Retail insolvencies start the year
With both Greeting Card Group and Music Zone going into administration this week (reported in Financial Director), are we seeing a retail-led continuation of the last quarter's surge in UK corporate insolvency rates?
It's hardly surprising to see retail administrations at this time of year - over-leveraged and under-performing retailers have minimum borrowings after the Christmas sales peak and secured creditors will naturally choose that point to stop the losses.
Retail has been a risky sector for some while, and although some brands are reporting a strong Christmas season, the continuing consumer debt problem (£1.3 trillion total and over 100,000 personal insolvencies in 2006) cannot help.
But constructive use of formal insolvency - such as the pre-pack administration used to rescue Little Chef this week - can often add value when a business is saleable and the right restructuring team is brought in early enough.
I think it's less about the sectors and personal debt, and more about the fundamentals of the three businesses you mention.
Any customer could point out flaws in the business models of all three - GCG and Music Zone are competing with supermarkets, Music Zone is also competing with HMV and Virgin, Little Chef is competing with fast food outlets. What do any of them do differently that means they should be able to make money?
I think the consumer has the last word on who survives - if they wish for identikit high streets, or doughnut towns, or McDonalds bacon sandwiches, so be it.
Paul
I agree, business fundamentals are usually the trigger for insolvency. But sector and market analysis remain useful tools and in this instance go to the heart of two of the current economic questions most frequently asked, in my experience, of insolvency practitioners:
Product-market analysis is crucial when considering business model flaws and competition is only one factor, albeit a significant one for these retailers.
The consumer can be thought of as having the last word, but better retailers are in tune with their customers and prepare for and adapt to changing demand.
More important for weaker retailers is whether the business moves early enough to apply the right remedy to avoid impending problems, which is often easier when you bring in an adviser or executive with appropriate situational management skills and experience.