Why do retailers keep going into administration?

Ross Greenwood speaks to Eli Greenblat, Senior business reporter at The Australian, about why luxury handbag retailer Oroton has gone into administration.

Introduction: Why do retailers keep going into administration?

Ross Greenwood:  Great to have your company here on Money News. Another story that’s come out today is the very highly regarded Australian retailer- or at least it was a few years ago- Oroton, has today fallen into voluntary administration. There is some suggestion that this could be all of a plan to try and get a rescue up for the company which makes accessories, handbags, has for many years. You might bear in mind that a little while ago, we spoke about Oroton, when it basically savored a tie with GAP.

Everybody understands GAP’s stores are clothing stores around the world. Previously, of course, it had lost its rights to sell Ralph Lauren Polo in Australia, which was really one of the keys to the profitability and the success of Oroton. When it lost that, it took up with GAP. It has not been as successful ever since it’s cut the cord with GAP, and now really has ultimately fallen into voluntary administration. Let’s try and find out exactly what’s taken place.

I do know that Deloitte restructuring services partners, Vaughan Strawbridge and Glen Kanevsky are the administrators here. Eli Greenblat is the Australian newspaper senior business reporter, who does specialize on retail matters. Eli, I guess to a certain extent, we’ve been looking around the place for a while. You and I are not surprised that Oroton has found itself in this dilemma.

Interview with: Eli Greenblat, Senior Business Reporter, The Australian

Eli Greenblat: Thanks Ross. It’s been tough for them. I think you’re absolutely right, having this slow death for four or five years now. You are absolutely right. They lost that distribution deal to Ralph Lauren about four or five years ago. Actually, after that. Their shares go by that a quarter, and they’ve never really recovered. They had to go with GAP, didn’t work, cost them money. They had to go with Books Brothers in Australia, to launch that, it didn’t work. They wanted to bring out Old Navy, even Banana Republic, it didn’t work.

Now, they’ve just collapsed in the heap. It’s a tough environment for them. Oroton, it is a luxury brand. It’s one of the few luxury brands Australia has created, or Australia has really got here, in terms of fashion. I think in this market, it just really can’t compete with those European luxury brands like Bulgari, or any of those like Louis Vuitton. It’s hard to compete.

Ross Greenwood:  Louis Vuitton, yes. I was going to say, one interesting thing about this, Eli, and it really shows a dilemma. In retail, I don’t think a lot of people pick this up. It’s even a dilemma of our big department stores right now. Those department stores and places such as Oroton, if they’ve got a GAP license here in Australia. Clearly, they have to pay a license fee to GAP. Then they actually have to go on and buy the clothes from GAP. They then have to go and lease the stores, hire the staff, and all of that. The problem is, by that time, they’ve actually got costs that are really quite significant.

To be able to sell those clothes, they’ve got to charge a premium for the clothes. If you take H&M, Zara, Uniqlo- classic examples of those, but there’s other places as well- they are direct manufacturers. They buy directly from the source overseas. No license fees, none of that type of stuff. As a result, if they need to clear this stock, they can count it to zero to get it off the floor, because their margins are so much bigger. This is the dilemma of Australian retailing right now.

Eli Greenblat:  It is. It was perhaps a poor decision on behalf of Oroton, and they’re paying the price now, their shareholders are paying the price. You’re absolutely right. They agreed to take the stocks that GAP gave them, or Brooks Brothers gave them. It could’ve been out of season, it could be the wrong type of stock. And of course, there are ways where online, you could buy GAP, or buy Brooks Brothers, in America, or other geographies, go online and maybe get a better price. Why would you go into one of their stores?

Then you’ve got lease obligations, and lots of other obligations that Oroton would’ve made to GAP in America, which they had to now get out of and pay them, as opposed to get out of those deals. It’s a really bad step for them. They’ve got 59 stores, Oroton. Their future’s in doubt.

The problem now, Ross, it’s less than a month before Christmas. What happens is no white knight comes to rescue Oroton, which is a possibility.

If that stock is liquidated in the fire sale, that then triggers this massive fire sale speed discounting right before Christmas, which other retails may have to copy, because they have to match profits, they have to be competitive.

Ross Greenwood:  It’s going to be interesting to watch that. Mind you, you talked about white knights. There are a few around the place. There’s quite clearly Will Vicars, he’s the chief investment officer at Caledonia Funds Management, highly regarded, certainly got plenty of money in his pocket. He owns 17% of the stock. You’ve got the Gazelle Corporation. Same for Gazelle’s whole business. It bought 7% in July. There’s also Anchorage Capital Partners. Then there’s even the family itself.

Roseline, the chief executive. The Roseline family’s got plenty of chuff. You’d actually imagine that this might get relifted out of administration and put back into private hands.

Eli Greenblat:  For shareholders, you’d hope there’s some kind of return. You’re right, the Roseline family, they’re in, they’ve got 20%. Roseline’s grandfather founded the company in 1938. They’re first, I suppose, in the order. Gazelle, they’re the fourth biggest shareholder. Their shareholders maybe asking them some questions why they spent so much money buying the stakes in the first place only a few months ago. That company, Oroton, have been in pain for a long time, why did the Gazelle buy it?

There are other investors around town.  Myer, AGM now. Myer bought Mark. I think they’re out of the administration, they just bought the brand. I don’t think Myer would touch this.

Ross Greenwood:  I don’t think Myer is in any position to touch anything at the moment. You and I both agree on it, I would’ve thought.

Eli Greenblat:  No. Solley Lew’s got his AGM tomorrow with primary investments. Maybe he would touch it. I think it’s going to be a very tough call in this market. Would you put good money after bad? It could be, whilst the outcome is that whoever buys it, if someone does buy it, they allow the stores to close, shut them down, and all you do is just buy the brand itself, and then give it some life online, or give it some other kind of life with a confession department store, perhaps.

Ross Greenwood:  It’s going to be interesting to watch it. Eli Greenblat, Australian newspaper, senior business writer and also specializing in retail. Eli, as always, we appreciate your time.

Eli Greenblat:  Thanks, Ross.

 

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