Rapid expansion, coupled with margin declines and supply chain inflation proved to be a heady mix for Conviviality, which has announced plans to potentially enter administration in the coming days.
That's according to analyst Molly Johnson-Jones at GlobalData, who said that the group "took its eye off the ball in search of new growth", a move that has led to the current challenges at the business.
While in February, Conviviality reported 'strong organic growth', with trading ahead of consensus, Johnson-Jones suggested that the group was perhaps too ambitious in its expansion strategy.
Expansion Strategy
"Under Diana Hunter, who resigned last week, the business acquired Matthew Clark and Bibendum to move further into wholesale, and Peppermint to try to broaden its reach into the events business," she said.
"Although discount and wholesale retailing has been more resilient than the rest of UK retail, aggressive expansion in a cost inflationary environment is a risky move.
"If the business had seen the severe margin erosion which had occurred, rather than the inflated EBITDA number which was reported due to error, then moves could have been made to cut costs and storm-proof the business.
"However, this was missed and the acquisitions continued, with 25 P&H stores acquired at the end of 2017."
These high levels of space addition would have provided a "detrimental impact to Conviviality’s sales densities," Johnson-Jones added.
"Combining the margin erosion from inflation throughout the supply chain with declining sales densities is a recipe for disaster. Other F&G retailers (even the discounters to a lesser extent) have chosen to focus on improving sales densities in this inflationary environment rather than aggressively expanding."
Acquisition Opportunity
Elsewhere, analysts Phil Carroll and Clive Black of Shore Capital Stockbrokers said that the current pressures on the business mean that a resolution is needed "sooner rather than later".
On the topic of whether Conviviality could make a viable acquisition opportunity for a different group, the analysts said that based on the announcements to date, any "interested parties are likely to be from different market segments. The complication for us is likely to be how many would be interested in the group in its current structure to enable a quick sale.
"Depending on due diligence, we believe private equity could be an acquirer of the entire group assuming it sees Conviviality’s issues as operational ones that are fixable and confidence could be rebuilt in its customer and supplier base. The acquisition could be done with a view for follow selective disposals to help fund any such deal in due course."
'A Sad Day'
Elsewhere, commenting on the news that Conviviality is poised to enter administration, Miles Beale, chief executive of the Wine and Spirit Trade Association said, “It is sad news for all concerned and for the wine and spirit industry as a whole that Conviviality have announced plans to file for administration.
"We are sending our support and best wishes to Conviviality’s employees who are facing uncertain times. The WSTA look to support the great British wine and spirit industry – including its jobs, businesses and employees facing uncertain times.”
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
