A question of timing

29 October, 2010

Before the administrators were finally called in, one senior retail analyst warned it was a question of “when, not if” First Quench collapsed. The timing of the decision to close Britain’s biggest off-licence chain remains controversial, even one year on.

One senior trade figure is among many who still believe First Quench stores should have continued trading until Christmas. “Why would you close your doors before your biggest trading period, with stock in the warehouse?” he asks.

“All I can assume is they either said ‘we’re in danger of trading insolvently’ or found something nasty when they had opened up the books. Every­one was feeling very confident that, if the business was kept on a tight rein, they should get through. November to December would be 55% of their turnover and 60% of their net margin. On that basis you would never close a retail operation down unless there’s something absolutely horrendous there.”?After credit insurers lost their confidence in the business, senior directors attempted to calm market jitters by opening their books and talking suppliers through the latest incarnation of the turnaround strategy. “If they were trading insolvently, you’ve got to ask ‘why was that not showing up in the accounts they were showing people?’” demands the trade figure.

Former wine buyer Jonathan Butt takes a similar view. “I find it bizarre. Obviously there was revenue that would have been generated in clearing stock that was eventually sold off at a low price. It hit a lot of people, suppliers and staff. It caused a lot of pain that could have been lessened. The business wouldn’t have limped through Christmas – it would have done bloody marvellously.”?All sorts of theories abound about why the company was shut down when it was. Some have speculated about a massive hole in the accounts, or even some form of duty evasion. But in the absence of any evidence to the contrary – and based on the detailed accounts KPMG has issued to creditors the truth simply seems to be that the business had run out of money.

Says one senior trade insider: “Appar­ently the Vision Capital owners, when they took board positions, decided however you looked at it, the business was trading insolvently.

The implications for them as directors if the company was forced into administration rather than going voluntarily were too great.”?Bill Rolfe of 10 International and the Market Square food and wine company agrees. “They got to the point where they felt they had sold whatever they could and couldn’t replenish the stores anyway. They just had to bite the bullet.

“If they had left it any later there might have been more damage and problems. But it would have been better if they could have kept the shops going into the new year.”?Administrator Ian Corfield is keen to set the record straight about his role in First Quench’s closure. “There was a misconception that KPMG chose the timing, but the directors requested it because the cashflow requirements were so huge it would have been the wrong thing for the business to continue to trade.

He continues: “Arguably you could say it’s the best time to sell the stock [in the shops] – we sold the stock above cost. It was absolutely the right time to do it. The directors took an awful lot of advice and a look at the cash requirements of the business and decided the time was right.”?But why were the directors so keen to persuade suppliers of the financial health of the business, just weeks or even days before pulling the plug??“I can’t speak for what the directors did or didn’t do. In terms of a ‘hole’ or a problem … I haven’t heard any specific rumours. It’s not something we’ve come across,” Corfield says.

“Business can be fragile at times. There were a lot of stakeholders and it would be remiss of management teams not to try and show confidence.

“Having a lack of leadership can culminate in a failure.

“I’m not aware of any illegal activities people may be alluding to. We’ve carried out a statutory investigation and obviously that remains confidential.” As far as unpaid duty is concerned, Corfield says HMRC was owed £21 million, a figure clearly documented in the papers issued to creditors. “There was a duty bill to be paid and it was large, but we’ve reported on that. There’s nothing hidden.” Patrick McGrath MW, managing director of Hatch Mansfield, was originally staring at an £800,000 loss due to First Quench’s demise, but after reclaiming stock the final figure worked out at something like £30,000.

“At the end of the day none of us were privy to the inside numbers,” he says. “We were all surprised it pulled out then but they must have had a reason for doing it. It was for the best in some ways because it allowed us to get on with it.”?McGrath is impressed by the way the administration was handled.

“We found the KPMG people extremely helpful and co-operative,” he says.

“They were doing their job and we ?were doing ours and we had a strong relationship with them. They were good guys.”

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