Richard Siddle assesses where the rescue of Matthew Clark Bibendum leaves the rest of the industry that has been watching on the edge of their seats, and why C&C Group and AB InBev were so willing to pull of their last minute rescue act.
If we are to compare the rollercoaster ride that has been Conviviality PLC’s very public and very humbling crash to earth over the last few weeks to a Hollywood blockbuster, then it feels like we are still gripped in our seats, transfixed, shocked and blown away by what we have just witnessed on the big screen.
But as the credits start to roll and we pop the last straggling bits of popcorn into our mouths, it’s also time to reflect on how on earth, first Conviviality, and second we, as a collective industry, got to this point.
Did that really just happen!?
It’s hard to imagine now that only in January, Conviviality’s then chief executive Diana Hunter was promising the City that the business was on course to hit its year end predictions for the financial year, even though it had seen a 13% drop in pre-tax profits for the six months to October 2017.
Overall sales for the period were up 9.2% to £836m, retail sales were up 10%, and on-trade sales had climbed 6.9%.
There was certainly no major warning signs that its “phasing” of cost cutting measures had been delayed was storing up the kind of trouble that was to come. Its 0.3% slip in gross margins was put down by Hunter to increased business with large players such as Wetherspoons and the large volumes it was able to gain as a result was seen as a positive for the business.
Less than two months later the Conviviality supertanker had transformed itself into a clown’s car with wheels falling off left right and centre.
Suddenly margin erosion across its wholesale businesses was now being cited as being responsible for two subsequent profit warnings in a week (March 8 to March 15). This coupled with the even more alarming news that it had discovered an unforeseen and overdue £30m tax bill saw its shares being suspended.
Suddenly the global drinks industry was not only thrown into a state of shock, but overnight faced with the prospect of the biggest UK drinks distributor falling into administration.
Lessons for all
The fact, after days of mounting tension, for staff and suppliers alike, Ireland’s C&C Group, backed with money from global brewing giant, AB InBev, has stepped in to rescue the wholesaling parts of the business, and Bestway its retailing arms Bargain Booze and Wine Rack, should not cloud, or distract the industry as a whole from how a business of this scale and significance could get things so spectacularly wrong.
Central to the Conviviality fallout has to be the fundamental way it was doing business. Clearly a lot of that detail remains unknown, or at least it remains between itself and the different operators and suppliers it has been working with.
How Conviviality was managing cash flow and debt through its business is seen as being central to its failure
But suppliers and producers are now breaking rank to speak out against what are being seen as unsustainable levels of margin, which are said to have been as low as 4% and 5%, in such a volatile sector as the on-trade and wholesaling in particular.
There are also major questions over how a group, that was initially built on retailing, with Bargain Booze and Wine Rack, transformed itself into the UK’s biggest wholesaling business and whether the PLC board had the necessary experience to switch their own skills accordingly.
Particularly in the way it was handling and planning cash flow and finance through the business. Conviviality was used as a retail business to getting its money up front, in store. But as a wholesaler it had to invoice customers and wait for the money to come in.
The balance in how you manage those so called ‘debtor days’ is crucial to how a successful wholesale business works.
Analysts who have been picking over the Conviviality corpse have pointed to Conviviality’s last set of annual results, where, “current trade receivables rose by 45% year on year, whilst debtor days rose from 51 to 65”.
Here’s Investors Chronicle interesting analysis of where it thinks things went wrong for Conviviality: “Conviviality’s free cash flow of £51.2m at the end the last financial year turned into a cash outflow of £13.6m by the end of the first half, pushing net debt up from £95.7m at 30 April 2017 to £133m by 29 October 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.”
Time to rebuild bridges
The financial tribulations of Conviviality’s demise will no doubt be played out in the weeks to come, but in the short term the new Matthew Clark Bibendum business has a lot of bridges to rebuild.
Not from a personal staff point of view who have said to have been working, both as individuals and as teams, day and night to ensure as normal service has been possible. That’s after all what fundamentally makes Matthew Clark and Bibendum both such great potential businesses to buy. The people. As well as the customers they serve.
