As Patisserie Valerie enters administration with heavy store closures and redundancies incoming, Business Advice looks at what went wrong for the café.
The café chain, which opened in Soho in 1926 and had eight stores before entrepreneur Luke Johnson’s Risk Capital Partners bought a majority stake in 2006. By 2014, Patisserie Valerie was floated on the AIM stock market for smaller firms, with 191 stores open as of 2019.
As Patisserie Value fell into administration this week, administrator KPMG confirmed that 70 outlets will close immediately, with the remaining 121 left open while the search for a buyer begins.
The crisis began in October 2018 when Patisserie Valerie revealed “significant, and potentially fraudulent accounting regularities”. Three months later, the company released a statement confirming it could not afford to pay its debts.
KPMG has already stated that “significant” redundancies are to come, while Johnson, the chain’s chairman and chief stakeholder, has held talks with banks for a cash lifeline to pay staff.
As the café follows Debenhams, Toys R Us and House of Fraser as the latest big name facing high street extinction, we asked a number of retail and insolvency experts where Patisserie Valerie went wrong, and whether there are any lessons for independent cafés.
What went wrong?
Gavin Pearson, partner and head of forensic accounting at business advisory firm Quantuma, explains that the fraud at Patisserie Valerie was “so extensive”, with historic profits overstated, that the company was forced to hand the keys to administrators.
“It indicates that the underlying business was far less profitable and successful than had been assumed by stakeholders,” he added.
Outlining just how extensive the accounts fraud was, Pearson said that even after three months of investigation, “the true position has still not been established”.
“In particular, the reference to ‘thousands of false entries’ suggests a long, complex and well-disguised fraud. The fact that the cash flow and profitability is now likely to be below that announced on 12 October suggests that the position is likely to be worse than was anticipated when investors determined to inject new funds into the company following identification of the fraud.”
“It is also interesting to note that KPMG has been hired to carry out a “review of all options available”, which may suggest that the extent of the fraud may continue to threaten the future viability of the company. This is likely to be of significant concern to stakeholders in the business, who it appears will need to wait some time to find out exactly what has occurred.
“This update on the extent and impact of the fraud may also be of particular interest to those investigating Grant Thornton’s historic role as auditor of Patisserie Valerie.”
The rules have changed
Carl Reader, founder of the #BeYourOwnBoss movement and chairman of business advisory firm d&t, maintains that despite the troubles large chains have found themselves in, there are signs of life on Britain’s high streets.
“Another big name in the headlines – House of Fraser, Debenhams, Toys R Us…the list goes on and on. Some might say this means the high street is dead – but I firmly contend that it isn’t. However, retailers need to play by the rules of a fast-moving game in today’s world.
“Patisserie Valerie is an interesting situation, as we don’t know how much is due to fraud and how much is down to poor performance. What this unfortunate situation has shown us is the need for both robust financial controls, together with a keen eye on cash flow.”
Wake-up call for ecommerce
Gavin Lowther, head of digital at ecommerce digital marketing agency, Visualsoft, believes the collapse of Patisserie Valerie highlights the importance of a strong online presence for all small businesses.
“It’s clear that the UK’s top retailers have their work cut out to stay ahead of the game in 2019, with even giants such as Patisserie Valerie unable to withstand the harsh retail climate. In this respect, optimising website performance is of business-critical importance.”
Lowther added that a recent Visualsoft report highlighted the complacency within big retail names of their online strategy.
“Most significantly, online customer experience and page loads speeds are being neglected.
“This provides a huge opportunity for smaller, hungrier businesses in the market to challenge the big high street brands – many of whom are clearly unable (or unwilling) to focus on getting the basics right – and are losing out on sales as a result.”
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