Business Reloaded

Another interesting article in the Telegraph has caught my eye:

HMV profit warning: can it survive?

Now, I am going to have to confess some pro-HMV bias here.  I’ve been involved with them on a number of occasions over the last twenty-five years, I’ve had a beer or two with Mr Fox, and I even know what HMV stands for.

BUT

Now, it seems that the vultures are circling over HMV as it declares that it is struggling to keep within its banking covenants.  Another innocent victim of the recession or a retailer that has lost sight of the fundamentals of doing business?

Let me quote from the article:

It will have sold and banked the proceeds from X-Factor’s Matt Cardle single weeks before it actually paid for it. Positive working capital is how the bean counters describe it.

I refer you back to my post a few weeks ago where I discussed cash & working capital.  In it I revealed how major retailers get paid by their customers long before they have to pay their suppliers.  This is a fantastic place to be.  A place that most businesses can only dream about.

There couldn’t be a business model that is more cash rich.  It is the financial secret behind the phenomenal success of retailers such as Walmart and Tesco.  So why on earth have HMV got huge bank borrowings?

I recall vividly the time back in 2008 / 2009 during the dark days of the banking crisis when both Woolworth and Zavvi went to the wall.  What this did was hand the domestic retail entertainment market to HMV on a plate.  Their two major rivals had gone to the wall and Simon Fox was up for making the most of the situation.  For the next twelve months or so HMV seemed to be opening a new store almost every week.  Steaming ahead to plug the gap in the market left by the boarded up shop fronts of their ex-rivals.

Now, two years later, it seems they are in trouble.  The performance of John Lewis shows that they cannot blame it on the economy so what has gone wrong?

• Have HMV seriously misjudged the move to online media delivery?
• Did HMV truly believe that the decline of the high street music store in the USA and Europe was not going to happen here?
• Is this another big retailer so drunk on the power of their market strength that they have forgotten how to run a business in a profitable way?

So, how does this impact their suppliers?  According to the article:

Spooked suppliers altering their terms would make a bad situation even worse.

Really?  If you’re one of the 98% of businesses that classify as an SME this isn’t going to happen.  SME Suppliers don’t dictate terms to people like HMV.  People like HMV dictate terms to their SME suppliers.

When a big retailer sneezes it is the suppliers that catch the flu.  The debt insurers will pull their cover.  The banks will then pull any financing, discounting or factoring that will be underpinned by that insurance.  The retailer will increase their terms and the supplier will suffer a major working capital crisis.

Try to argue for better terms and you will, at best, be ignored.  At worst, the retailer will simply return all the stock it has of your products and refuse to pay your invoices.