Conviviality: the fall of an empire
In November 2017, Conviviality was riding the crest of a wave after share prices hit a record high of 426p following a raft of acquisitions.
Chief executive Diana Hunter was the toast of the stock market as revenues had soared by 85% to £1.65 billion in the year to April 2017, while profits more than doubled to £22.5 million.
Investors were sitting on a healthy paper profit, and Conviviality was praised for integrating retail chains Bargain Booze and Wine Rack, suppliers Matthew Clark and Bibendum PLB and events companies like Peppermint into one sprawling beast.
It took just five years to grow the business amid rampant consolidation, but it will now always be remembered for providing one of the swiftest corporate collapses in British history.
Now it is time to take stock, figure out who has suffered the worst and work out how to prevent something like this from happening again after the face of our industry was irrevocably changed. First, it has to be said that the Bestway buyout is not a silver bullet to save the Bargain Booze estate. Retailers across the UK have suffered immense reputational damage in the past few weeks as shelves have been bare, stores have been shut and shoppers headed elsewhere. Retailers’ margins will have taken a battering and they will have been dipping into cash reserves in a desperate bid to source drinks from wholesalers. Bestway needs to get the supply chain back up and running swiftly, sort out Bargain Booze’s AWRS certification, appease suppliers and win over sceptical and embattled franchisees.
Then there is the reputational damage that the British wine trade has suffered amid reports of wine being held in ports or returned to wineries as insurers would not allow it to be shipped. There is unease about a cider and lager producer taking on Bibendum, one of the UK’s most respected wine suppliers, particularly when respected commentators like Jancis Robinson MW are Tweeting things like: “Magners 1-0 Wine.” Meanwhile, several leading suppliers and wholesalers are at one another’s throats, squabbling over whether to seize on Conviviality’s collapse as a business opportunity or to respectfully sit back and refrain from sticking the knife in. Many have fallen out and tensions are frayed. It will take a while to restore order and, ahem, conviviality to the trade, and in the meantime business will probably suffer.
That is a prescient warning for the entire supply and wholesale trade, but retailers can also learn from it. Christmas 2017 saw exceptionally strong sales for the BWS category, and Conviviality should have been able to tap into this. It was unable to highlight an issue with its relevance in today’s market. Stacking them high and selling them cheap is arguably not the most sensible approach in an era where craft, premiumisation and moderation are the buzzwords.
Is a major chain viable?
The Conviviality saga evoked painful memories of the collapse of Thresher and previous woes suffered by national off-licence chains such as Oddbins.
Former franchisee Doug McQueen said: “I never had great faith when somebody wanted to turn 700 specialist off-licences into convenience stores. It had been tried so often, in several formats, What gave people the arrogance to make people think they could do it now? Goodness only knows.”
We polled 200 retailers to gauge confidence levels, and just 32% said they felt it is possible for a big chain like Bargain Booze or Thresher to thrive in the years ahead, while 68% said it isn’t.
We also asked what the trade can learn from the whole sorry saga. Here are some of the responses:
"Mergers do not solve the underlying problems of fundamentally weak companies.”
"Look at margin, not turnover through price reduction.”
"Empire-building can stop businesses growing organically.”
"Know what you are doing and have competent people doing it.”
"Do not drive margin out of the chain. Look after your people and stability of your customers first and do not grow aggressively if you do not have the right processes in place.”
"Big is not necessarily beautiful. Individuality and charm may yet prevail.”
"Make sensible, realistic margins and don’t race to the bottom with pricing. Be honest and accurate with accountancy reporting.”
"We have to break the cycle of alcohol being used by major multinational retail as a marketing tool. Alcohol is priced to attract people into supermarkets, not to make money, and that has to change for the health of our industry.”
"Expand with caution, within your means.”
"You can’t buy business either by acquisition or deep discounting. You need to add value.”
"It’s not just about volume and number of stores, most important is developing viable and sustainable store formats for store owners or franchisees. If you ask any c-store operators they would exit the trade in next few years.”
"Do not try to grow quicker than needed.”
"Need a cohesion to all the different arms of the business.”
"Don’t get too big for your boots.”
How did it collapse so quickly?
At the height of her pomp Diana Hunter was the most influential figure in the UK drinks industry, after engaging in the sort of rampant empire building that would have made Caesar proud. Instead of riding the realm in a chariot, her vehicle of choice was a chauffeured Porsche Cayenne. She would sit in the back, working on her computer as she was driven between the various Conviviality hubs in places such as Bristol and Crewe. This mobile office was even equipped with a printer that allowed her to produce takeover agreements and sign them on the go. This detail once sounded vaguely impressive and somewhat intimidating, but now it is being used to mock her. Comparisons to David Brent abound.
