The devil was in the detail of online wholesaler Blueheath's recent annual results statement. Geoff Igharo and Julian Hunt report

Casual readers of the upbeat annual results statement issued a couple of weeks ago by online wholesaler Blueheath would probably have thought that this was an exciting new business making waves in the grocery sector and heading in the right direction towards profit.

It was only those who took the time to read the detail of the statement that found plenty to be worried about. Such as the news of a heavily discounted share placing. Or the departure of senior managers, including founder Douglas Gurr. The closure of its Tamworth depot. And most significant of all, an indication that its auditors may qualify the annual report because of concerns over its ability to continue as a going concern.

Dynamite stuff. It has certainly provided plenty of ammunition for rival wholesalers who have long been predicting the demise of Blueheath. Even neutral observers have raised concerns: Charles Stanley, one of two securities firms following Blueheath, suspended its coverage of the business in the wake of the results statement, ­citing concerns over the company&'s restructuring plans and share­holder dilution due to the rights issue which was due to be ­approved at a meeting yesterday.

So is this a business that is still waving or is it, in truth, one that is now starting to drown?

Such questions have been asked before, of course, particularly by those who argue Blueheath&'s core proposition of offering a delivered grocery wholesale service at &'close to&' cash and carry prices is fundamentally flawed.

Following the results statement, there has also been increasing speculation in the wholesale trade that rivals are watching developments with interest because they would dearly love to get their hands on Blueheath&'s clever ordering and fulfilment technology.

But when we caught up with Gurr this week, he was having none of it: "People can speculate as much as they want. If I believed the speculation I have heard over the past five years then this company would have been sold 25 times and bought 25 companies. So I don&'t really pay attention to speculation. We are happy with where the company is going and we have plans to grow it."

The critical issue facing the business is lack of scale. As supply chain expert Tim Knowles says: "Blueheath&'s unit cost of transportation will be very high at the [relatively] small volumes it is operating at. Scale is so important because margins in grocery are so low. Its objective of providing delivery at C&C prices will not work unless it has large volumes."

Rival wholesalers point out that profit is equally as important.

One of our Big 30 members says: "I don&'t think the Blueheath model is working. They sell too cheaply compared with their costs, which are higher than other wholesalers. Business is about making money; not about selling more for a loss."

The search for volume and profit was clearly behind Blueheath&'s ­acquisition of AC Ward & Son and CTM Wholesale last year. The deals raised plenty of eyebrows. After all, they represented a major change of direction for a company that had started life as a &'virtual&' wholesaler, with tight stockholdings and limited distribution capacity of its own (for instance, its lorries came via a tie-up with British Bakeries).

While the takeovers have helped Blueheath to report an 89% rise in turnover to £132.3m in the year to March, they have done little to stem losses, which were £5.3m for the year after exceptionals related to the cost of integrating the acquisitions. Worse, we estimate that its organic growth slowed to 8%.

Gurr says: "We want to grow as much as possible and we have said that repeatedly over the past few years. But we had the challenge of integrating our acquisitions last year. While we want to grow as fast as possible, any organisation can only take so much. We were fine with our organic growth."

He adds: "Overall we have delivered more than 100% year-on-year growth over the past five years. That&'s a very good track record."

And Gurr is not ruling out further acquisitions either: "In the next 12 months we will make acquisi­tions if they are right. But we won&'t buy just for the sake of it."

The priorities for the business now, says Gurr, are to keep building volumes while improving its operating efficiency and service. It will also have more cash, thanks to the £5m stock placing (which should calm the auditors&' nerves). But Gurr steps down in August and it will be left to incoming chief executive Mark Aylwin, the respected supply chain director of Musgrave Budgens Londis, to drive the business forward.

Former colleagues at MBL say Aylwin is well aware of the huge challenges he faces at Blueheath, but felt he could not turn down the opportunity to run a business. Yet, it is hard not to agree with those who feel that Aylwin&'s first, and only, task will be to oversee a sale of the business to a rival wholesaler. n

The history
April 2000: The business is founded by ex-McKinsey consultant Douglas Gurr with venture capital backing. Blueheath sets out to revolutionise the wholesale sector with an electronic order process and a lean supply chain based on predictive ordering.By September, the business has secured £6.5m of additional venture capital support. 2002: The Grocer identifies Blueheath as one of the most innovative wholesalers making waves in the sector. With more financial support in the bag, the business really starts to motor. July 2004: Blueheath floats on the AIM, securing £18.5m. That same year, Gurr joins the board of Landmark, the wholesale buying group of which it is a member. January 2005: Blueheath is ranked number 30 in our Big 30 listing with sales of £63m. In April it buys CTM. In July, it announces a pre-tax loss of £5.7m on sales of £70.2m. And in November it buys AC Ward. 2006: In January, Blueheath is ranked at 19 on The Grocer's Big 30. It leaves Landmark to join the Today's Group. We name Gurr as the fifth most powerful man in wholesale. In May, Blueheath reports a pre-tax loss of £4.8m on sales of £132m. The business is restructured and Gurr steps down, to be replaced by MBL's Mark Aylwin.