Retail Risk Lessons

Anthony Perl: 00:00:02

Mosaic Brands Lessons: Protecting Retailers and

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Suppliers from Insolvency Risk.

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Welcome to IO Insolvency Options with

Darren Vardy, the managing director

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of Insolvency Options and a registered

liquidator with over 30 years of

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experience helping businesses and

individuals navigate financial challenges.

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In today's episode, Darren continues

the Mosaic Brands discussion and draws

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out the practical lessons for retailers,

suppliers, and business owners.

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He explains why aggressive growth without

adequate capital can place suppliers

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at risk, why household names can still

fail, and how payment terms, retention

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of title clauses, PPSR registrations,

realistic forecasting, and break-even

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monitoring can help reduce exposure.

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Darren Vardy: I'm your

co-host, Anthony Perl.

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Let's dive into unlocking

more about insolvency options.

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Anthony Perl: Darren, I want to

continue the story about Mosaic.

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I think we should talk a little bit as

well at the fact that what's interesting

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about this, and it's not unusual, is

that this is a brand that owned multiple

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very well-known brands we're talking

about here So, and first we probably

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need to talk about some of those brands,

but I want to understand as well that

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was it one or two of those businesses

that caused the issues, or was this, you

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know, systemic across the entire brands?

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Because that's an interesting

piece within itself.

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Darren Vardy: I'm not close enough

to the detail to be able to comment

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on whether it was one brand or

another which brought about the

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demise of the group Mosaic Brands.

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But as I mentioned earlier, and

quite often you find, is if there

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is an aggressive acquisition program

undertaken and there is no capital

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funding for that, well then the funds

used to acquire these businesses

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then generally done out of cash flow.

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And so therefore, unless you have

significant positive cash flow

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available to enable these acquisitions,

so it doesn't impact payment to

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creditors or result in a detriment

to creditors, then that's fine.

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But in this case, as we've seen, or

as I mentioned earlier, you know,

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where payables, where the company's

trade payables are stretched from 120

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days to in excess of 200 days, it is

clearly evident to me that it was their

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suppliers' cash flow that were used

to go on this aggressive acquisition

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campaign to acquire all these brands,

and I'm unable to comment on the extent

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of the due diligence done or otherwise

to determine whether these brands

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were in fact profitable brands or not.

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Anthony Perl: I think for people listening

in, if you're not familiar with Mosaic as,

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as such, we're talking about brands like

Rivers, Millers, Katies, Rockmans, Noni B.

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Those are the kinds of brands that

have filled shopping centers for many,

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many years, so they're very familiar

to the public and would feel like, "Oh,

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these are household names, therefore

somehow we feel like they're protected."

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But, you know, as new shopping centers

open up, suddenly the same brands pop

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up in, in those ones, so there's always

pressure to grow and to acquire more.

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Is that part of the problem that

exists when you have a larger

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retailing company, particularly

one that's owning multiple brands?

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Darren Vardy: I think the issue

here is, you know, the real

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estate it, it actually occupied.

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You know, there were a number, you know,

there were 1,379 stores at the date of the

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appointment of the administrators, right?

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Now, with new centers opening, yes,

there is always a carrot to go and

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enter into these stores and sign up on

leases and have a presence in an area.

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But at what cost?

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And the cost might not be in the

first year or the second year.

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The cost might be in the tail

end of the lease where the fixed

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percentage increases in the rent,

which may or may not be commercial

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increases, are more than probably CPI.

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That's when they actually

bite into the bottom line.

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And then you've also got consumer

spending habits and ability.

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And what we're seeing now is

we've had the, you know, 15

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consecutive interest rate hikes.

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You know, people's discretionary income is

getting more difficult and less and less.

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So I spoke about the perfect

storm when COVID came in,

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hit, and that hit all retail.

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And many retailers pivoted.

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They had the ability to pivot to online,

which they did, and a lot have survived

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off that and managed to scale back

their real estate occupancy But scaling

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back real estate occupancy comes at a

cost as well, and if that cost can't

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be met, then it has a detrimental

impact to the business as a whole.

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Anthony Perl: And retail's a

very interesting place, isn't it?

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Because of the big push to being online,

and even your typical stores that have

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a presence in many of the shopping

centers across Australia, many well-known

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brands, have online specials, so you

can't even view them in store anyway.