Hunter went from stock market darling to pariah in the course of a few weeks, but the recriminations will go on for years. The question on many lips is: how did it collapse so quickly? Some see it as a cynical effort to drive the share price up, allowing some investors to sell before the empire crumbled. Others insist Hunter knew little about the problems and her generals were keeping her in the dark. Some sources claim the group had been covering things up for a while and when it realised it could no longer do so it all disintegrated rapidly, like a line-up of dominoes toppling. But the majority call it sheer managerial incompetence, and that is the most likely explanation.
Conviviality performed a dizzying sequence of acquisitions, producing impressive growth, but the team running the show could not keep up. It snapped up retail chains such as Wine Rack, Rhythm & Booze and Central Convenience and bought wholesaler Matthew Clark for £200 million in 2015. That was followed by the purchase of outdoor bars firm Peppermint and, in 2016, a £60 million deal for Bibendum. At one point the business was valued at £750 million. Investors were handed £20 million in dividends in 2017 – more than double the payout in 2016. Hunter was more than justifying her pay packet of almost £1 million.
But then it all simply fell apart. So convivial was the company that it forgot how to do its sums, forgot its taxes were due and forgot how to keep proper records, quipped one national newspaper. An arithmetic error that led to it inadvertently exaggerating expected profits from its wholesale division by £5 million a year in January was pretty shocking. It evoked memories of an Olympics embarrassment, whereby the London 2012 Organising Committee sold 10,000 too many tickets for the synchronised swimming after a member of staff had entered 20,000 into a spreadsheet instead of 10,000. Or the Goldman Sachs valuation blunder that undervalued Tibco during a $4 billion buyout, where partners double-counted in error on a spreadsheet, leading to a $35 million lawsuit payment.
However, a simple arithmetic error is not enough to bring down a business of Conviviality’s size. A source pointed out there had been signs of the empire crumbling long before the March meltdown. When Conviviality purchased 127 c-stores from Central Convenience in December 2017 for £25 million, it did so through the placing of 8 million new ordinary shares at a price of 375p to raise £30 million. That raised eyebrows, as many expected Conviviality – which had a turnover of £1.6 billion in 2017 – to be a cash-rich business. Conviviality’s chief financial officer, Andrew Humphreys, left in October 2017, while non-executive director Jennifer Laing left last April after just 11 months on the board.
The source said: “The half-year figures weren’t very good. It was classic CEO playbook, to look at the numbers and say that was the strategy all along [the group announced it had deliberately taken a hit to secure long-term supply deals].” Conviviality is believed to have paid £1 million to Wetherspoon for the right to be its exclusive supplier. On tiny margins, this is the sort of arrangement that would take years to pay for itself, if ever.
Conviviality also struggled to wear two hats at the same time, trying to operate effectively as a retail group and a supplier. “Conviviality came from a retail background, and maybe it strayed too far into a sector of the market it didn’t understand so well,” said David Gleave MW, managing director of Liberty Wine.
“The biggest difference is cashflow. As a retailer, you get money in the till right away. As a wholesaler, you generally wait 60 days for payments. That can be hard to manage given that distributing wine generally operates on very thin profit margins.”
The analysts are now savaging the group. “The numerous accounting errors and misjudgements suggest poor management oversight,” said Molly Johnson-Jones, retail analyst at Global Data.
Mark Brumby, an analyst at Langton Capital, said: “If you’re bombing along at 120mph on a straight road, that’s great. But when you hit a bend, you go flying off into the woods. The firm’s cashflow management certainly wasn’t good enough or it wouldn’t have gone bust. This was a £1 billion company a few months ago and now it’s worth nothing.
“The speed with which Conviviality has apparently unravelled will unsettle investors, suppliers and customers. One potential source of problems is the extremely low-margin nature of the majority of the businesses that Conviviality was involved in. This was a problem shared with Carillion. It is harder to survive shocks when margins are low. The antidote is perhaps to be incredibly well run.”
Investors Chronicle added: “Conviviality’s free cashflow of £51.2 million at the end the last financial year turned into a cash outflow of £13.6 million by the end of the first half, pushing net debt up from £95.7 million at April 30, 2017, to £133 million by October 29, 2017. Having a lot of debt doesn’t necessarily do you in, but running out of cash to pay back that debt, or even pay your overheads, often spells the beginning of the end.
“Investors and analysts have been left scratching their heads asking what went wrong. We must include ourselves in this, having placed the shares on a long-term buy rating, although we weren’t alone: analysts at Shore Capital and Investec both reissued buy ratings on the stock just days before the initial warning, assured by management at the time of half-year results in January that all was well.
“It’s fair to say the recent turn of events has left plenty of investors fuming.”
After the fall of Rome, life became a pretty sad affair. The order that the Roman Empire had brought to western Europe for 1,000 years was no more. This period was called the Dark Ages and it lasted about 500 years. Conviviality was only going for five years, so by that reckoning the drinks industry’s dark age will hopefully last no longer than two-and-a-half years.
Yet, despite the multi-tentacled nature of Conviviality, and the damage its demise has caused, there are plenty of thriving businesses within our industry, and there is now the opportunity for many more to flourish in this post-Conviviality world, so there may not even be a dark age at all.