Learning a lesson

When the Price Club chain of supermarkets crashed, an estimated 200 suppliers were left facing collective debts totalling some Lm8.5 million. Tony Zammit Cutajar, whose company, P. Cutajar and Co. Ltd, was left with the biggest loss it ever incurred during its 135-year history of trading, tells MIRIAM DUNN what he thinks can be done to minimise the chances of such an episode happening again

The relatively new phenomenon in Malta of large-scale supermarkets looked set to be a surefire success. What went wrong?
I think many of the problems stemmed from the fact that the supermarket system had no proven track record in Malta. It is a relatively new business. It seems that success can only be achieved with a very large turnover, given the tight operating margins. After all, the reason that supermarkets dominate the grocery trade is that they offer the consumer lower prices.
Granted, our bigger supermarkets had a comparatively large turnover for the size of the island – Price Club’s was Lm24 million, for example. But they were not able to succeed on their margins because their operating expenditure – in Price Club’s case, over Lm3 million - was much too high.
As I said before, the concept used in the supermarket system is to bring down prices and offer the consumer a better deal, thereby ensuring you generate a great deal of business. But I suspect that the entrepreneurs in Malta hadn’t carried out sufficient feasibility studies. The going was obviously good from a cashflow standpoint, with the result that expansion happened much too quickly, and when the crunch came, many operators found themselves in serious difficulties and unable to pay their creditors.
When the Price Club crisis came to a head, a number of people began asking whether the supermarket model can work in Malta. After all, it is not only the Price Club that has had problems recently – both MA Supermarkets and Supermaster crashed with debts of over Lm1 million each.
One option that has been suggested is that the for the largescale supermarket concept to work in Malta, it must be run like a family grocer, albeit on a bigger scale, applying strict rules of expenditure. There are examples of this taking place, and these companies are doing well because they are still keeping a tight control on operations.
It all boils down to a lack of proper management practices. They did not do their homework and it must also be mentioned that they are not alone; some of the other operators are also in trouble.
There was some criticism levelled against the suppliers that they allowed the situation at the Price Club to worsen by extending credit terms. How do you react to these accusations?
I don’t think the criticism is justified. If things had been dragging on for something like a year, then yes, we would have had to accept such criticism, but this really did not happen. In the case of Price Club, the amount owed to creditors is on average equivalent to four months of sales.
The debts are large because the supermarket bought a great deal of stock because sales were high. They were selling an average of Lm2 million worth of items per month, so you can calculate that by taking something like four months’ credit, that accounts for the Lm8 million owed to suppliers.
Do you believe the government should have intervened to help in the crisis?
On balance, I don’t think it was up to the government to step in.
The private sector can’t have it both ways. We protest when the government intervenes in certain sectors, so I don’t think we should look for help when things go wrong.
Of course there are some issues, such as concern over predatory pricing and whether the supermarket was in a dominant position putting it in breach of the Competition Act, that might need addressing.
And there is no doubt that one of the saddest aspects of the current situation is the loss of jobs – about 600 from Price Club and further lay-offs from suppliers/importers as part of an inevitable ripple effect. There is talk of some creditors being hit so badly that they could have to close, which is of great concern. If anybody should have intervened, it was the banks who loaned money to the Price Club in the first place. If they thought that the people concerned were capable of running a successful operation, they should have provided the finance to bail them out.
What lessons can we learn from this collapse?
I think that firstly, this episode must serve as an eye-opener to the way that unsecured credit is granted. The only people in Malta who take collateral are the banks and in line with this, they always take a position of privilege, lending without taking any risk.
They might lose out in a forced sale situation, but they certainly had a great advantage over suppliers who ended up as bankers themselves.
In the supermarket business, the gross margins are nowhere near as high as they are in other retail sectors - most supermarkets operate at a gross margin of about 15 – 17% - which makes it especially important that calculations are done properly before going into business. I would like to see the banks playing a role in helping reform some of the practices and ensure enough groundwork has been done about the viability of a project. In line with this, I have written to HSBC and suggested that they start a factoring service, since they have a similar set-up operating in the UK. I have now been informed by HSBC Malta’s chief executive, Tom Robson, that they had given it some thought in the past and will consider it again next year. That will help us achieve more secure – albeit at a charge – trading conditions.
What has been the reaction from parent companies abroad?
The suppliers all know what has happened and I can say that some were shaken by it. But it was us importers who really got caught in the middle. We have to pay our bills, after all. From the three supermarket closures, I estimate that the trade creditors lost over Lm10 million, which is a lot of money.
So do you think the business ethic has to change in Malta?
Certainly, entrepreneurs have to change. Although no business is a guaranteed success, there must be an element of responsibility and people must play by the rules. They must prepare accurate accounts, they cannot go on trading when they are insolvent and they must not mislead creditors, denying there are problems when it is later revealed that there are serious ones.
However, it does not seem to be widely known that the Companies’ Act deals with much of this. If a company is declared insolvent, or goes into liquidation, a liquidator is appointed, who has the job of protecting whatever assets there are and then finally paying off the creditors in proportion to what they’re owed, if any assets are left. But he also investigates and ensures that none of the regulations set out in the Companies’ Act have been infringed. If they have, the directors can be personally liable and without liability.
I believe that the vast majority of company directors are unaware of this, with entrepreneurs probably imagining that if they start up a venture and it fails, they can just declare themselves bankrupt. This was how things stood before the Companies’ Act came into force in 1995. It is still relatively new legislation and has to be tested, but it is worth noting that according to this legislation, company directors have a lot of liabilities and duties.
Do you believe the creditors had no alternative than to force Price Club into liquidation?
I think the creditors were fed up waiting for the Italian businessman who was supposedly interested in taking over the Price Club to produce a guarantee of sorts that he had the money.
It must be remembered that when he came, he bought no references and the creditors were trying to get some background about him. When we reached a second or third deadline set by the creditors and the guarantee had not materialised, I agreed with the decision of the majority of the suppliers who were frustrated and running out of patience and decided to opt for liquidation.
This is not necessarily the end of the road; if an offer comes along, I think the courts may well allow the process of liquidation to stop.
What do you hope to get back?
We will probably get very little.
PriceWaterhouseCoopers had originally said the most we can hope to get back is 6-8% of what’s owed across the board. Then there’ll be expenses, so we’ll probably end up with nothing.
But we have to do it because if we don’t, technically, the company can continue trading and the interests of the creditors could be prejudiced.