of sleigh bells oozing out of speakers in these trading caverns in the weeks ahead. Like an electric light bulb suddenly going out, retailers are reminded that this is not a market that suffers foolish strategies lightly.