Devil in the hidden details of RedGroup

CHALKIE  17 August, 2011 - stuff.co.nz

OPINION: The abrupt demise in February of trans-Tasman retailer RedGroup will for many reasons remain one of the more unsatisfactory corporate sagas in New Zealand's recent history.

The decision of unsecured creditors (with about $20 million owed in New Zealand) to accept a payment of 3c in the dollar marks the beginning of the final phase for the company.
But Chalkie reckons that before Red - as he likes to call it - takes its final undignified bows, it is worth a last look at what went wrong.
Two recent statutory reports (one for either side of the Tasman) filed by Red's voluntary administrator Ferrier Hodgson fill in some much-needed detail.
Ferrier Hodgson levels what Chalkie construes as strong criticism of the way Red was managed:
* Management buying decisions did not meet market demands. There was more emphasis on "buying" than "selecting" stock, resulting in overstocking with aged, poor stock;
* Decisions were made by the Australian management team with respect to the New Zealand businesses with limited consultation from New Zealand management. This created a backlog in the distribution centre, reduced stock availability during the busy 2010 Christmas period and reduced periods for promotional campaigns;
* Failure to recognise and promptly address loss-making stores;
* Underuse of space in stores and poor organisation with no logical grouping;
* General lack of consistent business processes with little reference to signed- off critical paths and event management cycles.
RedGroup was formed in 2004 when funds controlled by Australia's Pacific Equity Partners bought a group of existing businesses for A$115 million (then about NZ$135m) from British retailer W H Smith. The assets included New Zealand institution Whitcoulls, around in various forms since the 1880s, and Australia's Angus & Robertson. In 2008 the Borders stores here and in Australia were added for A$105m.
In 2009 Red trumpeted a 52 per cent increase in sales. Stories emerged suggesting a stockmarket float worth as much as NZ$600m was contemplated. But in 2010 the company signalled banking covenant breaches and announced a loss of A$43m.
In late October last year Red said binding lending commitments had been received from BOS International (Australia) and Fortress Investment Group.
One of the things that intrigued and disturbed Chalkie about Red's subsequent demise was how its private equity owner PEP had somehow ended up between late October and February becoming the major secured lender to the company, owed A$118.5m. Red's annual report for the year till August 2010 came out in early December. In it the company reported that new financing had been agreed and this was sufficient for the company to operate successfully for "the foreseeable future".

Chalkie's full piece here.