It's August 1998, and news has broken that Thresher and Victoria Wine are to merge, creating a combined estate of 3,000 stores.
The new business employs 20,000 staff and claims a 13% share of the take-home drinks market. Tesco’s share is a modest 14%, and First Quench directors are convinced they now have the scale and expertise to “take on the super-markets and win”.
Eleven years later, when the administrators are called in, the First Quench estate stands at about 1,250 stores – less than half the original total. (Statisticians should note that Majestic doubled its branches to 150 over the same period.)
Experiments with food, convenience, three-for-two deals, viral discount offers, big-store formats, internet sales and new fascias – some more wholehearted than others – all failed to immunise the business against the relentless onslaught of the multiple grocers.
But was First Quench’s demise an inevitable consequence of tougher market conditions, or did strategic errors bring the business to its knees? Former head buyer Jonathan Butt is in no doubt, describing the business as “a car crash waiting to happen”.
Putting customers first
“There is no denying that the market conditions are difficult, especially for a retailer only selling booze,” he says, highlighting duty increases as a particular issue. “However, any retailer putting the customer first and offering quality and service alongside a compelling price proposition, and a degree of USP, should prosper – and herein lies the problem.
“First Quench was obsessed with chasing margin, despite an ever-shrinking customer base. For far too long the customer was at the tail end of the decision tree. Pricing looked out of kilter with the competition, and even though the three-for-two mechanic delivered some of the best pricing on the high street, it suffered from a lack of clarity in-store and a lack of stock to deliver the offer.”
Butt claims even at the top end of the estate, sales were hampered by lack of availability. The fine wines he sourced for Wine Rack were dispatched to stores in twos – a bizarre situation in a retail environment built around three-bottle purchases.
“In essence the business became far too centralised, and failed to deliver basic retailing,” he says. “An obsession with stock meant in many cases stores would run out of the main offers each week, often before the busiest periods, while large volumes of pre-paid stock sat in the warehouse. Where’s the sense in that? Customers were unable to purchase a case, or even six bottles of their favourite wines, and left disappointed.
“Store managers and staff, who should have been the company’s greatest asset, were completely cut out of the decision process, so they became totally redundant and demoralised. The control fell to head office, and in most cases into the hands of operators who had little or no first-hand knowledge of drinks retailing.”
Butt is critical of the sale and leaseback programme carried out by Terra Firma, which “left the business with some very high rents”. He also highlights “the poor allocation of funds at head office” which paid for unfulfilled systems projects and “a plethora of failed new convenience retail concepts”.
The net result was added pressure on cash flow, which became an even more serious issue once credit insurers withdrew their cover and the business was obliged to pay through the nose for its stock.
Alex Anson, the former trading director who conceived the three-for-two proposition, agrees that market conditions were not the sole reason for First Quench’s collapse.
“To be honest, although First Quench was always going to find it difficult to survive as one entity for many reasons, it still had a bunch of good and profitable stores that should have been the core of what was left after closures, disposals and so on,” he maintains.
“The fact that the management team was unable to realise this value before ending up in administration is a missed opportunity.
“We all know market conditions for many specialist retailers continue to be tough, but as far as I can make out there were some decisions taken in recent years that have added risk to the business during a highly challenging trading period, and for little, if any, benefit – draining cash and therefore accelerating the decline.”
Some have been critical of the deployment of three-for-two, arguing that it highlighted exorbitant unit prices and forced away lower-spending customers, but Anson is happy to defend the tactic. “I believe three-for-two gave First Quench a point of difference, and the performance we achieved during my time there reflected this,” he says.
“However, I also believe First Quench should have gone further and maximised this opportunity to drive footfall and sales, at the expense of margin, to fully establish this robust value-for-money proposition over the medium term.”
One former director, who asked not to be named, believes First Quench missed a number of opportunities simply because its various owners took a short-term approach. He says the failure to deliver an online sales strategy is a good example of this corporate inertia.
“You can only build an online business if shareholders take a three to five-year view, because it isn’t going to pay out for the first 18 months at least,” he says. “But if you go through a series of owners, no one’s prepared to make that long-term commitment.”
Could there have been a better solution?