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And so there is more and more of a push

to that, and yet is there less foot

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traffic going through shopping centers?

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I'm not sure.

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I suppose it depends on what time of

day and when you're traveling and where.

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But it's a difficult space to be in in

retail, and I think when you look at

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those, particularly the larger shopping

centers, you don't see many independent

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small operators sitting in those spaces.

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It is left to some of these bigger

retail chains and, you know, again,

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taking back to the Mosaic story, is

that kind of a, a bit of a catch 22?

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I do

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Darren Vardy: think it is, yes, and

this was a business that was built

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on the traditional retail model.

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The target market for product was

the ladies who are between sort of

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40 and 60, the generation that does

go into the shopping center and

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probably less likely to shop online.

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And as I said, it's a more

traditional customer, hence the

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more traditional business model

with having the store presence.

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Anthony Perl: I guess the cautionary

tale then for retailers that are

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sitting out there and maybe listening

in to this, what are the things that

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they've got to do to avoid this?

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Or if, what are the red flags that

they should start be looking for

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in order to get ahead of the game?

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Because as you said when we started

discussing this whole retail

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topic, there's a big bump in

the amount of retailers that are

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going to the wall at the moment.

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Darren Vardy: Yeah.

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And look, it all comes down to, in my

view, again, cash flow management and

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projecting and forecasting, and I think

the forecasts need to be realistic.

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There's murmurs of recessionary scenarios.

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We will all know that with the

recent interest rate rises,

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household cash flow becomes tight,

discretionary spend is less.

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And so I think the retailers, depending

on the type of retailers, need to look

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at their business, determine whether

they are more of a discretionary spend

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or not- Look at their cash flows to

determine what that baseline turnover

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needs to be to cover the fixed costs

of rent, electricity, and the like.

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Work out your break-even income,

and then be realistic in respect

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to the forecast to see whether you

can achieve the income needed to

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keep, literally keep the lights on.

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And if there's doubt or concern that

the retailers may not be able to achieve

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that, that's when they need to seek

advice as to what the options are.

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Anthony Perl: And many of the leases that

retailers are, I wouldn't say forced to

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sign, but, you know, want to sign because

they want to be in a specific space make

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it challenging for them, doesn't it?

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Darren Vardy: Absolutely.

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And, you know, you hear a number of

retailers have what they call marquee

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stores, which are loss leaders, but

they just think that they need to be

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in an area or in a certain shopping

center in a certain location to be seen.

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And that's fine, so long as there's

sufficient income coming in across

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all stores to cover all costs

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Anthony Perl: Yeah, I know what you're

saying about the marquee stores.

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It's really interesting, isn't it?

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Because you walk into some of these

and you think, "Wow, they're amazing.

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They're kitted to- out to the hilt."

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At the same time, they're huge, and

then you look around and you see there's

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quite a lot of staff in there and

quite a lot of stock, but not matched

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by the people, and you start doing the

maths going, how much does-- need to

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be spent in this store on a day-to-day

basis to get them even breaking even?

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Darren Vardy: And that's the key.

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The key is to be aware of the

blake- break-even level and to then

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monitor the income accordingly.

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Anthony Perl: Well, let's go back to

something I know we talked about in

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a previous episode, but I think we

can expand a little bit on it here

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today, is really about suppliers.

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What's the advice for them when they're

going into dealing with retailers?

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What are the things that they

can look for, and what are

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the triggers they can pull?

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Because I can imagine that if you're

a supplier to what you believe is a

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significant retailer, you probably feel

incumbent to them because you feel this

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kind of immunity, oh, they're, they're

big enough, they're going to pay us.

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Darren Vardy: So I think the, the key

is always, in my view, to minimize risk.

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What action needs to be

taken to minimize risk?

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That is, firstly, enter into a supply

contract, make sure that you've got

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security over the goods you supply

by way of retention of title clause,

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as well as a security interest

registered on the personal property

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securities register to support that.

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Second thing is payment

terms are payment terms.

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Make sure that you

monitor the payment terms.

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Now, quite often these large

organizations, not dissimilar

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to government, will request or

demand extended payment terms,

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forty-five days, sixty days.

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You need to make sure that you're on

top of whatever the payment terms are.

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Need to make sure that you're

on top of getting paid at

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or within the payment terms.

