A story of M, a failed retailer: We'll give you a clue – it rhymes with Charlie Chaplin Gather round, those who think you could make a go of it in tech retail or are currently working in the sector. Let's hear the tale of all that went wrong – and right – for Maplin Electronics Ltd, a once engaging and highly profitable business that smacked headfirst into a brick wall in 2018. Much has been written about its …
For those who are interested in reading further about the story behind Maplin's demise this is a worthwhile article which includes the original mail order history. It is involved (like this story) but also a fascinating insight to what happened. (Spoiler alert: The die was likely cast back in about 2001 - "In fact it has been insolvent for a very long time. It is a zombie company.")
As an aside I think of two types of private involvement in companies.
1. Buying up a tired or unloved company/brand, investing in it to restore it to good financial and business health, then selling it on at a profit as a stable going concern; where the profit is recompense for the hard work involved in restoring the fortunes of said company. (Rightly or wrongly I refer to this as venture capital)
2. Buying up a healthy company, loading it with debt to fund a bumper payout to the new owners, mortgaging any assets they can lay their hands on to fund more payouts, cutting CapEx and OpEx to the absolute bone to artificially flatter the accounts in the short term, then selling it on to some mug as quickly as they can before the whole house of cards collapses under the weight of its own debt, spiraling investment needs and imminently tanking revenues. (I look at this as Private Equity - this is what Maplin suffered from since at least 2001, along with many other companies on the high street).
Yeah, and that 2) is possible is... perverse. You buy a business from somebody and then put that price as a debt on the company you bought. Essentially, you bought the place with its own money (well, a promise that they will pay you back the money you paid for them - with interests).
Essentially, this kind of operations should be forbidden. They became available when debt could be unpacked and passed along (like subprimes), so who lent the money won't sustain the hit when the debtor defaults.
They should be allowed only it the debt stays wholly outside the bought company - backed by the assets of those who actually asked for the money.
Essentially, this kind of operations should be forbidden. They became available when debt could be unpacked and passed along (like subprimes), so who lent the money won't sustain the hit when the debtor defaults.
Not quite true. In Maplin's case the people who took a hair cut weren't innocent retail bond holders saving for their pension, they were the private equity outfits themselves taking a writedown on their own misguided investment.
And before we get into "think of the workers", I'd point out that despite not being viable or sustainable, Maplin's owners created and sustained several thousand jobs for probably a decade more than the underlying economics would justify. Whilst that was driven by optimistic opportunism, the net effect is almost socialist job creation.
So all in all, the right companies took the financial hit, and a lot of people got a good few years retail or back office work. Suppliers shouldn't have been hit other than through their own foolishness since the writing was on the wall for years and trade credit was withdawn months before the end. And if the retail unit freeholders lose out, what do we care? They've been pillaging retailers since the beginning of time, and deserve it once in a while.
"Yeah, and that 2) is possible is... perverse. You buy a business from somebody and then put that price as a debt on the company you bought. Essentially, you bought the place with its own money (well, a promise that they will pay you back the money you paid for them - with interests)."
But it's not all that different to how most people buy a house.
You borrow £100,000 that no bank would ever lend you on your own, but because you have a solicitor involved they trust the solicitor to let you buy the house and attach that debt to the house.
To be fair, both of those are private equity. There's also (3) investing in early stage firms.
(1) and (3) account for most private equity investments.
Unfortunately the effect of (2) is much more visible. Strangely it always seems to have the same firms associated with it - you'd have thought they would run out of buyers after a couple of failures.
@ARGO Agreed - yes my term for 1. is more accurately used to refer to your 3. funding early stage companies (e.g. Pied Piper). That's just my way of trying to separate "Good" Private Equity (the 1. type) from the "Bad" Private Equity (the 2. type) even if the terms aren't quite accurate.
You're spot on with your assessment of 2. I guess there is an ample supply of greedy mugs out there?
2 is exactly what is happening to my former employer - a software company. After a couple of rounds of private equity buyouts that have done exactly this, it is now with another new owner.
Having bought the company form the previous PE owner, who sold at a loss, they were able to buy for a price where the interest on the loan to pay it is less than the value of future revenues that are effectively locked in by existing client support contracts - once the have eliminated OpEx entirely by simply abandoning all sales activities and development of the product.
"I thought Maplin always had a store in Westcliffe-on-sea in addition to the mail order"
I think the store opened slightly after the mail order business, along with another one just after in Hammersmith.
One of the problems with their mail order business, I think, was that when it started up it would sell to anybody, while companies such as RS and Farnell would only sell to companies with a business account. When RS and Farnell started selling to anyone with a credit card and had a larger and more competitively priced range of components than Maplin, I suspect Maplin couldn't really compete in the mail-order component business any more and the tat content of their shops increased to compensate.
Maplin started as a mail-order business many, many moons ago - that distance-selling mindset should have helped with the on-line. Ironic that a business that was originally not about retail sites was killed off by the retail side...
Live by the sword, die by the shoddily-made blunt penknife which is available for the same price as a sword.
I always found Maplin stores to be very good from a customer point of view and the staff surprisingly knowledgeable about their stock and what you need.
