Why some businesses run out of a future?
Imagine you own an iconic Australian fashion brand that has been in operation for some 79 years. Your fiscal year 2017 revenues was $123.2 million. You’ve booked a loss of $17.3 million in 2017 mainly due to an agreement to run the business of a major international fashion company in Australia not playing out as planned. So, you’ve planned and announced an exit from that agreement and booked the majority of the consequent charges.
Your core business, though, looks ok. Underlying EBIT of $12.9 million on a declining sales base (-9.8 %) is a challenge but not insurmountable. Net debt is only $5.4 million. Sure, you have some stores out of your fleet of 59 that are not performing but they can be worked through.
Australian retail is in the middle of a ‘retail apocalypse’ with retail brands around you closing or exiting or being punished by the stock markets for lack of performance.
It’s in this context that you organise a 8-month strategic review of your business trying to decide should you sell, re-capitalise, re-finance or privatise.
At the end of the review, you move for voluntary administration.
Hang on…what? Really?
Does this sound like a normal collapse? Net debt of $5.4 million with the underlying business appearing to be profitable? For me, there’s a big piece of the puzzle missing…did this business run out of a future?
The business is Oroton, the numbers are real, sourced from their 2017 Annual Report and from the media reports on the voluntary administration.
Here is a business that has some challenges, both financial and market-driven in nature but these challenges are not a ‘train-smash’. Australian businesses have traded themselves out of far worse positions that Oroton’s, in fact, I’m pretty sure there’s businesses out there that would love to have challenges like Oroton’s.
So, why has Oroton hoisted the white flag and surrendered so meekly?
For me, Oroton ran out of a future.
The brand has become staid, appealing very much to Baby Boomers and, to some degree, Gen Xer’s. These two demographic groups are spending less on fashion, Baby Boomers because they’re getting older (now between 53 – 81 years old) and simply buy less, Gen X is now 33 – 52 years in age and their spending priorities have changed, they’re in peak ‘family spending’ patterns.
Millennials (or Gen Y), who are shifting Australian spending now and will continue to do so (Remember, there are 4.2 million millennials in Australia already and our immigration intake continues to swell their ranks.) prefer experiences over stuff so their spend is very different to the preceding generations. Yes, they will spend on those brands who can ‘connect & engage’ with them…has Oroton been one of them? I have never heard the words Oroton and Millennials in the same sentence!
Oroton’s share price history has shown a decline since 2010 when Australia’s retail market started to change, spending habits began their inexorable movement towards online and the millennials started to flex their spending muscle.
So, at Oroton’s peak, were the very clear demographic changes occurring in Australia were somehow missed? The answer would appear to be yes.
I found it somewhat ironic that Oroton purchased 30% of The Daily Edited in March 2017…right at the beginning of that strategic review. Given The Daily Edited’s success in the Millennials space, who knows…perhaps the problem was known right up front?
Oroton ran out of a future. Pity really, another iconic Australian brand up for sale, who knows where it will end up…just look at Billabong and Quiksilver!
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