Although few expected First Quench to be sold in its entirety as a going concern, there is surprise among many – indeed dismay – that KPMG did not manage to break the business into bigger chunks.
Speaking before the deal to sell 14 shops and the Wine Rack name to Venus, former trading director Alex Anson said: “The business still worth buying is the true Wine Rack estate with some good stores in good locations, selling some good wines to customers who find it more convenient, and want better one-to-one service by popping down to their local store rather than going to a supermarket.
“I don’t think the First Quench strategy on Wine Rack was totally wrong; it seemed to meet the needs of these customers. I believe many of these shops are successful and profitable, with the exception of the odd rental agreement, if these haven’t already been renegotiated during the past couple of years.
“To make this business an ongoing success I would simply do more of what they were doing: right locations, great wines, good value for money, local marketing and service with great people to bring it to life, and just a touch of modernity, fun and service added to bring it to the 2010s – but with simple, low-cost back office, logistics and structure.”
Another former director expresses “surprise” at the lack of a major deal following First Quench’s administration. “There were elements of the business that were profitable,” he insists.
But he can see what would have turned would-be buyers away. “Given that most people do the majority of their alcoholic shopping in the supermarkets, off-licences are only really viable for specialists and top-up shops,” he concedes.
“There is more competition on the high street because people such as the Co-op have improved their ranges immeasurably and it’s difficult for stores like Threshers to compete against shopping baskets of alcohol-plus-something-else.”
Yet another former director believes that around 300 of the remaining shops in the best locations could have represented a good deal for an investor, but only if they could be “bolted on” to an existing infrastructure.
He asks: “Is it viable to go in and set up a new head office, new infrastructure and run 300 or 500 shops? Funnily enough, no one has come forward to do that. The fact that nobody has come forward with a management buyout tells you the numbers don’t work.”
Sale and leaseback ‘crippled the business’
The decision to sell the leases of First Quench branches, and then lease them back, created long-term problems for the business and played a major part in its collapse, according to one former senior figure within the company.
The former director, who prefers not to be named, says: “The sale and leaseback deal really crippled the business. It put in cash in the short term but tied the business into a set of leases in what often became loss-making stores. That was the single biggest thing that hurt that business.”
But another former First Quench director who spoke to OLN, argues the decision benefited the company.
“Actually, it left the business with a huge amount of cash within the organisation,” he points out. “All the money went into the business. None went to the shareholders.
“Fundamentally, times would have been tight, but the sales line could have still delivered a reasonable profit and coped with the degree of over-rent applied at the time, given the thing was being sold at the top of the market.
“There was a forward strategy that would have worked. What nobody could have anticipated was the collapse of the global economy, and that’s led to a set of circumstances which have left a number of businesses struggling.”
According to this director, the credit insurance situation was the key issue. “The credit insurance industry effectively killed off First Quench, Woolworths and Borders by taking a particular stance with the level of cover it was prepared to extend,” he argues.
“The credit insurance withdrawal led to a cash call on the business, because everything went to a cash-on-delivery basis. It was a retail industry issue, not necessarily an FQR issue.”
Head buyer: ‘We got it pretty much right’
Kim Tidy was head buyer at Threshers when the merger with Victoria Wine occurred. He was tasked with combining the wine ranges at a time when Wine Rack was earning rave reviews. It was an auspicious way to begin a new business, though the process was complicated.
“In the 1980s and 1990s we were able to buy wines by the parcel, bought on quality and sold on quality, and all we had to do was properly merchandise them,” he says. “It was nothing more revolutionary than wines of the month in baskets on the floor. The great strength we had as a company was that we could do off-shelf merchandising. We could buy wines based on quality.”
So successful was the company’s work that, for a while, market share for supermarkets dipped a little while that of the multiple specialists rose. Does he feel the job of combining the two businesses diluted this progress?
“It’s difficult to say. I put both ranges together and made sure we kept the wines of quality rather than gimmicky wines or those with a lot of margin. The merger started in late 1998 and I left in 2000.
“Putting together two equally sized companies but with completely different ways of doing things like buying currency or organising shipping or how they did deliveries … it all took an awfully long time.
“We emerged after that period and we’d got it pretty much right, but I wouldn’t say it was perfect.
“The direction it then went in is not really for me to comment on.”