The problem is that the only things I ever need from Maplin are small items that I suddenly realise I need (USB stick, SD Card reader, cables, a mouse...) and isn't worth making a special trip into town for. So I open a new tab, find the item on Amazon and know that it will be with me in the morning.
"The problem is that the only things I ever need from Maplin are small items that I suddenly realise I need"
I found that the things I suddenly needed from Maplin would often appear in the on-line search as being in stock, and then would mysteriously not be in the shop when I got there, even though the shop assistants could still find them on the computer.
My closest Maplin was a short walk from home, so if there were in my hand in 30 minutes and I could get on with a project, I didn't really mind if they were a little bit more expensive than waiting for a delivery.
Or instead of next morning next month as you find you’ve accidentally order something shipping from china. Unless your making sure you only picking prime items.
Really gone off Amazon as it’s really easy to buy fake rubbish unless you make sure your picking only prime items, not sure your even safe then.
Usually you can buy the same stuff same brand cheaper elsewhere, think they’ve got to the point where people think they the cheapest so they don’t have to be anymore.
I remember fondly visiting their first premises (before they got an actual shop) in Hadleigh Essex. It was a 1st floor location above another shop. When I walked in it was a mess of boxes crates and reels of wire. I was there to get some components to repair my CB radio and was greeted by a really helpful guy who knew just where everything was located in the jumble. Then a few years later I was at the grand opening of their 1st shop in Westcliff (on the outskirts of Southend-on-Sea). Grand times. It was after the mass expansion of the company that they lost their small business feel and I believe that was the root of their eventual downfall. They became too expensive and non competative plus they lost those people that were a mine of great kmowledge in their core business - components. The guys in that first shop were hobbyists as well and so knew their stuff. For me that was the main reason I shopped their because of the staffs wealth of knowledge. Sadly they lost sight of those values that made them stand out from the rest and so were destined to fail.
Back when I was using Maplins for kits and CB spares (1980-84) the place was a warehouse-sized building a-la Comet located almost all the way to Birmingham. I had to be serious about my needs before setting out, but they always had what I needed.
I'm appalled that Maplins couldn't see the way forward was the WWW and an Amazon-like store for electronics like the now-defunct Radio Shack had. I shrugged when RS folded its tents. Maplins was a harder blow, even though I haven't used them for three decades. I would often moan that I wished I had a local Maplins when all I had was the web or the local RS.
Then again, I was appalled at how slow the UK retail industry in general was to climb onto the Highway of The Future. At the first GW tournament in Baltimore in '97 I asked Jervis Johnson when GW would be opening a web store (by then a standard retail model for the Eastern US) and he said something along the lines of "We're looking at it but don't really see the point". This from a representative of a niche hobby with expensive components, while standing amid about 400 people with demonstrably large sums of disposable income who couldn't just "nip to the store".
I sometimes by N Scale model railway (yes, sometimes I let m inner anorak out) stuff from UK retailers and time and again am confronted with bollixed UIs that can't cope with non-UK customer requirements. Hell, I can't get one UK-based interest forum's "webmaster" to understand the need for HTTPS on the login page.
I have trouble reconciling the lack of oomph in the retailers websites with the levels of acumen usually demonstrated in the El Reg comments.
Radio Shack (https://www.theonion.com/even-ceo-cant-figure-out-how-radioshack-still-in-busine-1819569077) was in a somewhat awkward position. They predated the big-box Best Buy and other electronics retailers, they had large amounts of space in each store dedicated to inventory that moved very slowly (2.3k ohm resistors, anybody? anybody? they're 5% tolerance, honest!).
People lost interest in "building" stuff (though RS later tried half-heartedly to join the Makers and 3D printing bus)
Then their attempt to become a mobile phone store drove away a large part of their customer base.
"From a gross profit perspective, Maplin was incredibly profitable (the full accounts made up to 28 December 1996 show gross profit of £15.6m on turnover of £32.6m), a result, perhaps, of its broad appeal to a mix of different clients "
I'd say the reason for the profitability was the ludicrous prices charged in Maplin stores. And there lay the roots of the demise. It wasn't "online" that killed Maplin it was "competition". Maplin had originally, in the catalogue days, been both competitive and extremely helpful. The catalogue was a brilliant source of information and something I looked forward to receiving each year. The many examples, plans and technical info sections in the catalogue encouraged experimenting and that lead to buying components, cases, etc from Maplin. The shops were originally the same, staffed by people with an interest and willing to help. The shops were also well stocked.
The rot set in partway through the 90s. The knowledgeable staff started to drift away, the availability of stock became intermittent. By the 00s that had turned into guaranteed unavailability of almost everything. I recall wanting some aluminium knobs only to be told that they weren't a stock item and the wait for delivery was two weeks. I could buy them online for a tenth of the price and have them delivered next day.
The suits were more interested in pushing very expensive tat and gouging on the price of cables and cards. I suspect that many customers stayed on though inertia but eventually everyone gave in to the fact that you can buy the leads at a fraction of the price in a supermarket / DIY store and any "unusual[1]" components like knobs, resistors, cases, PCBs, etch baths etc. could all be obtained faster and cheaper via eBay/Amazon.
The shop staff in my local store in Bristol were pretty knowledgeable, but given the massive range of stuff they sold, there's a limit how in depth anyone's knowledge could be.
