Valuable lessons from the Bevilles collapse

The following analysis is based solely on the official Bevilles’ administrators’ report, while the Michael Hill figures are from its 2013 annual report to the New Zealand Stock Exchange. Other observations from our independent commentators are provided based on extensive industry experience and generally accepted jewellery retailing “benchmarks”.

Sales

David Brown, president Retail Edge Consultants, a firm specialising in advice to independent jewellery storeowners, highlights some interesting statistics,

• Bevilles overall store sales dropped from an average of just over $3 million per door in 2011 to $2.67 million per door in 2013.
• As a matter of interest, even its 2013 results are more than double the average sales for an independent jewellery store.
• During the same period, Michael Hill stores averaged just over $2 million but managed a healthy 9.4 per cent increase in EBIT over 2012.
• Michael Hill increased its Australian revenue by 4.3 per cent from 2012 to 2013, in the same consumer market that Bevilles lost 9 per cent.
• When you look to what is happening “out there” (the economy, the industry), you take your eye off what is happening “in here” (your performance, your KPIs, your strategies).
• In “soft” markets, typically there are fewer people buying luxury goods, which means you need to get more money from the people who are still buying. This is achieved by: raising the average retail value; concentrating on close ratios; add on sales and margins rather than trying to renegotiate your rent.  

Colin Pocklington, managing director of Nationwide Jewellers, Australia and New Zealand’s largest group of independent jewellers, is well credentialed to provide a financial analysis of the Bevilles data. While he is also a JAA Board member, Pocklington makes the following observations as a qualified CPA and a member of the Associate Chartered Institute of Secretaries (now the Governance Institute).

Coincidentally, he was also the group finance manager at Prouds, and led the management buyout team in 1989 when the liquidator for Hooker Retail sold the business to Universal Retailers, and again when Universal Retailers was liquidated in 1996.

Pocklington says that, “Tough trading periods often bring undone businesses with underlying structural issues,” and points out that,

• In the two years from 2011 to 2013, Bevilles’ sales declined by 14 per cent however, in the same period, Michael Hills sales increased, albeit moderately.
• In 2013 Michael Hill had a profit before interest and tax of 9 per cent of sales whereas Bevilles had a loss of 9 per cent of sales. 
• The drop in sales exposed some structural issues in the Bevilles business, the main areas being gross profit, rent and wages.
• In addition, it would also appear that Bevilles suffered a loss of market share, as the fall in sales was below the industry trend. No doubt this is an issue that Bevilles is examining carefully.

 

Rent and staff

Brown notes that Bevilles blames a combination of a retail downturn and high fixed rental costs (among other factors) as part of the reason for its collapse. He observes,

• Rent, when combined with advertising, is high at 20 per cent in 2013 (and 17 per cent in 2011) when compared to industry benchmarks in these types of locations of between 12-16 per cent.
• In 2013, Michael Hill's rent and advertising totaled 14.5 per cent - which is within the benchmark range.
• Average store rents for Bevilles are considerably higher than Michael Hill's but then Bevilles doesn’t have the negotiating power of 267 stores that Michael Hill does!
• High rent is typically not a problem in, and by, itself. We have many clients paying extremely high shopping centre rents because they have even less negotiating power than Bevilles does with 27 stores, but their rent is a consistent and relevant percentage of the store’s sales volume.
• Not having enough sales relative to the rent is a problem which comes down to having the right image/brand (point of difference), the right staff to greet the customers who are enticed by the image and having the right product for them to sell.   

Pocklington’s analysis of the rent and occupancy cost data shows,

• 
  The high rent, at 16 per cent of sales (compared to Michael Hill’s 10 per cent) is no doubt related to the larger store size, which in turn might have been required to accommodate the additional giftware category. 
• I note that Bevilles has flagged this as an issue that they are working on.
• Even though sales dropped by $11.5 million between 2011 and 2013, wage costs remained the same at $19.5 million. With large decreases in sales, retailers must act quickly to reduce costs.

Bryan Young, managing director Retail Rescue, an advisory and mentoring firm specialising in the retail sector, said that when he first read that Bevilles had 477 staff across 27 stores the “alarm bells started ringing straight away.”

