Five lessons from the collapse of Colorado Group

The future of Colorado Group’s 3,800 staff and 441 stores hangs in the balance today as receivers Ferrier Hodgson start the process of picking through the collapsed retail group’s financials.

The company owes about $400 million to a syndicate of 18 lenders and another $27 million to unsecured creditors, although exactly how much might be recovered when the Colorado’s various brands – including Colorado, Jag, Diana Ferrari and Mathers – are sold off is unclear.

Initial estimates suggest the brands could fetch as little as $80 million.

The collapse of the private equity-owned business, which comes so quickly after the collapse of the private equity-owned book seller REDgroup Retail, has raised questions about the ability of private equity to run large retail chains.

But there appears to be a number of key factors that have caused the collapse of the business.

Stuck in the middle

This is becoming a common theme in retail collapses – being stuck in the middle of a particular sector is a dangerous place to be. According to Ferrier Hodgson receiver James Stewart, it was the performance of the Colorado chain that brought the group down, which is no shock. The chain sits above the discount-driven department stores, but well below high-end fashion chains – a middle ground that customers appear to be ignoring. In this environment, you need to be either mass market (and cheap) or niche (and expensive).

Management matters

Ferrier Hodgson were very quick to point out yesterday that Colorado Group management had changed three times in the past four years. Unforgivable. Stability at the top is essential, particularly in a business trying to ride out a downturn.

Not only were the management clearly poor, they also couldn’t get their financials straight. Ferrier says the group’s budgeted EBITDA for 2010-11 was originally $53.9 million, but this was recently slashed to just $18.6 million. Was the first forecast done by picking a number out of a hat?

Retail asset values are crumbling

It is less than five years since Affinity Equity Partners paid $430 million to acquire Colorado in 2006, a price that was gently nudged up by Solomon Lew, who opposed the private equity group’s bid. It was a big price at the time, but it’s remarkable just how crazy it looks now. Analysis by the syndicate of lenders prior to the appointment of receivers suggested a sale of the business would reap just $83-130 million on the current market, which gives you a good idea of how fast and how badly retail asset values have been eroded. It makes you wonder whether there are some other retail chains out there worth much, much less than their owners think.

Debt is a giant drag

We’ve said countless times that too much debt is a recipe for disaster and in Colorado’s case having a debt load greater than annual turnover proved fatal. Debt reduces your ability to make changes to your business and makes it much harder to respond to shifting consumer trends. But it’s also a giant distraction. Colorado has been negotiating with its lenders, preparing reports into its financial state and generally trying to escape being buried under its mountain of debt for months, if not years – which doesn’t make it easy to run a retail group in the toughest conditions in a generation.

Mark McInnes has a very tough few years ahead of him

Mark McInnes, the new chief of retail at Solomon Lew’s Premier Investments, may well have been torn by the collapse of Colorado. On one hand, he will get the chance to buy some well-known brands on the cheap. On the other hand, he’s just seen how hard it will be to deliver the growth Solly is looking for. Premier’s Just Group plays in a very similar space to Colorado (particularly with the Colorado and Jag chains) and it’s hard to see this sector getting any easier in the short-term.