A turnaround tale

I took over running our family business at a difficult time in 2011. The market for curtain fabric had dropped massively since the 2008 credit crunch and this had significantly changed how retailers operated. Gone were the days when retailers operating from big sheds, holding lots of fabric in stock. Retailers now preferred to sell from samples and it changed the way that wholesalers supplying the retailers had to operate.

So I had three big challenges:

-         A smaller target market size, which meant more competition and we were a relatively small fish in a market with some big players.

-         A change in our route to market. We could no longer drive from customer to customer, taking orders for rolls of fabric. The core market was in what we called ‘cut-length’ which was supplying a cut of fabric (I.e. what the end consumer required for their curtains) as opposed to supplying a retailer with a full role. The route to market was now to distribute samples, wait (or hope) for orders to arrive, cut the fabric to the correct length, re-package and distribute to customers. So, the cost and length of time to achieve an order increased significantly, whilst the average order value dropped.

-         Shifting from roll sales where the retailer held the stock to sales via samples meant that we had to hold the fabric in stock to be able to fulfil orders. All our cash was held up in stock which is a working capital nightmare, especially when you have no guaranteed orders for each SKU.

The mistakes…

-         Keeping up with the Joneses. Our larger competitors were bringing out lots of new designs regularly. To keep up, our sales team were pushing us to bring out more fabrics and we thought that the way to grow was to bring out more and more designs. Whilst we did grow, our stock levels increased significantly so although we were selling more, cash flow became more and more of an issue. Another problem was that because the market wasn’t growing as a whole, every time we launched a new range, the market become more and more saturated with product. We faced a diminishing return on each collection launched, and risked cannibalising sales of our older designs.

-         Focusing on price. Our success in the past had been from sourcing low cost fabrics from the Far East and selling stock to retailers. Low prices suited retailers stocking fabrics, but when the market shifted to buying from samples, price became less of an issue as consumers were prepared to pay higher prices for their considered purchases. Our mentality prevented us from charging higher prices, so we were making a low gross margin.

-         The wrong premises. We had recently moved into a new warehouse and office building and we received a 50% discount on the first two years rent. It sounded great at the time but in year two, I was looking ahead and we needed to achieve 20% sales growth just to pay the increase in rent.

The turnaround…

-         Launching new collections was putting massive pressure on cash flow as our stock levels were rising faster than sales. When I analysed our sales, I realised that the 80/20 rule applied and 80% of sales came from 20% of fabrics. So, I simply stopped launching new fabrics for a year and forced the sales team to ensure that each customer had samples and displays of our best-selling designs. This was easy low hanging fruit and sales increased 10% despite not releasing any new product that year.

-         Increase prices. We stopped focussing on low cost fabrics and focussed on higher price/margin ‘cut length’ sales instead. We changed our logo and the colour of our branding from a turquoise colour to a simple yet classic black and silver to give a higher end look to our brand. We were no longer in a race to the bottom on prices and managed to increase our gross margin significantly alongside the growth in sales.

-         Focus on profit. The adage of turnover is vanity, profit is sanity, cash in king became my mantra. We stopped focussing on growth as this was putting us under cash pressure and I went through the P&L line by line to strip out costs to ensure that the business was profitable at current turnover levels. We moved premises and stored our stock on higher racking to use less floor space and cut around ￡100k pa off our overhead. We had to make some tough decisions on staff numbers, changed our company cars to Skodas and outsourced various admin roll such as payroll.

The end result was that in 12 months we went from a loss-making business with a major cash flow crisis to making a six-figure profit. An added benefit of not launching new designs was that we didn’t incur ancillary costs that I hadn’t thought of such as the cost of photography, production of sample books, sample distribution costs and the staff time and cost of handling/processing the new launches so profits were greater than forecast.

In addition, as we weren’t launching anything new, I didn’t feel the need to drive around the country burning diesel and staying in hotels to drum up sales of new designs. I had a better work/life balance and the business was saving about ￡1k per month in my expenses alone!

There is a quote which says that ‘luck is what happens when preparation meets opportunity’. Well, when I received an email out of the blue from a broker who had been engaged to buy a business in our sector, I was able to send across a healthy set of accounts for an efficiently run business, which eventually enabled my family to achieve a successful exit.  

About the Author

Having previously worked as a Charted Accountant in Corporate Finance before running and then selling his family business, Daniel is now building a portfolio of businesses through acquisition. Typical target companies are in the manufacturing and wholesale sectors with turnovers of between ￡1 and ￡5m.

If you want to discuss selling your business, or know someone who does, you can contact Daniel via LinkedIn.