• An average sized jewellery store is between 35-50sqm and supports between 4-7 staff, both factors depending on whether there is an onsite bench jeweller and an admin office. 
• This means that even with maximum staff, there should only be around 190 employees in a 27-store business.
• Bevilles stores averaged a massive 160sqm, mostly due to a large giftware section, but even if you double staff to cover this, in my view Bevilles was overstaffed by approx 100 people, and with the average annual wage being around $37,000, (not including owners), that’s $3.7 million per annum overspent on wages alone! 
• In support of this comment, benchmarking data available from the ATO indicates jewellers average wages sit at 15 per cent of sales for regional stores and 18 per cent for city stores. 
• The data indicates that Bevilles was operating at between 24-27 per cent.  

Gross margin

Gross margin is an important KPI for any business and Pocklington says,

• Bevilles’ 53 per cent gross profit or gross margin is too low for the jewellery industry.
• No doubt the giftware products have weighted it down, however one would have thought that with a strong relationship with the large Indian jewellery manufacturer, Tara Jewels, a higher gross profit percentage would be expected. 
• By comparison, Michael Hill achieved a 63 per cent gross profit. 
• I believe that retailers should be targeting a gross profit rate of 60 per cent. I note that some long standing jewellery people think that a 60 per cent gross profit is too high, but it actually represents the same dollar gross profit as did a 53 per cent rate when calculated under the old sales tax regime (pre-GST).

Brown also focuses on Bevilles’ gross margin saying, “The biggest difference, and lesson, to take out of the Bevilles collapse when comparing the performance of Bevilles to Michael Hill is gross margin.”

For example, he highlights,

• Bevilles has maintained a consistent 53 per cent to 54 per cent margin with COGS (cost of good sold) running at between 46 per cent and 47 per cent.
• Michael Hill has maintained a consistent margin of more than 60 per cent - actually closer to 64 per cent - which means COGS are running at around 36 per cent.
• Sure, Michael Hill has greater negotiating power with suppliers too, but its more than just buying better. It's also about pricing better, less discounting and generally improving selling skills … and yes, negotiating skills. 
• It's also about honouring and protecting margin and openly discussing margin targets and strategies with the sales team.
• Every 1 per cent improvement in gross margin for Bevilles, based on 2013 sales, would have added $719,000 of extra gross profit - most of which ends up on the bottom line. 
• To put this into perspective, if Bevilles achieved the same margins as Michael Hill did last year (64 per cent), the business would have generated an extra $8 million in gross/net profit before tax.
• That is, the entire Bevilles loss of $6.74 million could have been wiped out by increasing margin to 62 per cent, still 2 per cent less than Michael Hill.
• Yes, it’s easier said than done, but it is possible - because Michael Hill is already doing it, as are many other independent retailers, with far less buying power than Bevilles.

Cashflow, credit and stockturn

Brown’s analysis of the Bevilles financial results show,

• With nearly $1.6 million of cash washing through the business per week on average - $58K per week, per store – it’s quite possible to mask underlying business problems by paying yesterday’s bills with today's cash.  
• But when that cash drops to $50K per week, per store ($1.38 million), it's hard to hide from the ugly truth and things start to unravel pretty quickly and dramatically.
• Despite attempts to reduce costs after the event, unless these problems are confronted when they start, it is often too late to make adequate improvements quickly enough to prevent the house of cards “falling over”, as witnessed with Bevilles.
• Living off surplus, non-performing stock is not a sustainable strategy.      

