Case Study I: The case of DSG International
DSG International (DSGi) is one the leading consumer electronics retailers in Europe. Amongst the leading brands, it operates Dixons, Currys, PC World and Electro World stores across Europe.
DSGi displayed signs of distress in August 2008 when it informed 50 of its employees that their jobs were at stake. The electronic retail giant was considering job cuts across three of its stores in a response to the tough market circumstances. Two months later in November, it was stalled in Atradius's decision to reduce its exposure in the overall retail market. Although it recognised this fact, it however talked down the matter by stating that it was not a DSG specific issue but rather a sector specific issue. DSG further went on to say at this point that it was more about the way Atradius managed its business and that ‘Atradius is only one of the providers of credit insurance'.
However, merely a week had passed since Atradius reduced its exposure that DSG had to close it PC World Business in Ireland. This further confirmed that the group was in trouble. Later on in January 2009, DSGi was further hit after Euler Hermes also reduced its cover. At this point, DSG continued to shrug off the label of being a troubled business by stating ‘As market leaders we are an important route to consumers for our suppliers' products and we have seen no change in our overall terms with our suppliers.' In March, Euler Hermes further cut down DSG's credit cover for the second time in the year.
This came over the curtailing of about half the limits earlier in January. Already in January many distributors had stopped trading with DSGi. The distributors believed that Euler assessed the risks successfully.
All statements from DSGi in its defence were brushed aside in April when its fund raising statement came out. DSGi announced that it had its net borrowings increased more than three folds in the previous five months because of the contracting credit insurance. The group revealed that as on 07 March 2009, its total debt was £502 million as compared to the £149.5 million, the last time such figures were disclosed. This increase has been attributed to the changes in the credit market restraining DSG's ability to repeat the deferral of payments of about £130-150 million (previous year figures) and instead having to pay off supplier up front to the tune of £40-80 million. Further on, the decision to delay the sale and lease back of its distribution centre in Jonkoping, Sweden17.
The group also revealed that its sales fell 3 percent in 26 weeks ending April 2009. The impact of the crisis on the financial performance, increasing costs of raising finance and the lack of credit insurance pressurising the cash flow resulted in the management's decision to raise funds through equity. The group has taken action by closing down loss making stores, reducing stock levels within the group and suspending dividends. The master plan has however been to raise £100 million through placing 333 million fresh issues at 30 p each. The rights issue would raise a further £ 211 million on a 5 for 7 shares issue at a price of 14p per share.
The group has been paying suppliers earlier, outside the terms so as to avoid any further issues. As a result of this placing and rights issue, the management believes that it would be able to strengthen its capital base and hence reducing the need for any early payments. Hence, we can see that as a result of the actions of the credit insurers, many distributors have pulled back on trading with DSGi, causing immense cash flow difficulties and increasing level of debts. The group was then left without any choice but to go for a placing and rights issue to raise finance to stabilise itself.
Case Study II: The case of Threshers
The latest retailer to have been disturbed by the credit insurers' cuts is Threshers, owned by the First Quench Retailing (FQR). Threshers is an off license chain of alcoholic drinks. The business has been severely affected after alcohol deliveries to several of its franchisees have been disrupted following the reduction in credit insurance to a few of its suppliers. The chain has been running out of stocks as a result, badly damaging its reputation.
FQR has as a result reduced the management fee which it charges the franchisees. Normally, it charges he franchisees about 3% to 5% of the sales18. This amount was reduced for the coming six months keeping in mind the harsh trading environment.
The chain is also believed to be sourcing its stock from the ‘grey market'. Although this has not been confirmed but the management stated ‘The sourcing strategy for the business is to work with manufacturers wherever possible with the view of getting the best cost prices for the benefit of our customers.'
Auditors Ernst & Young stated that there was ‘material uncertainty' pointing towards the group's inability to continue as a going concern. FQR however has stated that the audit report was for the initial six months of the implementation of the ‘turnaround' plan. 18 The