Majestic has been the envy of the multiples for years. This week, however, its reputation was bruised as profits fell 55.8% to £7.4m and sales crept up just 2.4%.
But its troubles are as nothing to the situation at First Quench, which belatedly filed accounts on 16 May for the year to 28 June 2008. There had been speculation pre-tax losses could be as high as £12m. They turned out to be a whopping £30m, with auditor Ernst & Young warning about the ability of the group - comprising Threshers, Wine Rack, Haddows and The Local - to continue as a going concern. The losses have prompted a flurry of obituaries among suppliers. David Stoddart, an analyst at Altium Capital , argued recently it was a question of "when, not if" First Quench goes under. Even optimists are wondering how Vision Capital, which bought the business in 2007 for £95m, has any chance of getting its money back, let alone making a profitable exit.
So what's gone wrong? First Quench was born in 1998, when Thresher and Victoria Wine came together to create a giant chain with 3,000 stores, 20,000 employees and 13% of the take-home drinks market. At the time, Tesco had a mere 14% share compared with 33% now [Nielsen] and Majestic just 75 branches (today it's 150). By contrast, First Quench Group today has less than 5%. And bombastic claims from directors at the time that the company had "the muscle to take on anyone and win" are, in hindsight, arrant nonsense.
And while Stoddart believes specialist off-licences are outmoded, its strategy and performance have been in stark contrast to that of multiple retail rival Majestic, as, repeatedly, it appears either to have missed the boat, or lost its nerve.
One obvious opportunity it missed was warehouse formats. Thresher had a trial fascia called Booze Barn; Victoria Wine attempted its own megastore, Martha's Vineyard, which had four branches and ambitions for 50. Both delivered patchy results and needed tweaking. Instead, they were abandoned. With Majestic (and latterly Laithwaites) still storming away at the 'big box' end, First Quench bosses must wonder why they were denied a piece of the action. (Majestic's recent troubles relate to corporate sales and Wine and Beer World, a 'booze cruise' business comprising three stores across the Channel, as customers have been put off by the strong euro.)
Another booming area is the internet: last year, market intelligence provider IMRG Capgemini calculated the online drinks market was worth £700m. It will be more this year (Majestic's online sales are up 16%) and First Quench has none of it. Yet both its constituent businesses had been active in direct delivery operations pre-merger. Even post-merger, a transactional website was launched but, as with the warehouse stores, the management pulled the plug due to slow sales, when investment and fine-tuning might have made it work.
The company has allowed itself intriguing diversions, first by buying the Leapingsalmon meal kit business and then rebranding some stores as Threshers+Food, based on the endearingly optimistic idea that customers wanted to buy sandwiches and ready meals with their wine. Much time, money and effort were channelled into the projects before the company finally decided to stick to the knitting.
Constant changes didn't help, although management has been reasonably stable. First Quench was bought by Nomura for £225m in 2000, but the transfer to Terra Firma in 2002, was relatively seamless as Guy Hands was still running the show. With Roger Whiteside at the helm, the company finally tidied up its retail brands, introducing The Local and revamping Wine Rack , and launching the trademark three-for-two promotion.
Suddenly, First Quench seemed to have found the point of difference it had sought. But the impact was short-lived and the mechanic is now supplemented with a conventional high-low strategy. Viral money-off vouchers have become another key tactic, but this does little to banish long-term perceptions its prices are high.
By the time Vision bought First Quench, all freeholds had gone in sale-and-leaseback , providing a welcome one-off spike on the balance sheet but limiting the room for manoeuvre. If push comes to shove, Vision has no assets to strip, and if it wants a return on its investment, it needs to trade its way into one. A £30m annual loss suggests that won't happen soon.
Vision says the accounts don't reflect the current state of play and cover a period when it was embroiled in a complex turnaround. Sales in 2007-08 stood at £652.3m, with a gross margin of 12.8%, which might have yielded a less dramatic loss were it not for exceptional items totalling £17.2m (though losses would still have been £12.8m). That was how much it cost to rearrange logistics and warehousing and to close underperforming branches - a process still ongoing. This year First Quench has shuttered more than 160 stores (10% of the estate) and the programme is scheduled to continue until June 2010.
In the current financial year, Vision has pumped £25m of equity into First Quench and £10m of working capital. Will it be enough? There is cash on the balance sheet and no third-party debt, but the directors' report admits there are no guarantees life will get easier. "The directors have carefully considered the assumptions and sensitivities and have concluded the group can remain within the level of available finance," the company says. "However, the current economic climate [means there] are inherent risks surrounding the achievability of the group's forecast sales and margins and the timing of cashflows."
First Quench's stated strategy is to invest in its four brands, tighten up HQ operations, reduce stockholding and further rationalise the estate. Some may regard this as a final throw of the dice, after giving the impression of being in a process of reinvention for 10 years.
Indeed Nielsen data for the multiple specialists sector, which combines the sales of First Quench and Majestic, point to an 8% decline in their wine volumes in the year to May 16. And with the average bottle of wine bought now £5.34 (£6.35 at Majestic), compared with the market mean of £4.25, its premium position worsens even as it reduces costs: in the year to 16 May the pair's price inflation of 38p a bottle was double the 19p reported by the off-trade in general.
First Quench bosses remain bullish. "As a result of implementation of the new strategy and the timely focus on costs, it is expected the group will be well positioned to take advantage when the economic situation improves," the report claims. "Management is committed to ensuring the group consolidates its status as the UK's premier independent drinks retailer."
In a sector that has already seen the demise of Unwins and the retrenchment of Oddbins and Wine Cellar, it is, on the face of it, a pretty modest target.
But to cap a year of woes, it's been managing without the use of credit insurance most of this year, meaning drinks companies are demanding cash-on delivery. Securing a future for a business facing such daunting challenges will be nothing less than heroic. n