Young says that retailers often don’t understand that credit is both a friend and an enemy,

• Keeping funds fluid is one of the biggest challenges any business can face but even more so in retail. It’s a “Catch 22 juggling act”… you can’t sell it if you don’t have it and you can’t get it if you don’t sell it. Therefore how you manage your credit is extremely important and by “credit” I also refer to loans, overdrafts and supplier terms. It can provide you with much needed stock, cover that wages bill, or even clear tax debt, but without capacity to repay it, it will eventually stab you in the back.
• Based on the current turnover and cashflow, retailers must ask if they can repay any new debt quickly and without compounding the problem? 
• The way to manage credit is to avoid it. Always look at the worst-case scenario before using it and to never allow wishful thinking, such as “hopefully business will turn around soon”, to govern your actions.
• Any injection of funds should be going towards improving your business, not a way of keeping doors open. If you are even one dollar in the red at the end of the financial year, then you need to take a long hard look at how you are running your business.
• Constantly compare industry trends against your own. Is everyone doing it tough, or just you? How much are others paying in wages, rent, marketing etc? Are you over or under spending?
• KPIs - how many dollars per hour are staff generating versus the cost to have them there? Are they more than paying for themselves, how big is their basket size? 

Pocklington provides some interesting analysis and commentary on cashflow and stockturn,

• Bevilles stock turn rate (1.7 times) and sales per store ($2.7 million) compare very favourably to Michael Hill. 
• However, both figures are likely to be influenced by the larger store footprint and the faster stock turns achieved by giftware.
• With large retail businesses it is also important to look at the balance sheet to determine liquidity, and sensitivity to periods of poor trading. 
• At 36 per cent, Bevilles equity is quite strong, as only 64 per cent of assets are financed by borrowings. This compares favourably to Michael Hill’s 32 per cent equity ratio. 
• The stock at cost per store of $659,000 also compares well to Michael Hill’s $690,000, indicating that overstocks have not contributed to the cashflow problems that resulted in insolvency.
• Comparing the proportion of trade creditors to inventory at cost is another quick measure of a retailer’s cash flow strength. When compared to Michael Hill at 27 per cent) Bevilles’ 45 per cent is high but I have seen a lot worse.

 

Lessons learned

Young makes an interesting point, which, in part, explains the reason for this article. “When a large jewellery chain such as Bevilles goes into administration it can only instill fear in smaller jewellery businesses. When you look at Bevilles history, a family business that has been operating for 80 years, with 27 stores and 477 staff, it sounds like they must have been doing something right, so how come they are now in such a position?”

Bevilles trading losses over the past three years amounted to more than $10 million and total claims against it, including related party loans, amount to $14 million. So, what went wrong?

Young believes that Bevilles identified the problems surrounding its giftware category too late, stepping away from it, while downsizing stores was a knee-jerk reaction.

“Unfortunately they [Bevilles] found themselves tied into leases that landlords weren’t keen to break. This highlights a new issue in regards to leases; traditionally, both landlords and owners prefer longer leases, for security reasons. However, noting how volatile the retail industry has become and how much things can rapidly change, perhaps shorter leases now provide more security?” Young said.

Pocklington also makes comment about the inherent problems with the giftware category. “It [Bevilles] appears to be a very good business that has been too slow to react to a changing market by continuing to maintain a large, but low margin giftware range, requiring large stores and a high rental cost.

“Their plan for smaller stores without giftware is sound and should result in higher gross profit percentages, lower rents, and hopefully reduced labor costs. Bevilles also needs to look at what caused their loss of market share from 2011 to 2013.”
 
He adds that, “In summary, when you look at the key indicators it is clear that there are some areas that need to be addressed. It’s encouraging that Bevilles is focused on making the changes needed, to ensure that this long standing jewellery business has a strong future.”

Young offers a cautionary take for all jewellery retailers – large or small - in light of traditional values and a changing market, thanks largely to the internet.

“Past success can easily become current failure if you try too hard to stick to old ‘proven ways’ of making money in your business while ignoring the changes in the marketplace itself.

I recently parted ways with a client due to his inflexibility to change. He had established his business with a set way of doing things, which were very successful during the 1980s and 90s. I told him how he need to change for the current market in order to turn his business around, but he refused to do so, simply because the advice didn’t correlate with his previously ‘proven’ methods.”

While it is not pleasing to hear about the failure of any business and the resulting job losses, it is encouraging to note that the Australian jewellery industry has not experienced the same number of major collapses that have occurred in other retail categories.

If there’s a silver lining in the Bevilles collapse, it’s that other retailers and suppliers can learn from the company’s mistakes and incorporate those lessons in order to strengthen their own businesses.

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