Worst still to come for Europe's retailers

By Mark Potter and James Davey - Analysis

LONDON (Reuters) - The pain for Europe's retailers has only just begun, as a deepening consumer downturn, rising costs and banks' reluctance to lend are set to drive thousands out of business and put tens of thousands of staff out of work.

Credit insurer Euler Hermes estimates that around 35,000 western European retail businesses could go insolvent next year, up about 17 percent on 2008 and making it the second worst hit sector behind manufacturing.

Britain, with its sliding currency, sinking house prices and high personal debt, is likely to suffer most, while smaller retailers, those selling discretionary items and those with high borrowings will be especially vulnerable, analysts said.

"Undoubtedly it will be even tougher to do retailing in 2009 than it has been in 2008, I would say almost universally across Europe," said Richard Lloyd-Owen, head of consumer business at consultants Deloitte.

The retail industry employs around 11 million people in the European Union and generates about 223 billion euros ($288 billion) of wealth, according to statistics agency Eurostat.

The sector has already been hit hard by a drop in consumer spending following a banking crisis which has plunged the world's top economies into recession and fueled unemployment.

Euler Hermes Chief Economist Karine Berger estimates that about 30,000 western European retailers went insolvent in 2008.

Casualties have included such long-standing businesses as British toys-to-homewares chain Woolworths, which went into administration, a form of creditor protection, last month and is holding closing down sales as it struggles to find a buyer.

With many retailers ordering stock for Christmas before the worst of the banking crisis in September, shopping streets across Europe are awash with discounts and promotions.

But if the festive season is tough, many analysts think 2009 could be even harder as consumers look to pay off credit card bills and start saving money amid worries about their jobs.

NIGHTMARE AFTER CHRISTMAS

"It's a very, very clear indication of just how bad it is that you've got major retailers (like Woolworths) failing before Christmas," said Nick Hood, a partner at business rescue firm Begbies Traynor.

"That, I think, is the banks and other stakeholders saying we think it might be absolutely tragic in terms of consumer spending after Christmas."

Earlier this week a survey of 2,700 people by Boston Consulting showed that about 56 percent of consumers in Germany, France, the UK, Italy and Spain plan to cut discretionary spending next year by an average 12 percent.

Alongside weaker demand, many retailers are facing problems getting stock as credit insurers, worried about store groups' ability to pay off debts, withdraw cover to suppliers.