Why HMV may just survive while other high street retailers crash and burn

Despite the continuing carnage on the High Street there are glimmers of hope emerging from the restructuring process currently being carried out on the music store HMV.

Why? Well as with any business restructuring the first step is to carry out a review which includes a thorough look at the accounts to identify any areas where savings can be made, the most obvious in this case being loss-making stores, onerous rental agreements and  the employment roll.

Already the closure of 66 loss-making stores has been announced, plus a further 37 this week, and also administrators Deloitte have noted that landlords have been generally “flexible and supportive” during the ongoing efforts to restructure the business.

Most significant, however, may be the recent announcement that trading agreements for the supply of new stock have been signed with the majority of HMV’s suppliers, something that is generally unusual when a company is in difficulties.

It is clear that HMV’s business model needs to change to take account of the shift in consumer behaviour and deal with intense competition for the sale of music, DVDs and games from online suppliers, digital downloads and also from supermarkets.

HMV however has support from a record industry, particularly the independent labels, which is keen to maintain a High Street presence and can learn from other retailers that justify their High Street presence by providing consumers with a retail experience rather than just a place to purchase goods.

Artists, too, have expressed support with Elton John suggesting holding live gigs in the stores.

The secret is in the details. Customers have been quoted as saying they valued the opportunity to browse, to talk to knowledgeable experts when they are searching for unusual and niche items and to have a sample listen to tracks before they buy. With appropriate staff training, these could provide a USP for the retail arm of the business to highlight.

All this illustrates that a thorough business restructuring involves attention to detail and identifying those aspects that make it special or unique and that may just help it to survive by returning focus to core strengths that may have been lost sight of over time.

Insolvency does not have to be the end of your business

When an SME encounters cash flow difficulties and cannot pay its bills many owners assume that their business is bust and should close.

It does not have to be the case. If the core of the business of a company is offering a genuinely useful and saleable product or service, it can normally be saved.

A detailed look at cash flow and accounts is the first step in the process of turning around a struggling business although this needs the help of a business doctor plus commitment, realism and honesty on the part of its owners.

The business doctor will help to identify the profitable activities that should be saved and also has a number of techniques in the toolbox to help deal with the pressing debts that impact on cash flow.

An increasingly useful tool provides a way of dealing with debt by reaching agreement with creditors to repay all or part of the debt in an affordable way that allows the business to focus on building its strengths for the future.

This is a Company Voluntary Arrangement also referred to as a CVA.  The CVA is a binding, formal agreement that is agreed with creditors but needs the help of a business doctor or turnaround adviser. To find out more, K2 Business Rescue has published a useful guide to the steps that need to be taken: K2 CVA Guide 2013. A copy along with other useful guides is available as a free download via the Resources section on the K2 website.

Frozen panic could become a self-fulfilling prophecy

The latest quarterly survey carried out by the insurance giant Zurich found that 16% of the British small and medium-sized businesses (SMEs) surveyed considered themselves at high risk of going out of business within the next year due to financial pressures.

Those perceiving themselves to be most at risk were SMEs in the Retail (21%), Construction (37%) and IT (24%) sectors. In all three the fear of going out of business had risen since the last Zurich quarterly survey.

However, it must be stressed that the survey is a record of the perceptions of SMEs.

More important, perhaps, is that almost 100% of them are not getting any help in dealing with their problems. Despite the latest government lending scheme, Funding for Lending, the banks continue to shun the SME sector as the Federation of Small Businesses (FSB) repeatedly highlights.

Just as important, is that most of them are not seeking help in dealing with their problems. Despite the perceived concerns of SMEs, they are not speaking to business advisers who remain quiet. Indeed insolvencies are at their lowest level for 30 years.

But again, perception plays a part but the insolvency statistics are a matter of fact.

Firstly there is the common view among SMEs that if they can’t see a solution then how can an “outsider”. Secondly, too often SMEs don’t know where to go for help and thirdly, they assume that it will cost them money they can’t afford to get help.

The danger is that the fear of going out of business then becomes a self-fulfilling prophecy, when with the help of a business doctor or turnaround advisor owners could save the business that has taken them years of hard work to build. Just a free consultation may be all that is needed, and most business doctors will provide some free support. It’s good business for all concerned.

 

A revolution in business culture?

Are the super rich at the World Economic Forum in Davos “morally and intellectually bankrupt” as opined by Will Hutton in last Sunday’s Observer? He argues that many of them generate excessive profits by squeezing employees’ wages. More tenuous is his view that this lack of wealth redistribution is restricting economies that would otherwise trade out of recession if employees had more to spend. 

However Mr Hutton does have a point: “Reality will out. Everyone knows by now, even in Davos, that there can be no return to the world before 2008, relying as it did on abundant supplies of cheap credit. Equally, we need our economies to grow with real, sustainable growth, as opposed to an artificially stimulated variety….. Real growth can only be achieved by the economic empowerment of ordinary men and women, by promoting individuals to become capitalists, to want to be owners who will bear the pain, and also share the spoils.”

