It was a car crash waiting to happen’

16 April, 2010

It’s August 1998, and news has broken that Thresher and Victoria Wine are to merge, creating a combined estate of 3,000 stores.

The new business employs 20,000 staff and claims a 13% share of the take-home drinks market. Tesco’s share is a modest 14%, and First Quench directors are convinced they now have the scale and expertise to “take on the super­markets and win”.

Eleven years later, when the administrators are called in, the First Quench estate stands at about 1,250 stores – less than half the original total. (Statisticians should note that Majestic doubled its branches to 150 over the same period.)?Experiments with food, convenience, three-for-two deals, viral discount offers, big-store formats, internet sales and new fascias – some more wholehearted than others – all failed to immunise the business against the relentless onslaught of the multiple grocers.

But was First Quench’s demise an inevitable consequence of tougher market conditions, or did strategic errors bring the business to its knees? Former head buyer Jonathan Butt is in no doubt, describing the business as “a car crash waiting to happen”.

Putting customers first?“There is no denying that the market conditions are difficult, especially for a retailer only selling booze,” he says, highlighting duty increases as a particular issue. “However, any retailer putting the customer first and offering quality and service alongside a compelling price proposition, and a degree of USP, should prosper – and herein lies the problem.

“First Quench was obsessed with chasing margin, despite an ever-shrinking customer base. For far too long the customer was at the tail end of the decision tree. Pricing looked out of kilter with the competition, and even though the three-for-two mechanic delivered some of the best pricing on the high street, it suffered from a lack of clarity in-store and a lack of stock to deliver the offer.”?Butt claims even at the top end of the estate, sales were hampered by lack of availability. The fine wines he sourced for Wine Rack were dispatched to stores in twos – a bizarre situation in a retail environment built around three-bottle purchases.

“In essence? the business became far too centralised, and failed to deliver basic retailing,” he says. “An obsession with stock meant in many cases stores would run out of the main offers each week, often before the busiest periods, while large volumes of pre-paid stock sat in the warehouse. Where’s the sense in that? Customers were unable to purchase a case, or even six bottles of their favourite wines, and left disappointed.

“Store managers and staff, who should have been the company’s greatest asset,?were completely cut out of the decision?process, so they became totally redundant and demoralised. The control fell to head office, and in most cases into the hands of operators who had little or no first-hand knowledge of drinks retailing.”?Butt is critical of the sale and leaseback programme carried out by Terra Firma, which “left the business with some very high rents”. He also highlights “the poor allocation of funds at head office” which paid for unfulfilled systems projects and “a plethora of failed new convenience retail concepts”.

The net result was added pressure on cash flow, which became an even more serious issue once credit insurers withdrew their cover and the business was obliged to pay through the nose for its stock.

Missed opportunities?Alex Anson, the former trading director who conceived the three-for-two proposition, agrees that market conditions were not the sole reason for First Quench’s collapse.

“To be honest, although First Quench was always going to find it difficult to survive as one entity for many reasons, it still had a bunch of good and profitable stores that should have been the core of what was left after closures, disposals and so on,” he maintains.

“The fact that the management team was unable to realise this value before ending up in administration is a missed opportunity.

“We all know market conditions for many specialist retailers continue to be tough, but as far as I can make out there were some decisions taken in recent years that have added risk to the business during a highly challenging trading period, and for little, if any, benefit – draining cash and therefore accelerating the decline.”?Some have been critical of the deployment of three-for-two, arguing that it highlighted exorbitant unit prices and forced away lower-spending customers, but Anson is happy to defend the tactic. “I believe three-for-two gave First Quench a point of difference, and the performance we achieved during my time there reflected this,” he says.

“However, I also believe First Quench should have gone further and maximised this opportunity to drive footfall and sales, at the expense of margin, to fully establish this robust value-for-money proposition over the medium term.”?One former director, who asked not to be named, believes First Quench missed a number of opportunities simply because its various owners took a short-term approach. He says the failure to deliver an online sales strategy is a good example of this corporate inertia.

“You can only build an online business if shareholders take a three to five-year view, because it isn’t going to pay out for the first 18 months at least,” he says. “But if you go through a series of owners, no one’s prepared to make that long-term commitment.”

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