Spendthrift companies caught out by the threat of recession

As the economy teeters on the brink of recession, like a blind-folded diver at the end of the board, we always get reports of litigation for unpaid bills. The litigation usually starts at the premium end of the markets, because the rich are most sensitive to downturns and their suppliers most exposed to them.

So we have it this week that the warehouse retailer Majestic Wine is being sued by Marne, the champagne house that distributes Lanson, over bills allegedly unpaid since last Christmas amounting to the best part of 1m. And, even more frothily, we have Aston Martin suing the playboy brother of the Sultan of Brunei, Prince Jefri Bolkiah, for 4m for the small matter of payments outstanding on 25 Lagondas.

The first striking issue here is how credit is managed by luxury goods manufacturers and retailers. Or, rather, how it isn’t. It seems to me inconceivable that a champagne house and a retailer in the largest export market for the wine should arrive at a position in which they are both exposed to outstanding costs that are worth going to court to recover or dispute.

Similarly, quite how a luxury car manufacturer potentially goes down for 4m through supplying 25 units to a man who turned an entire floor of the old Playboy Club on Park Lane into his bedroom is beyond belief.

No doubt the credit of both Majestic and Prince Jefri is deemed to be good. But these are business-threatening sums of money – before Aston Martin was bought by Ford, it was the kind of money that would have made the British marque join the Ford Edsel as a fond memory.

Where is the credit control? As importantly, where are the credit ratings? It seems to me that there may be something in the City of London’s champagne index, which seeks to judge the state of the markets through the number of bottles of vintage bubbly that are served within the Square Mile. At the premium end of consumer markets, the nature of the relationship between low turnover and high margins means that, in the event of a loss of consumer confidence, any downturn is all the more visible through the gearing effect of its innate inefficiencies.

Turn this observation around, of course, and it should be that at the high volume, low margin end of markets there are efficiencies available that can resist economic recession. We hear much about how the mass-market retail scene in France has credit efficiencies that produce lower margins on the shelves. They take much longer to pay their suppliers and, consequently, superstores are sitting on far greater sums of their customers’ cash at any time than are their British retail cousins.

It will be interesting to note how these continental ‘efficiencies’ fare in the event of a full-blown recession next year. A taste for litigation could spread from the posh to the rather more common retail practices. Alternatively, continental suppliers faced with narrowing markets may be rather less willing to wait so long for payment.

Either way, it might make the likes of Tesco look rather cleverer for its credit-control efficiencies than it and the other British superstores have recently, er, been given credit for. I said here last month that it was mildly unfair, given the different supply economies, for eight per cent margins in Britain to be compared with three per cent margins in France and the conclusion drawn that we are living in “Rip-off Britain”. A recession next year may well serve to put those margin differentials in context.

Meanwhile, I note that the retail researchers at Verdict have prophesied a price war looms next year among the supermarkets. Where critics of the British mass-market retailers have historically been right on the button is that price wars have all too often been seasonal sales gimmicks – phoney wars in which retailers have cynically manipulated prices in shopping baskets. Consumer staples and popular lines have not been reduced in price – in some instances have been ramped – while cuts are made only as a come-on at the inessential periphery of product ranges.

By contrast, economic pressures next year could bring a price war proper. And, under those conditions, it will be the stores that have the credit-control and margin efficiencies that will prosper at the expense of the less efficient. Verdict reckons that Tesco is best positioned, though it ascribes its strength to critical mass. I would suggest that those other efficiencies also play their significant part.

There is some piquancy to be found in the prospects for next year. Verdict reports that profit margins among the large British chains vary between 6.8 per cent at Sainsbury’s to a slim 2.2 per cent at Kwik Save. The really aggressive discounters to date, of course, are the likes of Aldi, Netto and Lidl, which join our market from the continent – where many of our consumer champions have been arguing the retail heroes are to be found.

As the merged Kwik Save/Somerfield is forced upmarket and the continental aggressors have to abandon the bargain basement of the industry, it will be a joy if Tesco cleans up on the back of its efficiencies. I just hope that the less efficient, discount end of the market doesn’t take a shine to the champagne market.

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