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Edinburgh Woollen Mills – Couldn’t Happen To A Nicer Guy

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I know nothing of Philip Day. Nowt. Except, obviously, what gets commonly reported in the newspapers. At which point there’s something delicious about this:

Thousands of jobs at risk as Edinburgh Woollen Mill on brink of collapse

Well, obviously not nice for those working there etc. But still:

Edinburgh Woollen Mill, which includes Peacocks, Jaeger and Austin Reed among its brands, yesterday filed notice to appoint FRP Advisory, a corporate restructuring specialist.

A recent reduction in its credit insurance has meant that suppliers are less willing to work with the group, which has also been affected by the harsh trading conditions during the pandemic.

It’s the credit insurance bit that is so lovely.

So, to explain a bit about business. You want to sell something in your nice little shop. You’ve, logically enough, got to get something from somewhere which you can then sell in your lovely little shop. You could simply pay for it when you order it and that would work, that would be fine. But there’s competition between the varied people who would or could supply you with things. That competition works out in price (more formally, price for what you’re getting but we don’t need to get that complex here).

One part of price is the cashflow of your business. This, in turn, determines how much working capital you’re going to need. The stock of your lovely little shop might be worth – oooh, just a guess – £100,000. So, if you have to pay that amount to your suppliers before you get the stuff then that means only people with £100,000 can have a lovely little shop. Scale this up and down to deal with rents and utilities and so on as much as you want. Even, you can borrow it from the bank instead of having it, no difference. Lovely little shops can only be had by those with £100,000 or more.

Competition among suppliers means some to many of them will offer you credit. You might – well, you hope you can – sell some of the stuff before you have to pay the supplier. Your working capital requirements shrink. Sure, those of the supplier increase but so what? We can now open a lovely shop with less than £100k in capital for the stock.

This then carries on and the big supermarkets have been perfecting this for decades. Some pay on 120 days. That is, cash flows to the supplier 120 days after the goods arrive in the supermarket. And that supermarket is only willing to carry stock that sells faster than that – 120 day old cucumbers have a limited market after all. Anecdotally some chains sell 7 loads and more of stock before they pay for the first shipment. They have substantially negative working capital requirements.

This was one of the Dell tricks. They built computers only when someone ordered one (first by telephone, then online). At which point they had the credit card money. Their suppliers were instructed to deliver components to warehouses just outside the assembly shed. Dell charged them rent for the use of those warehouses. And paid them the normal 60 days or whatever after delivery. But the date of delivery was not entry into the warehouse. It was crossing the line from warehouse to assembly shed. Dell had that lovely negative working capital requirement.

Actually, Dell went on step further. Depreciation on electronic componentry is about 1% per week. Pricing was fixed at that warehouse to shed date – so I hear at least – after possibly 6 weeks in the warehouse. Pretty cool business model.

However, there is a danger in this model. If your business starts to shrink then you need ever more capital to support an ever smaller business. The stuff you sold 7 cycles ago now needs to be paid for but you’ve sold less in 3, 2 and 1 cycles ago to pay for it. You will, because this is just what people do, have pulled that earlier money out of the business to pay for yachts, fast cars and slow women.

Ooops!

However, there’s a bit of glue needed in this system. The supplier needs to know that he’s going to get paid. So, he’ll take out credit insurance on a particular retailer that he’s delivering to. Fair enough. The credit insurers are hard little bastards who aren’t influenced – willing to take a chance on a nice smile etc – by the desire to make sales. They just price the insurance at the actual risk. And most suppliers won’t these days, supply without insurance. So, if you’ve done something to piss off the insurers then you’re going to find it difficult to gain stock without paying upfront for it which plunges your lovely little shop into that capital consumption stage, having to put ever more cash in just to keep the shrinking show on the road.

And:

The Bangladesh Garment Manufactures and Exporters Association had claimed that the group had £27 million of unpaid bills with suppliers, which the retailer denied.

Come the coronavirus closedown the claim at least is that Edinburgh Woollen Mills start stiffing those garment factories in Bangladesh on orders. Not just, so the story goes, cancelling orders and so on but even refusing to pay for goods already delivered. So the whispers are, I repeat just allegations published elsewhere you understand.

Which will have led to claims upon credit insurance suppliers. Even if the contracts were properly dealt with, we can indeed claim that coronavirus is a force majeure event after all, and no claims can be entertained, being aggressive in such matters might well lead to the credit insurers raising their prices or even refusing coverage. Because, you know, their money at risk and if someone’s willing to play hard bastard with their cash then they can bugger off matey.

All of which is one hell of a construct and pure opinion because I have no idea what really is happening in there.

But if it has happened that way then the company will be facing spiralling demands for ever more cash to pay for the stock – the negative working capital requirement rapidly turning into a swift reversal to a heavily positive requirement.

Oh dear, what a shame, eh?

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4 COMMENTS

  1. I’ve learnt one thing, anyway. Used to quite like Austin Read’s schmutter. Bought several suits there. For some reason ready-made always fits me better than tailored. They used to do some good styles & the quality was always acceptible. Dropped in there last time I was in London. Load of overpriced tat. Wouldn’t be seen dead in any of it. So they were sourcing in Bangladesh, were they? Explains a lot.

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