There have been some high-profile corporate failures over the past year, and the evidence suggests that the bloodbath isn’t over. We take a look at 25 more prominent cases to draw salient lessons for every business.
It’s getting ugly out there. Credit agency Dun & Bradstreet believes one in nine companies could hit the wall this year, although some accountants and restructuring experts are privately worried that 30% of their clients are in danger of collapse.
In the last 12 months, around 8898 companies have been placed in administration, liquidation or receivership. But what’s most worrying is the number of big brands that have collapsed, including household names such as ABC Learning, Kleins, Strathfield and Midas.
Greg Hayes, director of accounting firm Hayes Knight and SME expert, says the collapse of iconic brands is a troubling sign. Not only does it indicate the wider economy is heading for a prolonged downturn, but the collapse of big-name companies can often have devastating knock-on effects.
Hayes gives the example of ABC Learning: “ABC over the past three or four years were growing at such a phenomenal rate. If you were a small or medium business that was supplying ABC, this has this huge multiplier effect.”
While SMEs are always warned not to become too reliant on any one customer, that sort of growth is hard to resist.
“Typically very few small businesses, if they had the tiger by the tail, would let it go,” Hayes says. “But if your ABC falls over, then the tiger in the tail can turn around and bite you. Then it’s a question of ‘can I adjust my cost base quickly enough to save my business?”
But you don’t need to be the supplier of a collapsed brand name company to run into problems.
Hayes gives the example of the collapse of Storm Financial, another group that had grown at a very fast rate and achieved large market coverage in a short space of time. The fallout from Storm’s collapse is being felt throughout the financial planning space.
“All of a sudden across the whole sector, people who are absolutely unrelated to this business are picking up some of those legacy issues,” Hayes says. “The flow-on impact is that a lot of people are saying to their financial adviser, ‘are you OK?’.
“I think we are in a marketplace where we are going to see a lot more of that ripple effect.”
To help you avoid the traps that cause companies to fall over, we’ve prepared a list of the 25 most prominent corporate collapses in the past 12 months. As the year goes on, the lessons from these disasters are likely to become even more important.
Date: November 2008
Sector: Childcare
Lesson: ABC Learning founder Eddy Groves had a pretty good little business going in Australia – profitable, fast growing and underpinned by government childcare subsidies. But his forays into the US and British markets distracted Groves from the day-to-day running of the Australian business, and without his scrutiny the low-margin operations started losing money. Eddy’s ambition of creating a global childcare giant was his undoing – had he stayed focused, ABC’s fate could have been very different.
Date: November 2008
Sector: Financial services
Lesson: Like fellow fallen finance groups such as MFS, Allco’s problem was simple – too much debt. Add this to a business model that was insanely complex and you have a recipe for disaster.
Date: October 2008
Sector: Biotechnology
Lesson: You have to feel sorry for companies in the biotechnology sector. It takes years of research, product development and trials for these companies to turn a profit, which means they must continuously raise cash to stay alive. The funding freeze has hit the sector particularly hard – no-one wants to be involved in companies with long-term risks. As always, cash is king.
Date: September 2008
Sector: Financial services, property
Lesson: Another company that seemed to believe the good times would last forever. When the credit crisis hit, this small Queensland financier-turned-property-developer began frantically trying to sell assets to repay debt. But as the property market went into freefall, getting a sale across the line took too long, and Asset Loan Group went under. As administrator John Greig said, timing was the company’s biggest problem in the end.
Date: January 2009
Sector: Retail
Lesson: The collapse of Australian Discount Retail’s three cheap-and-cheerful chains was a shock – discount stores generally do well in a recession. But the company’s private equity owners had loaded the company with $201 million of debt, giving ADR little room to move when retail spending slowed. As always, debt kills.
Date: July 2008
Sector: Financial services
Lesson: The collapse of electronics payment provider Bill Express hit the company’s customers – mainly newsagents and small telecommunications providers – very hard. In hindsight, the company’s financials were clearly a mess – despite reporting a profit in every year it was listed (since 2004) the company managed to rack up debts of $180 million by the time it collapsed.
Date: May 2008
Sector: Construction
Lesson: The collapse of New South Wales’s largest homebuilder sent shockwaves through the property sector. The company was squeezed from three angles; demand dried up as the economy tanked, the cost of contractors and tradesman continued to escalate, and the credit markets froze. But Beechwood and the other collapsed home builders were guilty of undercutting each other and destroying margins in the process.
Date: November 2008
Sector: Childcare
Lesson: The collapse of ABC Learning sealed CFK’s fate – its attempts to sell its assets became impossible when ABC went under. The lesson from the childcare sector collapses is that apparently cottage industries such as childcare (which had, until 10 years ago, been largely dominated by community groups and single operators) are not always as easy to corporatise as it may appear.
Date: August 2008
Sector: Telecommunications
Lesson: Technology experts say Commander Communications treated its customers poorly, overcharging them for relatively old technology solutions. That was OK when the company had a strong position in the SME market, but as competition increased, customers turned away and revenue fell.
Date: November 2008
Sector: Digital media
Lesson: Digital media company Destra was always difficult to describe, mainly because it had so many different elements, from digital music businesses through to publishing through to marketing. The speed at which these diverse businesses were cobbled together proved to be the company’s undoing – Destra bought separate companies in the three years before its collapse, with most of the acquisitions funded by debt. In the end it was a case of too much, too fast.
