The Adage “Too big to fail”

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By Damien ROUSSEAU, Expert Bordeaux My Business Finance

 

While growth is on the rise for many companies, we are witnessing the fall of big retailers at the same time; What for?

 

The observation: Economic growth is at the rendezvous in France…

The year 2017 has benefited the French economic fabric since business failures fell by 8.3% in 2017 … a level that has not been reached since the fall of 2008.

Recovery obliges, the decline is net in construction. The sector, driven by household investment and still very low interest rates, alone accounts for half of the total decline in defaults. After years of lean cows, construction has even started to recreate jobs.


In 2018, construction and real estate business failures can be expected to continue to decline, but in a less dynamic way.

Economic conditions also improved in the automotive, textile, retail and personal services sectors, which benefited from the dynamism of consumption in a context of low inflation. Agri-food companies have also been more troubled, particularly bakers and pastry chefs, who have been particularly affected by the rebound in grain prices in 2017, caused in particular by the poor harvests of 2016.

… And in New Aquitaine

In new Aquitaine, the figures are even better than the national average but mask heavy disparities.

Indeed, business failures in New Aquitaine had fallen below 5,000 for the first time since 2007 in 2016 (-15%) and 2017 confirms this downward trend (-6.2%; 4612)..

Gironde accounts for almost a quarter of regional procedures. In 2016, the department of girona had almost returned to the level of failures of 2007 (1,300), now it is approaching the disaster of 2006 (1,281; -4%).

The trend is therefore rather good even if the TPE still suffer.

However, is it necessarily only the latter that should be monitored when making B2B?

New phenomenon: the failures of large companies

If the beautification is undeniable and will be confirmed in 2018, a new phenomenon is emerging. Big companies are not as strong as you might think and some are even paying the price today linked to massive debt. The world is changing rapidly and some, uninsure in their structure, sometimes find it difficult to renew themselves, to reinvent themselves.

The “too big to Fail”, yet so rooted in our certainties,now has lead in the wing..

In 2017, the agri-food sector suffered from the bankruptcy filings of large companies such as William Saurin, Jean Caby and Madrange, whose combined turnover is close to 790 million euros.

And that inspires concern.

Of course, the turmoil for William Saurin is linked to financial malfeasance but this has a direct impact on employment in the regions (4,200 employees for this company).

 

Similarly, the Pinder Circus, founded in 1854, is in serious financial difficulty.

In three years, attendance has increased from 450,000 school spectators per year to 100,000. While it employs 120 people, the circus’s turnover increased from 7.4 million euros to 6 million euros between 2014 and 2016.

The week of 4.5 days in primary school, criticism of animals in circuses but also the crisis and attacks have contributed to this drop in attendance.

 

What about internationally?

If we all remember the failure of Kodak, which has not been able to take the digital turn, large international companies with a foothold are now experiencing great difficulties.

The aim is not to brocade them but rather to understand the reasons and to apprehend this phenomenon to its proper extent.

 

  • Carillion

 

It is certainly not the best known of the listing, but the difficulties of this giant of the construction sector across the Channel portend complicated days for the British economy, which is also in a climate of uncertainty linked to Brexit.

The number two construction company in the UK, Carillion announced in early 2018 that its very degraded financial situation left it with no choice but to initiate a mandatory liquidation procedure with immediate effect.

The bankruptcy of this 200-year-old company, which has a turnover of 5.2 billion pounds, shakes the whole kingdom for several reasons. First, because it still employs 43,000 employees worldwide, including nearly 20,000 in the UK.

Secondly, because it raises questions about the future of several major projects under way, such as the construction of the TGV High Speed 2 line between London and the north of England.

What happened at Carillion to make this giant collapse at the foot of clay? The group suffered from an increase in its debt to 1.5 billion pounds, linked in particular to the 580 million deficit of its pension fund, at a time when the postponement of several construction sites and delays in the execution of certain contracts were weakening its activity.

 

  • Remington

 

Another sector, but one that illustrates how developments in the sector, political expectations and even exogenous contexts can weaken giants.

Remington also filed for bankruptcy in 2018 to reduce its debt with the help of its creditors amid mounting protests in the United States for stricter control of gun sales.

Sales of the oldest gunsmith in the United States had fallen sharply in 2017 and the company was struggling to meet its commitments with its creditors.

Remington still reached an agreement with its creditors to benefit from bankruptcy protection (Chapter 11) and reduce $950 million in debt.

Contrary to what one might think, the fact that the new president supports the right of Americans to own a firearm does nothing to help manufacturers. The latter, who had anticipated the election of Hillary Clinton, had increased their production under the phenomenon that Americans fearing the establishment of a control buy more. But the Democratic nominee was not elected and the power of the NRA, the main gun lobby, wiped out fears and fell sales.

 

  • Gibson

 

The famous guitar maker Gibson, whose instruments have passed into the hands of John Lennon or Elvis Presley, is in great financial difficulty and is fighting not to put the key under the door. Based in Nashville in the United States, the legendary company is mired in debt.

 

  • Toys R Us

 

In serious financial difficulties, Toys R Us, the first U.S. toy retailer and employing 65,000 people worldwide, announced in September 2017 that it had placed itself under Chapter 11 protection under the U.S. Bankruptcy Act. This decision allows the company in default to continue its activity, protecting it from its debtors, who cannot act to obtain payment of their debts.

Toys R Us was acquired in 2005 for $6.6 billion (5.5 billion euros) by investment funds KKR and Bain Capital, in partnership with the real estate company Vornado Realty Trust. But the transaction resulted in heavy debt that reduced the group’s room for manoeuvre and hindered its development.

This handicap is all the more important because, like other traditional distributors, Toys R Us is facing the dramatic growth of e-commerce. The global giant of this sector, Amazon, has thus become the leading seller of toys in the United States.

More than a dozen U.S. retailers filed for bankruptcy this year in the United States, including perfume chain Perfumania and clothing brands rue21, Gymboree or BCBG Max Azria Global.

 

How can we avoid the collateral damage of these bankruptcies?

As we can see, external factors such as political decisions, a geopolitical crisis, new norms or terrorism, but also endogenous factors. such as massive indebtedness, internal malice can push nationally and internationally renowned groups to the brink. And this is not without consequences for all their suppliers. The latter, in fact, are suffering the full brunt of the bad pass of their main customer and often with too little time to be able to turn around and prospect new customers.

It is recalled that one in four failures in France is directly attributable to a default of one of these customers. This figure is just eloquent, staggering, given the context.

Of course, we can never say enough, the diversification of his client portfolio allows to better absorb the shock but does not protect.

The solutions to protect and secure your customer position are numerous and can be internalized (create a Credit Management service within its own structure) or outsource (secure your turnover via credit insurance).

THE SOLUTION: Credit insurance combines both the preventive dimension necessary for good commercial prospecting to properly target its future customers and the curative dimension with claims compensation and the collection of commercial debts.

The latter seems all the more appropriate since many companies in France are so-called “Zombies” companies.

Since the end of the crisis, the rate of “zombie” companies, artificially kept alive by low-cost financing in a context of expansionary monetary policy, has not decreased in France, while Spain, badly affected by the crisis, began a decline as early as 2013.

The situation of French companies is therefore much more contrasted than the decline in the number of failures suggests.

 

Damien ROUSSEAU

GALLIEN COUNCIL LEADER

06 10 04 23 30

damien.rousseau@gallien-conseil.fr

353 Tivoli Avenue – 33110 BOUSCAT

www.gallien-conseil.fr

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