Of course, the big reason I didn't go in there much was the prices, but they did have one advantage which was speed. If I needed (eg) a SATA cable on a Saturday morning, I could pay a couple of quid to get one from Amazon, but it would take until Monday. Or I could walk five minutes down the road and spend about £8, but be home and plugging in my harddrive five minutes later.
There is also something to be said about not trusting things to the average delivery company. I used to buy blank DVDs at Maplin - their prices weren't significantly more than the equivalent at Amazon (this was a few years ago!) but made much more sense as the one time I bought from Amazon they sent the caketin of blanks in a big box with very little padding. By the time YoDel (or whatever) had played football with it and it got to me several of the discs were unusable so the whole lot had to go back for a refund. While I wasn't out of pocket it was still a hassle which made the Maplin surcharge fairly reasonable in comparison.
I remember one of my attempts to upgrade my own PC going disastrously badly because I just didn't do enough research on compatibilities.
I got a new i7 CPU. Didn't fit my motherboard, so I got a new motherboard.
Motherboard didn't fit the case. Got a new case. PSU didn't fit in the case (!??).
Got a new PSU. Oh, the RAM doesn't fit either. New RAM it is!
...motherboard didn't have the right bios version for the CPU. I got a dirt cheap i3 CPU that did work, got online and updated the BIOS (I later found out there's an easier option via USB stick).
And then, finally, I had a working computer that was somewhat more improved than originally planned.
Because Maplins was down the road, all of that palava took place over a long weekend. I could probably have saved ~50 quid if I'd taken a fortnight to ordered bits off Amazon each time, but, well, that's the price of convenience.
Yes, overpriced goods, product range and mistakes in online are usually what everyone talks about whenever Maplin comes up, but what I got from this article is that this author asserts it was problems at the corporate finance level that actually (or additionally) led to the death-spiral. The balance sheet numbers showed increasing sales every year up to 2014 and gross profit being maintained at around 50% which means they were still selling stuff and making a profit from what they sold despite being "expensive", but the whole time corporate debt and increasing liability for interest on the debt were catching up with them.
The buyout by Rutland in 2015 enabled them to reset some of the debt and interest liability, albeit with lower sales and gross profits (though still around 50%), but the years following showed exactly the same pattern - sales and profits going up but debt and interest going up much faster. The debt scared their suppliers into withdrawing credit supply arrangements, and if you have nothing to sell you have no business. So actually, customers were still going in and buying stuff, but the author's contention is that spiralling corporate debt killed them.
"...customers were still going in and buying stuff, but the author's contention is that spiralling corporate debt killed them."
It always seemed to us that Dragon's Den was just entertainment - a sort of censored happy slapping for TV. Apparently not though - the disease is real after all. Hubristically overpriced valuations of businesses leading to unfathomable exposure to debt. The result being the business raises prices far above any realistic expectation for the market they operate in and effectively killing their own business.
It's still an amazing achievement for Maplin though: according to the second table in the article they made £135m profit on just £269 of sales!!
;-)
"The suits were more interested in pushing very expensive tat and gouging on the price of cables and cards."
Another cause I've heard proposed- but not mentioned in this article- is that Maplin's opening of "big box" stores in retail parks (and other prominent, high-rental locations)- meant that they essentially *forced* themselves (#) into having to be a mass-market retailer of more mainstream tat at high markup, since even the most successful seller of components is never going to have enough turnover to support those sorts of costs.
(#) No doubt at the pushing of their private equity owners, mind.
From personal experience, I've largely used Maplins on behalf of employers as I've been too cheap to use them when I know I can get better quality stuff cheaper elsewhere.
We used them when we needed stuff fast - cables, hard drives etc. And generally we would buy their entire stock and go to the next store for more... Expensive but cheaper than delaying major pieces of work.
Over time, suppliers have become more reliable (i.e. delivering what we asked for with UK power cables rather than EU etc..) and equipment has become less user serviceable so the need for Maplin components naturally diminished.
Companies have also became less tolerant of additional last minute costs or are prepared to wait for cheaper alternatives.
Add in the VC debt burden, increases in credit insurance, reduction in credit and competition and the result was inevitable.
While the VC debt model is clearly flawed, the biggest issue is that it makes a company unable to address changing conditions, forcing it to "hope" the market will change while its competitors adapt and prosper.
"While the VC debt model is clearly flawed, the biggest issue is that it makes a company unable to address changing conditions"
Funny you should say that, as that exact reason has been pinpointed as a likely contributor to Toys R Us' failure. Yes, they probably *did* suffer due to their failure to move with the times (which lazy mainstream media reports parroted as the cause of their demise), but as others noted, this is quite likely because it's hard to invest in- and concentrate on- required changes like that when you're trying to keep your head above water servicing the owner-imposed debt in the first place.
(That said, I also read somewhere that Toys R Us' UK operation wasn't doing all *that* badly by market standards and its demise- shortly before the US stores also went under- was due to the American parent sucking cash out of it.)
Maplin's opening of "big box" stores in retail parks (and other prominent, high-rental locations)- meant that they essentially *forced* themselves (#) into having to be a mass-market retailer of more mainstream tat at high markup
...
