5 lessons learned from the collapse of Clive Peeters
May 2010 by James Thomson
This article first appeared on SmartCompany.com.au, Australia s premier site for business advice, news and features.
Editors Note: this is a good summary of the main reasons many businesses collapse when the ‘things they can’t control’ go against them (which they invariably do in a typical business cycle). As Turnaround Managers and Consultants, we would concur with James’ comments and views. The issue of fraud, so often assumed to be much easier in highly profitable companies, is actually more evident (in our experience) in businesses with a lack of profitability and poor accounting & systems controls.
The collapse of Clive Peeters did not come as a surprise to many in the retail sector. Since August last year, when it emerged that the company had been hit by a $20 million accounting scandal, industry scuttlebutts had suggested that the company was in serious trouble.
This morning, NAB formerly placed Clive Peeters into receivership, which means the company or at least its profitable stores will be placed up for sale.
Harvey Norman and JB Hi-Fi will probably pick over the most-profitable and best-located stores, although whether they buy or not remains to be seen – they could be just as happy to see one less competitor in the market.
So what went wrong? Here are five lessons that I’ve picked up.
#1 Debt kills off your survival options
The common theme in pretty much every corporate collapse is that debt makes it extraordinarily difficult for a struggling company to survive. Like many of our fallen businesses, Clive Peeters tried to expand rapidly during the boom years, using debt to open new stores and take out some smaller competitors. Servicing that debt is fine when the economy is going well and consumers are buying plasma TVs, but when the downturn hits, that debt becomes a millstone. Ironically, the Government’s stimulus payments in 2009, actually might have masked the true state of the company’s fall for 12 months or so.
#2 Deep discounting eventually catches up with you
Like most whitegood retailers, Clive Peeters lived and died on its ability to survive on wafer thin margins. In this sector, Harvey Norman, JB Hi-Fi and The Good Guys are constantly on sale and constantly offering discounts to lure customers. With discounts rife, retailers like Clive Peeters need to rely on volume. But when shoppers close their wallets, the timebomb starts ticking.
#3 If you’re not big and you’re not niche, you’re in trouble
Clive Peeters, which had 45 stores compared with Harvey Norman’s more than 100 stores, may have found itself in a dangerous middle ground – not big enough to compete with the scale and financial muscle of Harvey Norman, and too big to be seen as a specialist niche retailer. While the niche guys can avoid discounting wars by focussing on service, specialist products or a certain area of the market, mid-sized player like Clive Peeters have no choice but to take on Harvey Norman at their own discounting game. It’s another reminder that in many sectors, the Australian economy only supports very big or very small companies.
#4 There is nothing more important than your numbers
As we learn more about what actually went on in Australia’s big corporate collapses, it is astounding to see that on most occasions some sort of “accounting irregularities” were rife. So it was with Clive Peeters, which was hit with an accounting scandal when a payroll officer allegedly stole $20 million and used the cash to purchase a property portfolio. Plenty of entrepreneurs would have sympathy with any business that gets hits by a rogue employee, but the lesson here is that the numbers are sacred. A culture that allows accounting irregularities of any sort to remain undetected, or that allows problems to be hidden from the view of auditors or shareholders puts itself in the firing line.
#5 Retailers need to look at their models
Internet entrepreneurs Ruslan Kogan, who sells electronics and television products through his Kogan Tech website, argues that the Clive Peeters collapse shows that bricks and mortar retailing is dead, and argues that retailers with these old-fashioned business models including Harvey Norman are in the gun. That’s taking things way too far in my opinion, but Kogan does make an interesting point about how many retailers in this sector have refused to embrace the internet, instead relying on a model that involves spending millions on marketing to get customers into the stores, then discounting like hell to get them to buy. This “get the customer to come to us” model is starting to look dated. Customers want to compare, research and buy in their own time, and at their own convenience and retailers need to react.