Australia’s worst book retailing chain, RedGroup (parent of Borders and Angus & Robertson) went into administration yesterday. There are a few reasons for this:
1) RedGroup was a highly indebted private equity portfolio company;
2) Australian retail spending has been weak-ish in general for the last year or so;
3) Books have been particularly hard-hit by consumers switching to online retail from overseas;
4) This is exacerbated by an extremely silly law which bans wholesalers and retailers importing books from overseas, instead forcing them to pay exorbitant local publisher prices;
5) According to pinch-of-salt-worthy rumours, the chain wasn’t very well run. Certainly, it didn’t provide a very enjoyable retail experience.
So, it’s the kind of story that was prevalent in the UK in the late 2000s: a retailer which isn’t massively successful but was making just-about-tolerable money gets bought and heavily leveraged by a private equity company. Then the market takes a turn downhill, the new owners can’t cut costs enough to make up for the downturn, and the company can’t make enough profit to pay the debt – so the administrators get called in and the shareholders lose all their money. On the plus side, at least the shareholders who lost all their money on the deal were greedy private equity zillionaires.
But since the Australian media has been denied an ‘OMG THIS IS AN OUTRAGE!!!’ story from ripped-off shareholders, it’s managed to dig one up from consumers instead, about RedGroup gift cards not being honoured by the administrator. Well, no – of course they aren’t. Indeed, he’s being very generous in their case.
When a company goes into administration (Australian and UK law are fairly similar here), the administrator is required to run the company in the interests of its creditors – the people to whom it owes money – until he has worked out a longer-term plan for the company’s future. If he can sell the business as a going concern once the debts are out of the way, this will normally generate the most value for creditors.
In this case, RedGroup’s creditors are its banks, the Australian Tax Office, its landlords (because the stores have multi-year leases), its suppliers (because publishers are paid in arrears), and the people who hold RedGroup gift cards (because they represent a commitment for RedGroup to give you goods of a certain value on a certain future date).
If the company is unable to pay all of its debts, some of these creditors take priority over others, because their debts are legally enforceable against the assets of the business. Usually, these secured creditors are the banks and the ATO (under certain circumstances). So the administrator’s job is to come up with the best way of minimising the loss to the company’s creditors in total, while also ensuring that secured creditors are the first to be repaid. It’s likely that RedGroup is in this position: otherwise, its management would have been unlikely to bring in the administrator in the first place.
This means that if Penguin’s MD were to turn up at RedGroup’s head office saying “you haven’t paid us for books in months, give us some money now!”, then the administrator would tell him to go away until the administration process is complete. Penguin will get its share of the remaining assets once the secured creditors have been paid off, but as an unsecured creditor it won’t get anything until then.
The administrators of collapsed UK music retailer Zavvi applied this same approach to gift voucher holders: they were treated as unsecured creditors, and – along with other unsecured creditors – are likely to get back 10-20% of the face value of their debt. However, RedGroup’s administrator has been more generous to voucher-holders than Zavvi’s.
Borders or A&R gift card holders also have the right to lodge an unsecured claim, but the administrator has said that they can instead fully redeem their card as long as they are spending twice its face value (i.e. if you buy $40 worth of books, you can pay with a $20 gift card and $20 in cash or card). This is offered as a gesture of goodwill, but presumably reflects the administrator’s belief that the chain will be worth more if he does this – both because it’ll keep up cashflow in the short term, and because it’ll tarnish the brand less than if cardholders had been offered cents on the dollar years down the line.
The difference in administrator behavior is most likely because Borders and A&R are likely to continue to exist in some form or other, whereas Zavvi pretty much wasn’t (it was a newish brand, and it moved from ‘precarious’ to ‘ruined’ after its main supplier went insolvent a month before Christmas and therefore couldn’t supply it with stock). But if the administrator ends up concluding the finances look really nasty, this could all change – so if you’ve got a voucher and you value a half-price trip to the bookshop, then now’s the time to use it.
What’s the conclusion, apart from ‘don’t borrow money against assets that won’t cover your interest payments, duh’?
Well, for individuals, no matter how unimaginative you are, how mercenary your nieces and nephews are, or indeed any other concerns of any kind whatsoever, don’t buy gift vouchers. Would you spend $50 on unsecured, 0% interest bonds sold by a highly indebted company struggling to stay afloat in a massively competitive market? No, nor would I – and that’s exactly what purchasers of gift vouchers are doing.
There’s a policy conclusion as well, which is that retailers shouldn’t really be allowed to issue gift vouchers – they’re effectively a license to print money, granted to institutions that (jokes about the financial crisis aside) are far less regulated and far more likely to go under than banks are. That can’t be a good thing, for anyone in the system.
If retailers do want to have a gift card scheme, they should be obliged to lodge all money earned from the sale of gift cards with a third party, completely detached from the assets and liabilities of the business, and only released when the gift card is redeemed against goods. I suspect, since it doesn’t mean Free Cash Now, such a scheme would be significantly less popular among retailers than the current setup…