(#) No doubt at the pushing of their private equity owners, mind.
I wonder how many of those private equity owners were also investors in those retail parks? Another nice little way to siphon money out of the firm in the form of ground rental.
It wasn't about the components and cables, they had become a sideline.
By the 2000s the components and cables Maplin were selling were a fraction of the store. By then their shops was packed with more consumer items and toys, from battery powered toddler vehicles, off the shelf RC toys, mirror balls and disco lights, USB vinyl conversion turntables and in car entertainment. Then on the checkout counter there would be a box of multi-tip screwdrivers or some other flashlight/torch or multi-tool. A spindle of 100 cheap CD-RW, and a 12 pack of cheapo AA cells. The components were never ever going to grow and sustain the business, all that profit was made on these other toys.
I've walked into a Maplins, seen something I wanted to buy, seen the price of the item and walked out again without buying it.
Simply put they were too expensive. Not just high-street-markup expensive, but taking-the-piss expensive. Sometimes 5-10x markup, especially on cables and AV plugs.
If their clientele were idiots then maybe they'd have gotten away with it, but I suspect most of them were technically proficient and quite capable of looking up stuff on the internet and ordering from there instead. Even their own website was expensive possibly because they were scared of cannibalizing store sales. Dumb idea.
My thought exactly. £1.50 for a 13amp plug? I would often see their own brand products on Banggood with exactly the same packaging bar the branding for a fraction of the price. A £25 LED strip from Maplin, absolutely identical item under £5 on Banggood if you can put up the shipping time.
£1.50 for a 13amp plug?
But comparable to what other high street stores were wanting.
No, Maplins couldn't compete with on-line for price but nor can most retailers. And, with China "shipping for free", there's no longer "it's the same once you've paid postage". Only "it's instantly yours to take home and use" which is what usually has people paying £1.50 for a plug or more from anywhere they can get one.
The problems for Maplins were multiple but I believe it was mostly that they were tipped over the edge and there was never going to be any way back. In fact it's quite impressive they held on for so long when others facing similar problems and competition had folded far earlier.
"£1.50 for a 13amp plug?
But comparable to what other high street stores were wanting."
Not really. Both Screwfix and Toolstation charge 80p-90p for a standard 13a plug now.
£1.50 was generally over double what you would pay elsewhere back then. Unless you compare to generic high Street stores, which is maybe the problem with the high price perception.
Maplin was supposed to be a specialist store but had started selling at high 'generic clueless customer' prices.
People who still buy a 13 amp plug won't go to Screwfix and queue and wait for someone to fetch it for you and then voice all their personal contact details in front of a queue of strangers. They are pickup items in Wilko or similar.
But needing a plug nowadays is becoming less necessary.
The last time I went in Maplin was during the closing down sale of the branch near work.
I wanted some basic cable - usb to aux or something. I knew Maplin would be more expensive that buying from Amazon, but I needed it right away.
But then, even in the last days of the closing down sale, they were charging something like £8 when it was 50p on Amazon, So I walked out.
I was in about five years ago, and I saw the cost of a switch- something that would have cost around a quid on mail order. IIRC it was something between £4 and £6, and the words I remember quite literally thinking weren't "overpriced" but "shamlessly overpriced".
From what I overheard of the staff there, I got the impression they were genuinely enthusiastic and helpful, but the business itself had obviously forced itself into becoming mass-market and uncompetitive.
Be very wary of Vulture Capitalists and similar so called investors who want to do great things to your business.
All they want to do is walk away with a huge great profit in their pockets. Often the business that they have saved/rescued/invested/developed/etc/etc/etc is a shell of its former self now that the profitable bits have been flogged off and the remains are left with a load of debt that is almost always impossible to service.
The result is that the 'remains' are either left to rot or goes to the wall.
Having seen this happen twice from the inside... It is not pretty.
Can we have a Vulture icon please?
Inevitable that once you load a business up with debt you give it a finite life. Let's face it Maplin isn't unique it's just one of the latest dominoes to fall in the high street.
Years of super-low interest rates have encouraged businesses and consumers to borrow to the hilt. Why not, it's almost free? I know people with unbelievable mortgages, loads of stuff on tick, several maxed out credit cards but outwardly they look as though they are doing alright mostly, and in fact they themselves do really believe they are doing alright - it's become a normal way of life. They are just about keeping going so long as nothing happens.
Everything's fine so long as the economy can keep the plates spinning but now that interest rates are going back up (expect yet another rate hike from US Fed real soon now) the zombie companies'with fingernail existence on borrowed money will finally keel over, jobs will go, people will stop paying their bills, and we're going to see an extremely nasty fertiliser/turbine contact scenario.
Sorry this is a bit shouty but I am astounded we made it this far even.
Just, not for everybody.... debt is a simple way to push more money to the top of the pyramid, with less effort than getting your hands dirt with some actual work - like creating or improving ideas, products, services or whole companies. The financial obsession strongly slanted economy towards way of multiplying money without having actually to work, while minimizing the entrepreneurial risk.
Debt is one easy way, you lend your money, and reap the interests. Just, you have to enforce people to think they need to make more and more debts. One treasury minister here once complained people made too little debt.