Date: July 2008
Sector: Online retail
Lesson: EBS International was better known as EBusiness Supplies and became one of the biggest traders on eBay until its collapse last year. The company’s grow-at-all-costs mentality seemed to have been its undoing – it kept selling more and more goods even as its problems with suppliers and delivery mounted, further compounding its problems and eventually leading to its demise.
Date: July 2008
Sector: Financial services
Lesson: Former Liberal leader John Hewson resigned as chairman of Elderslie just weeks before the company was placed in receivership. The company’s problem was simple – it ran out of cash as investment markets tumbled and fee revenue shrunk. Another example of a business model built for good times but unable to weather the downturn.
Date: September 2008
Sector: Agribusiness
Lesson: Environinvest, which was founded by former Victorian state government minister Roger Prescott, was an unlisted public company that operated agricultural investment schemes, including tree plantations and cattle projects. While the company’s debt and poor cashflow forced it into administration, there were clear issues with management – in correspondence with the company, auditor David Nairn of HLB Mann Judd noted “ambiguous transactions with little documentation” and questioned the timeliness of financial reporting.
Date: December 2009
Sector: Retail
Lesson: EzyDVD is one of those rare birds – a collapsed company that actually found a new buyer, the Franchise Entertainment Group. Poor management seems to be the big problem here. The company reportedly lost $3 million in its last few years of operation and founder Jim Zavos went through two CEOs in quick succession in 2008. Now that the company’s unprofitable stores, warehouse and headquarters have been shut, the new owner should be able to turn the business around.
Date: November 2008
Sector: Infrastructure
Lesson: The collapse of Freightlink, owners of the Adelaide-to-Darwin railway, surprised no-one in the transport and logistics sector. The sheer cost of building the line meant the company had to take on huge borrowings, but revenue never lived up to the company’s over-inflated expectations. Freightlink was doomed to fail.
Date: December 2008
Sector: Manufacturing
Lesson: The collapse of power tool maker Global Machinery Company was a shock, but the reason was clear – Bunnings. When the hardware giant took GMC’s products of its shelves in early 2008, GMC’s sales plummeted and its debt load became difficult to manage. The lesson? If you can’t get on the shelves of the dominant retailer in your sector, you are in trouble.
Date: December 2008
Sector: Retail
Lesson: Luxury shirt brand Herringbone revelled in its image as outfitter to the financial services whiz kids of Martin Place and Collins Street. But as the financial crisis swept through the office towers of Australia, Herringbone’s sales fell by 23% in two months. Luxury goods always struggle in a recession, but Herringbone’s position was made all the more precarious by its debt levels.
Sector: Retail
Date: June 2008
Lesson: As well as the usual problems of mismanagement and too much debt, low-cost jewellery retailer Kleins was guilty of one of retail’s biggest sins – failing to keep up with its consumers. The arrival of costume jewellery chain Diva should have forced Kleins to freshen its product range and chase a younger consumer, but the company simply didn’t move quickly enough. Sales dried up, stock built up, and eventually the doors closed.
Date: May 2008
Sector: Financial services
Lesson: It was no coincidence that stockbroker and margin lender Lift Capital collapsed shortly after Opes Prime. While the company was tottering because of market conditions, the ripple effects from Opes caused a run by clients, almost immediately condemning the company to administration. The lesson is clear – when one of your competitors goes down, be prepared to feel referred pain.
Date: September 2008
Sector: Financial services, property, tourism
Lesson: It took MFS the best part of year to die, but the company’s fate was sealed in a few short weeks at the start of 2008 when a billion dollar pile of debt crushed the company as the credit crisis struck. Debt is bad enough, but when your entire business model is built around the idea of borrowing money to buy over-priced assets, you will almost always hit trouble when the business cycle turns.
Date: January 2009
Sector: Automotive retail
Lesson: Midas was put in administration early this year by its high-profiled shareholders, including former Coles boss John Fletcher, although the administrator is hopeful of finding a buyer. Midas’s ill-fated move into LPG conversions (which were suddenly less attractive because of falling petrol prices) didn’t help its cause, but its incredibly acrimonious relationships with franchisees was also a constant distraction for management.
Date: April 2008
Sector: Financial services
Lesson: In hindsight, the collapse of margin lender Opes Prime was the moment the global financial crisis hit Australian investors. While the Opes mess will probably take years to sort out, at the heart of its problems was poor management. When a key client’s debts exploded, the company appears to have been unwilling or unable to act. But in the end, this brought the entire company – and about 1400 clients – down too.
Date: February 2009
Sector: Property
Lesson: Jim Raptis was all but wiped in the property crash of the late 1980s and early 1990s, but the spectacular boom in Gold Coast property during the last decade allowed him to rebuild. Now, it’s all gone again. Not surprisingly, the problem was the same – Raptis Group was so heavily geared that when the apartment sales dried up, the company was simply unable to pay its financiers and subcontractors.
Date: January 2009
Sector: Financial services
Lesson: The collapse of financial planning group Storm Financial has been covered in depth, but the key problem was the company’s inability to build a business that could last through a business cycle. The company’s model – and its advice to clients – was based around the bull market, and when financial markets crashed Storm was unable to cut its cost quicker than its revenue was falling. A business must be strong enough to make it through good times and bad.
Date: January 2009
Sector: Retail
Lesson: The management of mobile phone and car audio retailer Strathfield has been a problem for the last few years, with directors, executives and shareholders coming and going at an alarming rate. The revolving management door has not helped the company’s profitability and a disastrous Christmas trading proved to be the final straw. As any good manager knows, stability is crucial to business success.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
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