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Wednesday, August 17, 2011

The devilish details behind the fall of RedGroup

A fascinating op-ed in today's Dominion Post

Business reporter and commentator David Hargreaves meditates on the failure of a big box business

He begins:

The abrupt demise in February of trans-Tasman retailer RedGroup will for many reasons remain one of the more unsatisfactory corporate sagas in New Zealand's recent history.

Why?  Because reasons for its failure still merit deep analysis.  What, exactly, went wrong?

Good theories are listed:

# Management market decisions did not reflect market demands, leading to overstocking with hard-to-sell items

# Decisions were made in Australia without enough communication with Kiwi counterparts, meaning that Christmas stock, for instance, did not arrive in time

# Loss-making stores were not identified and culled

# Poor interior organization, making the shopping and browsing experience more difficult than necessary

Communication seems to have been a major problem, being so foggy that it was utterly misleading.  For instance, in 2009 RedGroup trumpeted a 52% increase in sales, leading to gossip that a stockmarket float was being contemplated, worth up to $600 million.  Just one year later the company admitted to banking covenant breaches, and announced a loss of $43 million Australian.

Somehow, in the fog, a private equity owner, PEP, finished up being the major secured lender, not Bank of Scotland/Fortress, as was generally believed.  Yet this big change in financing was not explicitly revealed in the December 2010 report.  Commercial sensitivity?  Or an attempt to hide the fact that RedGroup was in big financial trouble?

Because the changed situation wasn't obvious, suppliers were still giving the company credit, and missed the chance to cut their losses.

PEP is also very likely to be a big loser.  Most of the Australian operations have simply closed down, after liquidating their stock.  The situation in New Zealand is much brighter: though sale prices of New Zealand assets have been kept confidential, reports from RedGroup's voluntary administrator Ferrier Hodgson reveal that about NZ$45 million was received from Anne and David Norman for the Whitcoulls bookstore chain, and just over two million for the five Borders stores.

It's quite an investment, particularly considering that the ten airport Whitcoulls stores and the eight Bennetts academic bookstores have gone to other buyers.  The Normans have the fervent best wishes of the whole book community in their effort to resuscitate the old and iconic Whitcoulls brand.

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