When I bought my last car and told the seller I would have paid it with a bank transfer, he tried and tried again to convince me to make a loan, at over 7% interest rate - at one point, exhausted, I told him bluntly why should I have had paid the car more, while in no way I could have invested those money and get more than that 7% - I would have just lost money (with inflation so low), and made someone else richer without getting anything more from that same car.
Now they're even switching to avoid to sell you a car at all - just rent it, so you pay and have nothing... and when you can't pay anymore, you lose it too.
If it was caused by too much cheap credit - then why was the solution providing even cheaper loans?
It wasn't caused by cheap credit, it was caused by collateralized debt obligations. This is packaging up debt from different sources into "packages" which are then sold on to other people, which in itself is not that much of a problem, but the crisis was caused by clever* people repeatedly packaging up and reselling debt on and on. Eventually it got to the point where the (mainly) banks holding this debt actually had no idea about the quality of this debt - the chance of them getting paid. Due to the repeated re-packaging, the debt was marked as AAA/AA+ (yes, just like ebay..)
Now, a lot of this debt was sub-prime mortgages. Whilst house prices are rising, this isn't a problem, you get a special cheap rate, because there is little risk in default - the bank takes the house, sells it, gets paid. When house prices stagnate or fall, there are no more special cheap rates, because the risk is much higher. Of course, then when the special rates expire, the debt will default.
The problem then was that these banks were all holding hundreds of billions of dollars of supposedly AA+ debt, but really its CCC or below. They get scared shitless, because they have no idea how much bad debt they have or what their exposure is, and then they stop lending to anyone (or rather, their lending rates go sky high). One crazy statistic is that 50% (or $300bn) of AA+ or greater CDOs issued between 2005-2007 were in junk status by 2009 - that's nuts!
Once banks won't lend to each other, banks start failing, government costs go through the roof (as almost every government runs on a deficit, anticipating growth that will negate the debt), and the entire modern world collapses in on itself. At that point, the only thing that can be done is to have governments step in to guarantee the debt (by taking it from the banks in return for equity), and setting ridiculously low central bank rates.
So yeah, cheap credit anticipating house price rises was the cause, but between the end of the world and stuffing the banks full of cheap credit, we choose the latter.
As to who to blame, you can blame the clever boys and girls making the CDOs; I prefer to blame the credit agencies who gave them these CDOs triple A ratings in the first place.
* Not the good clever, the "special" clever...
There's good debt, and there's bad debt.
Like, say, a well considered mortgage. You want a house, houses take dozens of workers a year to build, so it's gonna cost dozens of years of income to buy, right? So you take on debt and spend dozens of years paying off the debt, and at the end you own a house. More often than not, though, house prices rise faster than the interest on the mortgage (please do not rely on this), so you can sell the house, pay off the mortgage, and make a profit you never could have done without that initial debt.
But, say, you wander into Games Workshop and decide to start a goblin army, and you put it on your credit card. Due to the sheer scale of the job clipping a thousand goblins off their sprues, you never really get it done, but you keep seeing things you Want. Like a huge-ass spider with goblin spearmen on it, or a giant with a squashed goblin under his left boot, or a squig that spits smaller squigs at people. Then you go off goblins, but those new sea-elf dudes look sweet - there's a guy on a flying shark, some sort of war-turtle, a wizard riding a typhoon...
...anyway that's enough about my personal finances. Point is some debt can be used to buy things that will repay the debt by themselves, some debt allows you to take actions you could never have done yourself, and some debt throws money down a hole marked "beware of the Drukhari".
That's because today most people will never earn enough money in their youth to buy a house, or at least pay most part of it.
50-60 years ago, it was possible. Most wages stagnated (or even reduced) while people well kept alive telling them they could make debts to buy a house or study - just cost soared while wages didn't.
The real estate business became so lucrative exactly because it was so profitable to lend to buy a house even if the buyer would default soon, thanks to prices keep on increasing, which in turn required higher debts to be made.But for greed people, it was clear the system wasn't sustainable, and eventually it crumbled - and you can easily sell an house if it's a pure investment, not if it's were you're living in (your heirs could be happy, though).
While many people have to mortgage the house again to pay for studies, healthcare, or other needs - a never ending debt nightmare created so only a few really profit from.
Debt to start what should a profitable investment, and which could get repaid quickly is a smart move. Long term debts which can never be repaid, are just a hangman's knot
My bet is there will be another debt crisis in 10-15 years, maybe less.
50 years ago?? It was easily done 20 years ago - bought my house for £ 140k in suburban London 22 years ago. Nearly paid off and don't ask what it's "worth" now.
And thankfully I wasn't seduced by a pension mortgage or interest only.
More to the point why did the last buyer of Maplin (or their expert accountants and advisers) fail to see they were being stiffed?
"More to the point why did the last buyer of Maplin (or their expert accountants and advisers) fail to see they were being stiffed?"
AIUI they were making a loan to Maplin with high interest rates (presumably financed at much lower interest rates). Providing they got the money back as "interest" it wouldn't really matter to them that the firm went bankrupt. I take it that "interest" was a more tax-efficient way of getting money out of the business than "profits".
"That's because today most people will never earn enough money in their youth to buy a house, or at least pay most part of it."
