Widget's Mark Needham on why cashflow was at the core of Comet's problems.
The obituaries which have been written for Comet have all focussed on how hard it is to make money from bricks and mortar retailers as internet sales continue to rise. The Sunday Times commented cheerily that it had predicted that the whole venture would go wrong when, in February this year, French retailer Kesa paid OpCapita, a UK based private equity fund a £50m “dowry” to take Comet off its hands.
While nobody would deny that it was difficult, I do not believe that the task facing Comet’s management earlier this year was impossible. With good management and a bit of luck anything is possible. Look at the difference in fortune between Maplin today and the poorly located shops full of small electronic components they had ten years ago.
What killed Comet was not profitability, but cashflow. I remember my first finance director drumming it into me that profitable businesses can go bust if they do not have the trust of their suppliers and bank.
The Comet management have been saying for a few months that the business was at breakeven. They may well be right. But I never met anyone who trusted OpCapita to do the right thing for the long term of the business. I, like many other distributors, took credit decisions along the lines of “£50m from Kesa should keep them going for a while.”
By the autumn we, along with lots of other suppliers, were getting jumpy about what would happen when the dowry ran out. This lack of trust led to the withdrawal of credit which brought down Comet, not the state of the stores or their profit and loss account.
Rashly we agreed to supply one last small consignment of stock to Comet in September. Rather like the scene in a film where the safe cracker agrees to come out of retirement to do one last job, we should have known really that this was a risk too far and on 31st October the payment failed to appear. Fortunately it was a small order and under our terms of trade with Comet, goods supplied to them do not become the property of Comet until they were paid for, so we have a retention of title claim in with Deloittes.
According to press reports, OpCapita, may make a small profit out of the administration. But they sacrificed a larger potential profit and long term business because nobody believed they were worthy of credit.
Text courtesy of Mark Needham, reposted with permission from the Widget blog here.
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