He suggests: “It is a wonderful opportunity for enlightened business leaders, politicians, trade unions and indeed all of us to reimagine the role of people in western societies. One of the reasons it has been easy to reduce the power of people in the Anglo-Saxon world is through fear, fear of change. This has preserved the status quo and kept incumbent leaders in power.”

Those with long memories will recall the militant opposition of the British trade union movement to co-determination – that is, putting workers on company boards – in the 1970s: stupid. 

Yet Britain, and the West for that matter, needs a way of relating labour to capital. We need to engage employees by encouraging ownership and sharing the benefits of their efforts. It seems an impossible ask. We need employee representatives, union negotiators and business leaders to become leaders of change. Not confrontational or militant style negotiation of change, take it or leave it, one out, all out but strategic leaders who can negotiate reward for productive effort – to argue for a share of the spoils when they are genuinely there, but acknowledge that it might involve sharing pain to get there. They should be able to cut deals and support firms when jobs are at risk, but also make sure the deals are fair for all stakeholders when the business is turned round. 

Hutton argues: “One way forward is co-determination, putting employee representatives on company boards. Another would be to revisit the ideas of Nobel prize winner Professor James Meade and organise compensation so that a firm’s profits are equitably shared between workers, management and shareholders.” 

Whether or not Davos is intellectually bankrupt, the ideology it champions will ultimately seek to preserve the interests of its delegates rather than promoting those of employees. Capitalism certainly requires intellectual challengers, social movements and union leaders to take risks and reimagine their role. 

The best time to negotiate a good deal for workers is when their employer really does need their support, when they are in a financial crisis and need to restructure to survive.

One – or two – swallows do not make a summer

Following on from the demise of Jessups the camera retailers the news that HMV had finally called in the administrators comes as no surprise.

What is perhaps more surprising is that a couple of commentators have seized on this development as perhaps an early sign that banks are feeling more confident about surviving losses and that better times are on the way in 2013 on the grounds that there is usually a rise in insolvencies as an economy starts to recover.

The more realistic view, K2 would say, is that insolvencies are still at a very low level and it is way too early for anyone to be so optimistic.

More likely, and there has been plenty of evidence in the cases of Comet, Jessup’s and HMV, is that their business models have been found wanting in the new world of consumer caution, shopping around for the best prices and the move to online shopping.

With a raft of year-end reports due out this week, including Mothercare, Home Retail Group (Argos and Homebase), Bookers, and Asos the picture will gradually become clearer.  One to watch is Mothercare, which did alter its business model last year to focus more on out of town retail stores rather than the High Street. This measure does seem rather late, being at least 10 years after others took the same initiative. The question will be whether Mothercare has done enough to survive without further and more dramatic restructuring.

While the pain is most obvious on the High Street, reduced consumption, changing consumer behaviour and inappropriate business models apply to many businesses that have not yet gone bust. There is no sign yet of a lift in bank confidence as they continue to prop up zombie companies rather than lending to companies wanting to change their business model or new ones with a vision and growth potential.

For the foreseeable future, businesses would be wise to examine their business models and if necessary to implement change early rather than put it off as restructuring becomes more difficult the longer it is left.  This is still no market for dramatic moves to improve turnover.

Quarter Day Rent claims its first major scalp of 2013

K2 Business Rescue asked in a pre-Christmas blog whether January would see a rise of retail insolvencies given the December 25 quarter day rent falling due.

It may be too early to expect a flood but today’s announcement that the High Street camera chain Jessups has gone into administration with PWC as appointed administrators may be first sign. 

Jessups, which in 2009 managed to avoid administration by arranging a debt for equity swap with lender HSBC, saw a significant decline in market share throughout 2012. 

The company has 192 UK stores employing around 2,000 people and the administrators have said that inevitably some stores will have to close given the current ongoing economic crisis. 

Despite the balance sheet restructuring in 2009, Jessups is an example of a company that did not change its business model. As a long established retailer  they continued to rely on high street sales while its market and customers buying behaviour changed. 

Financial restructuring rarely works unless it is part of a strategic review which normally results in a change of business model and an associated operational reorganisation. 

The question is if companies that are currently hanging on by their fingernails do not take action and call in an experienced rescue and turnaround practitioner who will be next?

 

Are we doing enough to publicise the benefits of business rescue and turnaround?

A recent discussion in the LinkedIn group, Restructuring and Turnaround Management, asked whether anyone in the turnaround industry ever received solid referrals from the banks.

Although the majority were responding from the USA, it seems there is little difference between the two sides of the “pond” when it comes to the banks.

The general consensus was that most lenders were either not interested in considering the options for rescue and turnaround for struggling clients or preferred instead to “manage” loans themselves until it is too late, when they call in the insolvency practitioners.

This comment from Al Jones in the US was typical of what he saw as the banks’ view: “we can handle this, maybe it’ll fix itself especially if we bluster and threaten the borrower, or it’s unsalvageable.”

But the question is how can a bank’s staff with no direct experience in small business or business turnarounds make such an assumption?

UK-based Andrew Strachan, pointed out that an inevitable consequence of this attitude was that while interest rates remained low the banks continued to prop up zombie businesses rather than risk losses, thus diverting resources away from healthy, growing companies with a real need for investment.