I disagree, but that's because I did.
I saved at least 10% of my gross income each year. In part buying basic rather than flash stuff, all that boring penny pinching stuff (repair rather than replace, sandwiches).
After 12 years of this, we moved countries, and I bought a cheap* house. It was cheap becasue it hadn't had much maintenance done on it, and it was a mortgagee sale. Took me about 2000 hours and another 10 grand to get it livable.
So it's possible. It's possible now. But people don't want a first house they have to fix up. Or live in anywhere not as upmarket as their parents neighborhood. And there does seem to be a concerted effort to make sure the lowest rung on the housing ladder is above 100k...
* 3/4 bed, 1 bath, 100m^2, central heating, old double glazing in Southern Netherlands. Paid 45k in 2013
"So yeah, cheap credit anticipating house price rises was the cause, but between the end of the world and stuffing the banks full of cheap credit, we choose the latter."
And we've still got a house price bubble. Burst that and there are a lot of banks holding deeds to houses that are then worth less than the outstanding mortgages. As the A/C said, the [root] cause was cheap credit so why is cheap credit the answer?
"As the A/C said, the [root] cause was cheap credit so why is cheap credit the answer?"
And as Tom 38 answered, cheap credit wasn't the cause, inappropriate lending was. Mortgages being given to people who were at very high risk of not paying them back, then the lenders would take all their high-risk mortgages, package them together into the CDOs that Tom 38 talked about and sell them on to other banks, who treated them as less risky without looking at the contents.
You could argue that the cause of the problem was the CDOs being incorrectly (or fraudulently) rated less risky than reality. Or you could argue that the cause of the problem was the fact that such risky mortgages were being offered in the first place. You can't argue that cheap credit was the cause of the problem. Even if the credit was cheap, these people still couldn't afford to pay it back so never should it have been given to them.
Cheap credit is great for loaners, but not so much for banks.
The problem of cheap credit is they can't make money by simply storing money in central banks and the like, and also the interest rates they can apply have to be lower.
So banks and other financial entities, to keep profit higher and higher and make executives, stock exchanges and shareholder happy, look for other, riskier ways to sustain profits. Subprime was one example - they believed they could offset the risks, they couldn't - but not the only one.
So while cheap credit wasn't a direct factor, it was still a factor - although usually stupid greed is the main one.
"Cheap credit is great for loaners, but not so much for banks."
Nor for prudent people who saved rather than taking out loans. With the banking system now having cheap money from QE then they aren't particularly interested in paying savers a decent rate of interest.
The prudent savers thus find their accumulated capital is not keeping pace with inflation - and often the interest is further diminished by government tax.
The government actually want the savers to spend their savings in the consumer system to boost "growth".
"And as Tom 38 answered, cheap credit wasn't the cause, inappropriate lending was. Mortgages being given to people who were at very high risk of not paying them back"
And the whole house price bubble which powered this was driven by cheap credit. Various govts., including HMG, were addicted to low interest rates. We had the utter stupidity of Brown setting BoE the task of setting interest rates to control a measure of inflation which excluded housing costs. As a lot of the prices contributing to that measure were of products whose manufacture was being outsourced to China etc. those elements were falling, measured inflation was low and interest rates were low. Low interest rates drove up house prices and people were remortgaging on the basis of their inflated house prices just to get their hands on "cheap" money.
Forget the risk of not paying the mortgage back. If the punter can't do that the lender takes the house and sells it to recoup. It produces a housing crisis but not a financial one. What really does the damage is if the house is no longer worth what was lent on it. If the house prices are overinflated when the loan is made it doesn't take that many repossessions to deflate them so the lenders can't get their money back.
Way before the crash it was clearly unsustainable to anyone who gave a thought to it. Unfortunately there were too many involved who weren't inclined to give a though to it
And we stll have a housing bubble.
"Burst that and there are a lot of banks holding deeds to houses that are then worth less than the outstanding mortgages."
In the USA.
In the Netherlands and the UK (only places I've looked at mortgages) if you owe 100k and default, then your property is sold for 60k, you still owe the bank 40k.
Now that personal debt may be also shit, but the house will get sold, even if it's below the valuation or outstanding debt.
The other gem of the repackaging (and lying about) loans packages was that because the circle of loan packages was so obscured and front loaded (effectively a pyramid) the banks often found that they had underpinned their own package only to find it resold to them later. There were loan books with a nominal (pyramid/chain) value tens or more times the actual value of the underlying asset.
"[...] the banks often found that they had underpinned their own package only to find it resold to them later.
Obligatory Dilbert that preceded the financial crash by several years.
"As to who to blame, you can blame the clever boys and girls making the CDOs; I prefer to blame the credit agencies who gave them these CDOs triple A ratings in the first place."
There are actually three "moving parts" in the fuck up. CDOs and credit agencies are two of them. The other are the mortgage providers.
Now, normally you can only get a mortgage if you have enough dependable income or assets. The issuer will only get their money back if you pay it back, or they can sell the property. Selling property you're kicking people out of may well result in not getting as much as you could (see assorted tales of people wrecking stuff). In some countries the bank can still pursue you for the remaining debt, but the US you can just walk away from an underwater mortgage (as I understand it).