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And then if you're not being

paid at or within the payment

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terms, take the necessary action

required to remedy that situation.

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And yes, we've all got to be commercial

at the same time, and it's okay

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to accept sixty-day payment terms.

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But you then need to realize within

your business that will come at a cost

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to you, and you need the sufficient

capital and resources and cash flow

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within your business to ensure that

you can accept those payment terms.

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So it's not just agreeing with

them, it's making sure that your

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business cash flow can sustain that

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Anthony Perl: And I imagine the

lure is the big check, right?

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You've got a big retailer and you're

supplying to them, so relative to

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the suppliers, it might be a fairly

significant check that you're looking at.

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So there is the lure on one hand.

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On the other hand, you probably have

to be prepared to say no, because if

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the payment terms start getting out

of hand, if the discounts that they're

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expecting start getting out of hand,

then at what point do you walk away

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and say, "This is just not worth it"?

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Darren Vardy: Interesting you

made a comment about big check.

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Big check is not profit.

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Big check is income.

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And quite often people

mistake income for profit.

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And my experience is dealing with

large retailers and suppliers to

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large retailers is that whilst there's

volume which gives rise to big check,

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large payments, what I've often found

is that because of the volume, the

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margins, the profit margin is squeezed.

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So it'll be high volume, low margin.

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So then all of a sudden if you are then

delayed in your payment, it has a more

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significant impact because you need to put

more out the door to gain the profit you

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need to offset the funds being withheld.

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And that's one thing that, you know,

we quite often speak with business

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owners about is that the income

doesn't necessarily mean profit.

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And business owners really

need to be aware of that

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Anthony Perl: So just to wrap up this

whole story of Mosaic, and it's a

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fascinating story within itself, but

also the impact on retailers everywhere.

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But when we finish this off in terms of

the suppliers, how many were affected?

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How many ended up, suppliers

themselves ended up in administration

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as a result, or certainly in

bad situations because of this?

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Did it go far enough to

really ruin other businesses?

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Darren Vardy: It certainly did.

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Absolutely.

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I don't have the stats on how

many suppliers were impacted.

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I do know that I'm the liquidator of two.

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There were a number of overseas

businesses that I'm told had to

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shut down from China and Bangladesh,

you know, suppliers of garments and

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the like, and that this has had a

significant international impact given

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the level of debt that's outstanding.

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And, you know, it's understood that

there are some programs on TV which have

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followed through on that, and that's

where that's sort of been derived from.

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But it has had a significant impact

on a broad number of businesses,

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both locally and internationally.

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Anthony Perl: It really is hard to

believe sometimes when you see brands

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that are such household names and have

been such household names for such a

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long time to feel like, wow, there was

nothing that could save them as well,

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that those brands have now irreparably

damaged, as well as a brand that has

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left them disappeared for all time.

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It, it's an amazing story and

one that there's so much to

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learn from everyone listening in.

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Darren Vardy: And to an extent, this,

the failure of Mosaic Brands, it can't be

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denied that the COVID-19 pandemic had a

significant impact and contributed to its

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failure, given the nature of the business,

and unfortunately with all businesses

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in Australia and throughout the world.

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We couldn't predict.

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We didn't know it was coming.

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It was something that had

never occurred historically.

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I think the closest was probably the

Black Plague back in the: 1920

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we don't have, you know, information

about how that affected businesses.

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We were less sophisticated back then.

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But this is, I think, in my view, just

a prime example of how COVID-19 pandemic

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has adversely impacted a large business.

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Anthony Perl: Well, that's all

we have time for in this episode

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of IO and Solvency Options.

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We'll continue exploring the

practical warning signs and decision

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points that help business owners,

accountants, lawyers, and advisors

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recognize financial distress earlier

and understand the options available

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before the situation becomes critical.

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As Darren reminds us through

this series, early action creates

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more choices and better outcomes.

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We've created a workbook for

this episode of the podcast with

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questions for you to answer, key

quotes, and action steps to follow.

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Check out the show notes for

the link to download your copy.

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For details on how to get in touch

with Darren and his team on insolvency

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challenges, please consult the show notes.

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This podcast is produced by my

team at podcastdoneforyou.com.au,

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helping professionals share

their expertise through

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powerful podcast content.

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If you found value in today's episode,

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Until next time, remember, there's always

a way forward when you know your options