At K2 Business Rescue we too have seen very few referrals from banks in our 22 years as a firm specialising in turnaround. We understand that there are good reasons why banks do not initiate a turnaround or recommend one to their clients. They mainly relate to fear, fear that it may result in financial risk to the bank or damage to its reputation. This fear is valid in a world that wants to blame and possibly sue someone. And who could blame them if it goes wrong? Creditors who aren’t paid, employees who lose their jobs, or they may attract some bad press. A big risk.

A further reason for a lack of engagement in turnaround is the view that banks no longer behave as long-term partners with a client. The bank-client relationship has become more transactional. This works both ways, why should a bank invest further time or money in a client who might take their business away after the business has recovered?  

Business rescue and turnaround focuses on survival whereas all too often the insolvency practitioner makes more in fees out of a formal insolvency procedure. The banks understandably use their trusted (panel firm) insolvency practitioners to do reviews on their behalf but the system is flawed if the insolvency practitioner’s interest lies in a formal insolvency appointment. The banks know this and so the number of business reviews has declined, but it has not yet been replaced with an alternative that focuses on rescue and turnaround.

…..Or perhaps we in the turnaround profession need to get our message across more loudly and clearly?

 

Update

In view of our comments in the last item it is no surprise, therefore that the struggling music, films and games retailer HMV has announced today (December 13 2012) that it is in talks with its banks, following a 13.5% reduction in sales in the six months to October and amid fears of a “probable” breach of its banking agreements next month.

Whether new initiatives put in place by the company’s new Chief Executive, Trevor Moore, who took up his post in September, will be enough to help HMV take advantage of the run-up to Christmas to significantly improve on sales remains to be seen. Like many retailers it will have December deadlines looming.

Season of Goodwill?

December marks a “pinch point” for many businesses, particularly for the high street retailers.

The quarter day – when quarterly rents to landlords fall due – is on December 25. About then most businesses will be facing their next pay run of salaries for employees and possibly of payments to additional temporary staff who have been taken on to cover the festive season. Then there is a VAT return with VAT to pay on the Christmas trading.

If all has gone well the seasonal stock will have been run down and there will be a lot of cash in the bank from the Christmas trading.

The question is what will the banks do at this point? Are they lining up to pull the plug on businesses at the point in the year when their clients have most cash? Or the point when their clients have significantly reduced the overdraft? Arguably Christmas is the best time for a secured creditor, such as the bank, to call in its loans, or reduce the overdraft. The banks don’t even need to pull the plug, they can just take the cash to offset a loan or simply reduce the overdraft facility.

With banks seeking to repair their balance sheets and the uncertainty ahead, are we likely to see a sudden upsurge in insolvencies immediately after the Christmas period?

It is estimated that 160,000 businesses are classified as ‘zombie companies’, defined as those who are surviving by only servicing interest with little prospect of ever repaying the loans. Since the start of the recession it may not have been in the interests of the banks as secured lenders to pull the plug, however Christmas can be the best time for them to consider such an option.

Companies who are just servicing interest ought to be concerned. They ought to be seeking advice before the bank swoops.

Crowd Funding has a Key Factor that makes it Attractive to Firms Seeking Cash

The plethora of Government initiatives designed to stimulate lending to small enterprises and StartUps, seem to have mainly sunk without trace as the economic meltdown continues.

From Project Merlin, via the National Loan Guarantee Scheme and others including the latest initiative, Funding for Lending, they have largely been ignored by both banks and companies.

Throughout the downturn the banks have said they are willing to lend, and most commentators have claimed there is no shortage of finance, however business lending has continued to decline.

There seem to be two main issues that have caused the decline, firstly the banks are more cautious and want both security for the loans and business plans that demonstrate they will be repaid, and secondly companies remain uncertain with few applying for loans unless they are in financial difficulties.

Similarly investors have been somewhat absent from the market. Many have already been wiped out leaving those with cash very wary.

Despite the tax relief incentives offered under the Enterprise Investment Scheme (EIS), and for StartUps, the Seed Enterprise Investment Scheme (SEIS), there has been little interest. This lack of appetite can be explained by the stringent pre-qualifications. In the case of StartUps, SEIS investors may qualify for 50% tax relief on up to £100,000 however the HMRC guidance notes may help explain why no one is excited: http://www.hmrc.gov.uk/seedeis/index.htm

There has however been much excitement over a newer funding alternative called “Crowd Sourcing” or “Crowd Funding” since the launch of the UK version of the US enterprise Kickstarter on 31 October 2012.

While Crowd Funding may prove to be a good option for many firms, StartUps in particular should do their research. Kickstarter, for example, is restricted largely to creative projects that have a defined beginning and end and its website clearly states: “Starting a business …does not qualify as a project.”

This innovative type of funding is becoming more common. There are already several finance providers each with its own criteria and the number is likely to grow as investors and lenders put up more cash.

The Crowd Funding providers appear to have one common factor that makes them attractive to firms seeking cash. They make it simple to apply for finance, whether debt or equity.