But since the lenders could resell the loan almost immediately, for a chunk of commission. How much you earned was based on how many mortgages you could sell. So NINJA* mortgages would get issued with the client deciding how much they wanted, and the normal sanity checks abandoned.
Then these shitty mortgages were bundled into CDOs. But they were not correctly classified as shitty, they got given "generic retail mortgage" status, which assumes that they were responsibly made loans.
Now, there isn't actually wrong with CDOs, even synthetic CDOs. You take a mix of various debts, put them in one big pot, and then pay off the debt in tranches. So the first tranche gets paid first, and might get AA+ rating and 2% return. The next tranche would be A+ and 3%, and so on. It is one of the few ways to take a bunch of risky assets and make a (smaller) less risky asset.
The selection of assets to go into the mix and pricing the tranches is where the dark arts come in. There are plenty of correctly priced CDOs, but they don't offer AA+ rated securities with >5% return. Anyone seeing that should really look at what goes into the mix.
Now this alone wouldn't be enough to cause a crisis. For each dollar that is not repaid, there is one dollar of loss.
Enter the synthetic CDO. This is a CDO constructed entirely from tranches of other CDOs. And not the good tranches either. But you can magically feed in B and C grade assets, and get some more AA+ assets to sell.
But now if the original debt is not paid, each dollar not repaid causes at least two dollars of downstream failure. Considering you could buy CDOs which were 3-4 steps away from the actual borrower it gets even worse.
So the people issuing the loans didn't care about their quality, as long as they got their commission. The people making the CDOs didn't care, as long as they got their commission. And the credit gagencies wanted to keep getting paid to mark junk as gold.
CDos are just tools. But they can be used to hide things, and they were. But there were other people involved in the deception.
We had to make (theoretical) CDOs, one of the questions was how many NINJA/junk loans can you put in while still managing to pay back all your B+ and above tranches, assuming it ran through the financial crisis.
"As to who to blame, you can blame the clever boys and girls making the CDOs"
They do deserve the blame for the failed ones. They definitely knew how much shit was in the beef. There were people making ones designed to fail. And there were also many who built perfectly good ones, but those ones also suck up the better quality of assets. They would also make it as hard as possible for the credit agencies to actually know what went in to the mix.
* No income, no job, no assets
There was also an article that compared it to drunks in a pub.
IIRC, something about giving credit to the drunks, who ordered more beer. So the orders to the brewery increased, so their sales increased. Then some beancounter decided that the drunks' slates were worth something and sold them on.
At the end of the month, the barman went to the drunks to get them to pay up - only to find that they had no money.
Correct, debt is mostly bad, the real problem comes from the financial arrangements that are used by these "venture capital" outfits. They exist with the sole purpose of making money for their own directors , some of their clients and possible the directors of the companies the "invest" in.
All these takeovers, or injections of money have several things in common:
Any assets are ruthlessly stripped out of the business and sold
Property is then leased or rented back at rates far in excess of what the business can afford, often from shell companies owned by the same directors of the venture capital company.
Shareholders and the newly appointed directors all take out far more that the business can sustain, either in dividends paid from loans or convoluted share deals.
The result is that the once perfectly viable business has been completely hamstrung with all the financial liabilities it has been saddled with so it then goes under. The one thing you can be completely sure of is that all the money is safely off shore and the real cause of the failure are completely safe and could not give a stuff.
Capitalism is not far off broken, perfectly viable business are getting destroyed because they issue a "profits warning" as it is below expectation. They are still viable, making profits but the "investors" promptly dump stock as everything is done on a time scales of days (or possible minutes). The concept of longer term investment appears to be dead and as with most of society, only instant gratification matters and bugger the consequences.
The list of companies affected by this goes on and on. BHS is another, they ended up having to bp
So, the Private Equity "investors" (ha) borrow a shed load of money to buy a business. They then do this what-should-be-illegal reverse takeover shenanegans so that the loan required to pay the original owners is now on the business balance sheet, not the "investors'".
Business goes under.
Don't the banks or other lenders lose out mightily?
Who fills the hole where the money was?
No, because they create derivatives to unpack and pass that debt along, and maybe buy some form of insurance like swaps. Someone in the end will lose money, but it could be a long chain - "financial engineers" go a long way to make things complex and hard to understand. The house of cards for a while stands.
Just, sooner or later it happens some greed institution gets full of "toxic" assets, or a big crisis start a chain effect, and you get Lehman going bankrupt or being bailed out with taxpayers money, while the economy freezes and people suffer the consequences...
"and maybe buy some form of insurance like swaps"
Swaps are not insurance, they are a straight up bet. That can be used as a hedge.
You can't just insure other people's stuff and collect if it goes poof. But you can with swaps.
Also there are no limits on swaps. Insurance caps at the value of the insured asset. You can bet on as many swaps as you can find someone to take the other side of the deal.
"So many buy-and-build strategies, repeat managed buyouts and successive private equity or venture capital investments continue to saddle businesses with unsustainable debt levels."
Yep, so short termism is at the core of this. I joined a small, niche electronic design business in 1988. I was into the tech, and embedded micros were just coming in, so I learnt my craft in assembly and C.