But on a corporate level there is going to have to be a lot of humble pie eaten. Not only with all the customers it has let down in terms of service and supply levels in recent weeks, but with all the suppliers and producers that have largely stood by them and risked huge losses if they had gone to the wall. As well as the long term global damage it has potentially already done to the reputation of the UK drinks industry and a market that producers want to do business in. The industry has been awash with stories over the last week of wine being held in ports, or sent back to wineries as local insurance companies would not all them to be shipped.
Picture Richard Gere in Pretty Woman telling the shop assistants in the Rodeo Drive clothes store that, Julia Roberts, needs a lot more “sucking up to be done”.
Customers are going to want even more loving in the future
C&C also needs to do a lot of work to get the City and investors back on side. Now City analysts are not the most verbose at the best of times when it comes to giving their time to journalists, but the mood amongst the analysts covering and closest to Conviviality PLC would best be described as hostile.
Remember the majority of these and other investor channels had Conviviality as a “buy” recommendation up until weeks if not days before its collapse.
To give you a sense of the animosity there is in the City, here’s what the Investors Chronicle has said this week: “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.”
Darren McKinley of Merrion Capital was equally damning: “While the acquisition is extremely opportunistic we feel C&C has picked up a solid underlying business that was subject to unbelievable managerial incompetence.”
The fact C&C has taken over the business has gone a little way to calming the City’s nerves. Particularly as it has the power of AB InBev sitting just behind with potentially more than just a couple of fingers on the tiller.
The AB Inbev factor
In fact, arguably the biggest factor in the C&C and ABInbev rescue package is that all suppliers and producers are to be paid back any outstanding debts.
How long that takes is another question, but the drinks industry as a whole should doff its proverbial cap to the global power of AB Inbev, which is widely understood to be underwriting the majority if not all of the rescue funds.
Which is thought to include, as well as the initial £102m Conviviality debt payment, supplier and producer debts that are said to be double that. Again unconfirmed.
Those in the traditional wine trade that have scoffed at the idea of the owners of Magners and Tennents controlling so much of their sector should look again at the fact brewers and distributors of this size have the potential to step in when no-one other than private equity can.
Matthew Clark Bibendum is now owned by a drinks business, C&C, on course to make operating profit of €86m this year.
A company that not only knows how to create, grow and build a successful global brand like Magners, but is a major drinks distributor itself in Ireland and Scotland.
AB Inbev has the size and scale in the drinks industry like no other, with annual revenues of $64bn a year.
AB InBev knows what it is doing and the fact it will also have, at the very least, a virtual seat at the table should reassure the industry enormously. This is after all one of the five biggest Fast Moving Consumer Goods businesses in the world alongside Unilever, Procter & Gamble, Nestlé and PepsiCo with its own global revenues of $64 billion.
It may not have any equity in Matthew Clark Bibendum, but, rest assured, it will be ensuring everything it does in the future is efficient and profitable.
AB InBev being so heavily involved in their rescue also fits very much into its own global strategy which is essentially to control and influence as many routes to market in as many of the countries it operators in around the world.
AB Inbev, and its closest brewing rivals, Heineken and Carlsberg, have each been on their own acquisition drives in recent years to buy up, or strike allegiances with major brewers and drinks brands with strong distribution channels in all their key markets. Be it Brazil, Peru, Nigeria, China, Japan, and now the UK.
Bestway’s move to take on Conviviality’s retail division, noticeably Bargain Booze and Wine Rack, could also not have been better timed. They could not have got a safer, more respected and professional business to move into. Bestway with its own cash and carry wholesale and symbol group business, Best-One, knows how to make these retail chains work and it will be fascinating to see the steps it takes to move them on to the next level of performance that they clearly have not been able to move up to under Conviviality.
