Insolvency refers to a state or condition where a person or company is unable to pay their debts as they fall due, or in the usual course of trade and business. In other words, it is the condition of having more debts than assets. As it stands, Metro Peech is technically insolvent. Metro Peech was recently placed under corporate rescue. At the time that happened, here was the rough summary: assets worth US$12.8 million and liabilities of US$21.7 million. This means Metro Peech was or is insolvent by roughly US$8.9 million – that is huge! This is the kind of situation that necessitates so many talking points, and that is what we shall be discussing in this article.
Brief Overview Of The Metro Peech Balance Sheet
Metro Peech’s assets stood at US$12.8 million. A breakdown of those assets is quite interesting. Properties were worth US$2.2 million, and office equipment was US$2.4 million. It is a strange scenario when office equipment is worth more than properties. Then cash stood at US$193 833. Liabilities stood at roughly US$21.7 million. A breakdown of liabilities was also quite interesting. Suppliers were or are owed US$9.8 million, and banks are owed US$5.4 million. Then, US$5 million is owed to intercompany and miscellaneous aspects. Unpaid salaries are US$ 229,000. Just by looking at those numbers a lot comes to mind.
Do These Numbers Make Sense?
There have been debates and discussions on this interesting matter. Does Metro Peech’s balance sheet show a true reflection of the financial state of the company? How can a company that is backed by private equity from Europe end up like this? Some have speculated that the actual balance sheet could be worse than this. Overall, the numbers are not making sense – cooked figures, maybe? What is your take?
How Did All Of This Happen?
According to a recent official report by the appointed administrator, it was the coming together of a number of factors. Here is a summary of the core reasons that led to Metro Peech’s insolvency:
- Inadequate Capitalization
- Excessive Debt (Coupled By Poor Debt Servicing)
- Poor Stocking
- Rapid Expansion Whilst Undercapitalized
- Failure To Keep Up With Competition
- Poor Governance And Financial Indiscipline
Let us explore some of those reasons in detail.
Failure To Keep Up With Competition
The rise of informal traders is worth noting. In the report, it was stated that Metro Peech failed to adjust its business strategy with informal traders in mind. Generally, it is becoming more apparent that informal traders are not as insignificant as some may think. In the case of Metro Peech it is clear that informal traders toppled it. Informal traders may be (actually are) toppling the big brands. Informal traders are characterized by three major dynamics.
They are small and thus have low labour costs (or operating costs as a whole), they employ guerilla marketing tactics, and they have remarkable supply chains. At the end of the day, they are always stocked up and offer competitive prices. This shortens turnaround periods, thus leading to outstanding profits. Metro Peech should have adjusted in response to these dynamics, but it did not. Perhaps it could not.
Excessive Debt (Coupled By Poor Debt Servicing)
As you can tell from Metro Peech’s numbers, the lion’s share of liabilities is money owed to suppliers – what may this mean? Were they majorly selling borrowed goods? Plus, it also suggests that poor stocking in part emanated from that. After all, a supplier would not want to continue to extend credit to you when you still owe much. Asking for rent holidays also drove debt up.
This was, of course, after being late on rent payments for a stretch. It is, however, interesting how and why banks and suppliers continued to give Metro Peech overdrafts and stock. Metro Peech has seriously overreacted on debt financing. Ultimately, their debt kept snowballing because US$8.9 million was no joke. Zimbabwe dollar loans being converted to US dollar ones also contributed.
Poor Governance And Financial Indiscipline
This one encapsulates the entirety of everything that went wrong. The decision to expand without having enough capital indicates poor governance and financial indiscipline. Another sign is the failure to effectively strategize on dealing with the threat of informal trader competitors. Continuing to assume more debt whilst not servicing current debt was another sign.
Though not particularly easy to prove, there is speculation of abuse of funds. This is a sentiment that many people have expressed. For instance, some suspect there could have been hidden executive expenditures. Overpaying management is also another possibility. The bottom line is that poor governance and financial indiscipline were rife.
Metro Peech is, of course, a wholesaler and a retailer to a certain degree. The key to success in this space is always stocked up with fast-moving consumer goods with good margins. Failure to stock means losing potential revenue and even high-value customers. It seems Metro Peech was now mostly selling borrowed goods. Exchange rate issues exacerbated this.
This issue of exchange rate losses is worth noting. Stock valuations were compromised because of this. It worsened Metro Peech’s ability to pay suppliers, let alone make a profit. Another issue worth noting is that Metro Peech predominantly traded (trades) in Zimbabwean dollars – a volatile currency. All these factors were a menace to Metro Peech’s ability to stock optimally.
Does the Metro Peech story mean that formal wholesalers in Zimbabwe are struggling? Not really. The fact that over ten investors have been reported to have expressed interest speaks otherwise. Metro Peech got where it is due to poor governance and financial indiscipline. Its situation can be turned around. Metro Peech should serve as a case study for any of you running businesses. There is much to learn here.