Why do businesses keep going into voluntary administration?

Ross Greenwood speaks to  SV Partners insolvency practitioner Ian Purchas after  Max Brenner’s Australian business has gone into voluntary administration, citing sluggish sales and increasing costs.

Introduction: Why do businesses keep going into voluntary administration?

Ross Greenwood: Welcome back to Money News, right around Australia. Now, a name that you well all know, instinctively perhaps, even if you haven’t been there, is Max Brenner to associate it with chocolate.

Now, Max Brenner was created as a business in Israel, but here in Australia effectively a husband and wife team, Tom and Lilly Haikin created Max Brenner in Australia and now it’s built to a stage where it’s 37 stalls, about six hundred people, but like a lot of other retailers, it’s struggling at the moment and has gone into voluntary administration today.

Now that raises question marks, obviously, about the future of it. McGrathNicol will be the voluntary administrator. They will try and work out what happens next. It follows a pattern, at the moment, with retailers, in particular are struggling and there’s, obviously, the issues of wages.

There’s fairly slack consumer demand, even though people are now dipping into their savings more to fund their consumption. There’s obviously rents that are going through, but then also perhaps even in this case, the issue of chocolate, whether really, we are as enamored with going out to eat chocolate or heavy desserts, as what we might have once been.

A man who’s always great with his time here, an insolvency practitioner and certainly an organization that put’s out it’s own report, looking at the health of retail, where it’s really flagged for quite some years.

The struggles and the pressures inside the retail sector, is SV Partners and one of its partners, Ian Purchas is always great with his time. Many thanks for your time this evening, Ian.

Interview with: Ian Purchas, SV Partners, Insolvency

Ian Purchas: My pleasure, Ross.

Ross Greenwood:  Okay. Max Brenner is now a part of a long line of Australian retailers that have hit the skids. We can say, Toy’s “R” Us. We can go to Pumpkin Patch. We can go to Top Shop, we can go to–

Ian Purchas: Dick Smith.

Ross Greenwood:  Herring Bone. What was the other one you said? Dick Smith- [crosstalk]

Ian Purchas: Dick Smith.

Ross Greenwood:  Dick Smith goes back, of course, is a big one. David Lawrence. There’s now a situation is different because the one area that was outstanding in consumer sales was always take-out, restaurants, and cafes. Now, this is in that space and one that makes me wonder whether there’s a bit of a change in pattern for retailers in the future.

Ian Purchas: Well, I’m not sure there’s a changing pattern, Ross. I think there’s just a continuing pattern and really what the retailers have been fighting for sometime now is increasing operating costs and sluggish or poor sales.

Just a general tightening right across the retail trade area. Right across the board, but I think in particular with a business like Max Brenner, I’m sure there’s been a change in taste since it first came to Australia, which I think was in the early 2000’s.

Those types of specialty food shops, they’re the one’s that are probably going to suffer first when it comes into their hospitality area.

Ross Greenwood:  Is there another aspect of this also because there were suggestions early this year that a rescue package was trying to be mattered for Max Brenner to try and recapitalize it and get extra $50,000,000 of investment in it.

Given the fact that banks are starting to become a little more risk averse. Is one of the real problems today that a lot of investors might equally be coming more risk averse about plowing money into businesses to try and rescue them, when the future of consumer demand and the future of consumer spending might be a little bit in question.

Ian Purchas: Well, with the current we’ve found, really, that any businesses that is requiring additional funding is finding it very difficult to get that funding, and the businesses that is or that require a seasonal. They really do sometimes need a little bit of extra cash flow when sales– That traditionally they also have.

They’re finding out it’s even more difficult to get that extra funding. What we’ve found is that the property and the construction and the development market,  industries, businesses are starting to really feel the pinch with this hiatus that’s coming in.

We’re doing the banking world commission and I think that’s driving quite a few of those businesses who would normally have had access to mainstream banking funding are now going to mezzanine funding, which we all know is higher interest rates.

They’re the one’s that are willing to take a risk on some these businesses that maybe the big four or the mainstream lenders won’t allow, so you’re quite right. I think the current climate, in terms of access to funding is going to effect the economy right across the board, particularly with a lot of those businesses.

The SME’s are going to probably feel it just as badly as the construction industry.

Ross Greenwood:  I did mention, also, that you’re organization, SV Partners puts out a regular report on the state of retail and you’ve been uncannily accurate in saying in the past that there are a number of very large retailers under financial pressure. That you in certain circumstances could imagine falling out of an air.

Some of that’s come to pass. Toys “R” Us is one of the classics, Dick Smith is another. What’s the future like according to that research that you do?

Ian Purchas: Well, the last commercial risk report that we did, Ross, came out in August and it didn’t bode well, particularly for the retail industry. It also indicated that building construction is another lead indicator for us that times are not probably not going to be quite as good as they have been over the last four or five years economically.

That commercial risk report did identify that there going to be a number of larger retailers that were going to experience this financial difficulty that leads them into the situation that Max Brenner’s in and having to put their companies into voluntary administration.

Ross Greenwood:  Yes. It’s interesting to note this. I did speak with the general manager of Max Brenner today. They’re obviously deferring a lot of the questions back to the administrators now, but effectively said they we’re of being able to, somehow, find a solution and get through this, but as we can hear these types of solutions in a more risk averse world are increasingly difficult to go.

The other one’s– Just quickly. I do know it, of course, Jamie Oliver’s chain of Italian restaurants, they went under in April and on top of this, also, the company that owns Gloria Jeans, Donut King, Retail Food Group, has really struggled on the stock market in recent times. I would just wonder whether that might be also part of the trend that’s coming as well?

Ian Purchas: Well, Ross, it is and you I just see consumer confidence has not really increased for quite some time. The numbers astound me, when they come out, because it does show a different picture to the one that walks in through our office doors.

Definitely, Retail Food Group, which is a very large organization like Jamie Oliver’s, another specialist type of food business, which is I think is going to struggle and had. As I mentioned just before spoke, we have really found that the insolvency issues are becoming more prevalent in a number of businesses.

The last six months, just to give you some more idea, we’ve had three or four development companies. Quite a large manufacturing company, a media business, medical technology, clothing retailer, a winery. As you can see some from that small sample, retail at the moment, but we always see that constructions is the lead indicator in this regard.

Ross Greenwood:  I tell what, always good to have you in the program. Ian Purchas, from SV Partners, and have a great evening.

Ian Purchas: Oh, my pleasure, Ross. You too. Thank you.

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