The recent catastrophic failure of WaverleyTBS demonstrates that change to the traditional drinks wholesale model is long overdue, says Graeme Smith, partner at Zolfo Cooper. One of the most extraordinary developments in 2012 was the collapse of Waverley TBS. For one of wholesale’s most established and dominant players to slip into oblivion so precipitously speaks of a drinks supply market with seismic issues. So what are these issues and what are the lessons? The collapse of Waverley TBS shows what can happen when a creaking industry model is delivered a devastating blow. The fatal strike in this case was the crippling cash cruch that was delivered to the company when its suppliers pulled in credit terms. The speed of the collapse was shocking, but the reality is that the inherent challenges to the traditional wholesale model meant there had been a slow compounding of a number of problems at Waverley – then the elastic snapped. Capacity management Having landed landmark national accounts such as Center Parcs and Hilton in the preceding days, there was little to suggest anything was wrong at Waverley before it unravelled. But the issues that are at play in the wholesale market have been evident for some time. The truth that dare not speak its name is that, while in the past decade the on-trade drinks market has seen significant declines driven by a material volume switch to the off trade and a significant reduction in trading outlets brought about principally by pub closures, the “capacity of supply” has not altered in the same way. Although some companies have sought to exit wholesale – notably some of the vertically integrated regional brewers – this continuing decrease in volume demand was a slow, ticking issue that would eventually demand more significant structural change. Such change had not sufficiently been addressed by the market in the form of consolidation and the removal of cost and capacity. There remained a large number of supply-distribution companies chasing a diminishing customer base. Typically, a market where supply exceeds demand (as any economist or business student will attest) will inevitably see material downward pressure on pricing, leading to diminishing profit margins. This has certainly been the case for some time in the wholesale drinks market. In addition, traditional wholesale models operated by businesses like Waverley TBS tend to carry significant fixed cost bases, in the shape of people, distribution centres and depots, fleets of vehicles with associated costs, and most significantly, large amounts of stock. The nature of this wholesale model – high fixed costs and small, shrinking margins – means that incumbent companies walk a cash-flow management tightrope. ‘Like a run on a bank’ Ultimately, these businesses are run on increasingly precise cash lines, which means a minor trading blip can trigger a major problem. This blip came in September after the wettest summer in 100 years when, reportedly, the very challenging market conditions translated through into lower-than-expected drinks orders for wholesalers. At the same time, for reasons that are not entirely clear, there was apparently a degree of nervousness among the brand-owning companies that supply Waverley TBS regarding the general health of the company (some industry commentators have suggested that a notable increase in promotional activity in the form of deep discounting prompted speculation that the company ‘needed’ a quick sales spike – and cash). Whatever the reasons, confidence started to wane. This by all accounts prompted suppliers to Waverley TBS to start pulling in credit terms from 60 or even 90 days, to half these terms. Traditional wholesale businesses are dependent on their suppliers for credit. The supply of credit is the oxygen that keeps this model alive – it’s the licence to trade. Once a confidence issue becomes apparent, contagion spreads – in this case it was the drinks industry equivalent to a run on a bank – and more suppliers start to review and cut credit terms. Not many businesses with such big input and output purchases – and slender margins in the middle – could suffer a halving of credit terms. For Waverley TBS, this credit vacuum was probably the equivalent of four or five weeks of cash – many millions of pounds – vanishing into thin air. The death-knell for the business was when brand owners refused to supply and started retrieving stock, removing its ability to trade. Waverley is a wake-up call The collapse of Waverley TBS is a wake-up call for the drinks wholesale industry. It has not been the only casualty – D&D Wines and Stratford’s have also fallen this year – and it will not be the last, and there is a good deal of speculation about who will be next. This cash intense, high-fixed cost, slow, cumbersome model must change. To my mind, Ooberstock, a new ‘intelligent wholesale’ business, has sought many of the answers. At this juncture, I must declare an interest as we, as an advisory house, spent a lot of time looking at the wholesale market – and model – whilst working on a fundraising exercise on behalf of Ooberstock in 2011. Nevertheless, it remains a great example; a business designed for today’s operating environment. The distinct differences in its model are instructive as to the challenges that the more traditional players face. Like Amazon, it operates essentially as a marketplace – lots of supply companies seeking lots of purchasers meeting through a trading portal. The supply companies ‘rent’ a presence on the website, paying a modest fee for every transaction. The retailers making the purchases also pay a modest fee for delivery. Unlike the slow, cash-intense traditional wholesale model, Ooberstock is only committed to buying stock once an order has been placed for that stock ie it does not buy stock and then start looking for a home for it. In terms of the issue of high-fixed costs, virtually everything that can be outsourced by Ooberstock, is: iTradeNetwork support the trading platform; Kuhne & Nagel handle the physical distribution of goods; and BCW Group handles credit control and payments. It means that the business operates with less than 1% of the staff of a Waverley TBS style model and more than 90% of its cost base is variable i.e. it doesn’t spend money, until it takes receives orders. Another lesson evident in the current climate is relevance: in order to have a strong business with longevity, companies that take other people’s product to market must have a USP: a critical reason to exist in the eyes of the brand owners. In retail – another market with its fair share of structural issues – businesses that have survived have offered a crucial route to market for their suppliers. This has been the case with HMV, which is important for the music industry in terms of providing a physical distribution arm and a counterweight to the likes of Apple and Amazon. Similarly, Jessops has traded well partly because it offers a vital physical showroom for the products of companies such as Canon and Nikon. Ooberstock has targeted the freehouse pub market, with the end-game objective of filling the information gap about what brands are sold by what freehouse pubs. he lack of margin in the traditional drinks wholesale model translates visibly into lack of investment, especially in new technology and information. The idea that a brand owner still has no way of seeing to which outlets their products go once they hit the wholesaler, is at odds with modern retail. There are more virtues to this model, but ultimately, unlike many companies operating in drinks wholesale, it is one designed for the current market.Companies that do not have the luxury of starting from scratch clearly face myriad issues. However, there must remain an opportunity for a clutch of enlightened incumbents to lead the change that is so evidently required. Graeme Smith is a partner at Zolfo Cooper, a leading provider of advisory and restructuring services

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