That said, it is unclear whether the Bestway deal will also include paying back debts to suppliers which could be a further hammer blow to drinks brands, producers and distributors just when they thought the the troubles of the past month were drawing to a close. Any debet payments could potentially dwarf the £7.25m that Bestway has paid for Conviviality’s retail arm.
Route to market
One of the biggest lessons to come out of the collapse of Conviviality PLC, is that when it comes to success in drinks wholesaling it’s not what you sell that’s exclusively important, it’s who you sell it to.
The fact it’s the wholesaling and distribution businesses of Conviviality PLC that its saviours, the C&C Group and AB InBev, came into rescue, speaks volumes of where the perceived (rather than real) value of Conviviality’s business was.
It was the near 25,000 on-trade accounts that Matthew Clark and Bibendum are contracted to supply that has made them seem valuable enough to come in and keep afloat.
C&C Group and, AB Inbev are also securing and protecting their route to market which if lost would have seen them unable to continue to supply their beers, ciders, spirits and wines to many of the 23,000 plus pubs, bars, hotels and restaurants across the Matthew Clark and Bibendum combined customer pool.
Hard work starts now
There’s much work to be done to get Matthew Clark and Bibendum’s engines back up and firing on all cylinders again
In a way saving these parts of Conviviality from the fires of administration is the easy bit. Picking them up and turning them around is going to be just as big a problem for C&C as it was for the Conviviality executive team who spectacularly failed to do so.
It is going to have to tackle what are arguably these three biggest factors:
- a perceived lack of senior PLC management experience to understand the national wholesale business, made worse by a constant churn of leading figures that made it even harder both internally and externally to know who was responsible for what.
- major systems issues across the group that meant there was not apparently the necessary real time information and data analysis to help the buying and sales teams do their jobs.
- working to the kind of threadbare margins that left such little wriggle room when things went wrong.
The management and margin bits are clearly going to be a lot easier to fix than the systems and processes part of the operation.
C&C’s chief executive, Stephen Glancey, has said its initial focus won’t be to “take costs out”.
In fact you wonder quite how much time he has had to think the whole thing through as the deal apparently all came together over the long Easter weekend.
But he said he “felt it was the right thing to do for the UK hospitality industry”. “If these businesses had gone under, there were quite a lot of small craft brewers, gin distillers and the likes, who would have been under real pressure because of money owed to suppliers,” he stressed.
Initial reaction within Bibendum and Matthew Clark is said to be one of relief mixed with genuine excitement that they have a business of the calibre of C&C, with AB Inbev in the wings, ready and willing to take them on.
Whatever misgivings there might have been in the group about being taken over by effectively a drinks brand owner will surely have been quelled by the speed in which the deal has been able to be done, coupled with the fact it has been done without the immediate uncertainty of a deal involving private equity.
Working as one?
The key now will be how much Matthew Clark and Bibendum can combine their forces for the good of their business and the industry they serve
The fact C&C has immediately decided to call the new business Matthew Clark Bibendum could also be significant. Not just the fact it is not the other way around – Bibendum Matthew Clark – but that for the last 18 months anyone who was anyone in both companies has been at pains to say that the two are run completely separately.
But was that really the case or the right strategy to take?
Particularly as they had an all powerful group buying team where wines bought centrally were intended to end up in both companies, along with PLB. Wines that were being bought in bulk, and then bottled in the UK with different labels to serve different channels of the UK through Matthew Clark, PLB and to a lesser degree, Bibendum. So, in reality, not that separate after all.
It was only in January that the group brought together all of its drinks buying teams under Steve Jebson, its buying and insights director, and was seen as having successfully delivered buying synergies from integrating Matthew Clark and Bibendum into the Conviviality business.
It’s clear that part of Conviviality’s problem was too much complexity in the business, so it will be interesting to see how separate they are in the C&C Group.
It would certainly appear to make sense to bring as much of this new consolidated business together.
If the new Matthew Clark Bibendum becomes as joined up and together as the name of the business sounds, then that has to be for the best not only for the staff, but more importantly the suppliers and producers they serve.