One day, my boss took me down the pub and offered me a pint and a directorship. He then explained his plan: get the company to a certain size, and then look for a buyer. Zzzzzzzz. I turned his offer down, (not the pint).
When people in suits lead a business whose core product is of zero interest to those people, it will fail or cease to exist.
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Hahahaha. In 1997 Maplin staff knew nothing unless you needed to know which batteries are AAA or which cable would connect your Sky box to your telly.
In the early 90s I enquired about a summer job in my local Maplin. The manager looked at me in disdain, probably caused by my long hair and biker jacket, and asked "Do you know anything about electronics?" in his most condescending tone. I replied "I've just finished the second year of my MSc in Electronics and Physics. Do YOU know anything about electronics?" Needless to say I didn't get a job.
To be apparently successful in any business it is useful not to be hampered by knowledge.
Like company skill self-assessments - the people who get the high marks are those who don't know much - but think they know everything. The real experts are marked down because they are aware of the limits of their knowledge. Usually quoted as "The more I know - the more I know I don't know".
On the pro side, Maplin encouraged a lot of non-techies to play around with electronics. Plus they had a wide range of components I could get instantly when I'd mucked up some urgent project.
Their prices were so prohibitive though. I felt sorry for their staff desperate to sell you batteries or take your home address, like shoe shop staff trying to sell shoe polish.
Most of the staff were unsympathetic and annoying, but there was one young geeky engineering student at my local branch that I hope is in a better place now. She'd always come up to me asking if I needed help. One time I told her the prices were just too inflated she sighed sadly, looked at her feet and said, "I know".
Circa 2000, I would have spent days poring over the Maplin catalogue ("the tome") and/or just idly browsing through their stores. I spent a fortune with them online when they launched there, and used to organise my electronics components by their Maplin catalogue number because it was easy to reference the datasheet like that... either from the catalogue itself (I mean, who puts a circuit diagram of intended use into the catalogue image?!), or from their CD which often had links or PDFs of all that kind of stuff.
Circa 2010, I stopped and never went back in one. They were full of over-priced tat. Nobody on staff ever manned their electronics counter. The catalogue was a thin pile of shite that resembled a Betterware catalogue more than anything else. Datasheets and other information was just non-existent. The online presence was basic and basically whatever they had in a store, with not much other information. Even the in-store bargain bins were full of 90's-era hardware with stupendous price tags.
It all seems to coincide, sure. But it wasn't just "taking out loans" that killed them. It was forgetting who their customer base was, i.e. not people enamoured with service assistants bothering them when they walk in, people who need a techy behind the counter, and are likely to want something that they can't just buy online elsewhere and get more information by doing so. Maplin's used to be a "CPC/Farnell". Then they just turned into a poor Argos / MenKind.
A few years back I discovered Digikey, which was US only at that point.
Man what an awesome catalog they had: by which I mean a real paper book like the thickest, richest most addictive telephone book you've ever seen. It was like being a kid again.
I literally had to throw it out because I was spending too much time browsing it.
I used them again recently. Their website has not changed in about 30 years and their delivery charges for small orders is still expensive, but the delivery is surprisingly fast. I ordered stuff on the saturday evening, and it was delivered on the monday morning.
The range of components blows anything Maplin or Tandy had right out the water.
Quite simply, with outrageous valuations and prices paid comes the saddling of huge business debt at an often punitive interest rate which pretty quickly or immediately wipes out profit generation.
That's what venture capitalists and hedge funds do though - borrow heavily, extract the money, then sell the company cheap so someone else can do the work of getting it out of the mess they put it in so they can buy a Lamborghini...
...another way of explaining it a bit more easier for us that aren't accountants? I'm interested in accounts, despite being shit at maths but didn't understand some of this. All I knew was they'd priced themselves out of the market long ago due to everything being way overpriced. But seeing what other purchased did to them was interesting. I know some investors buy up companies that they see as cheap purchases cause they know they can make more money breaking a company up.
My limited understanding:
Someone builds a business which sells stuff and makes a profit. This has obvious value, and should keep on going if the income from sales pays for purchasing stock, paying staff and paying for infrastructure. More money in than out and the owner can take the surplus out at the end of the year. A bit like a salary.
Let's look at the salary thing. If you have a salary, say, of 30k you can usually borrow money based on being able to repay the INTEREST each month, not necessarily the capital. See bad credit card debt.
Looks like a business is much the same. You can borrow money against future revenue and you are judged on your ability to service the debt - that is, repay the interest each month not repay the complete loan. If a loan is coming due then you just take out another loan to pay it off - see bad credit card debt (again) and sub-prime mortgages.
All fine and dandy if you are borrowing the money then taking it out of the company as dividends and salary. The company rolls on because it can service the debt. However rinse and repeat enough times and the balance sheet shows that the company has far more debts than assets and dosen't have a hope in hell of paying its debts.
At that point suppliers want cash up front, and insurers won't cover credit agreements. Cue death spiral.
The company is basically in the same position as someone with a 95% mortgage on a house (so little equity to release) and a pocket full of maxed out credit cards. At some point all the money coming in is needed just to service the debt and there is no more credit available. No money for food, heat, light, clothing, council tax etc.
Lenders try to avoid this with personal credit. $Deity alone knows why they allow this kind of thing for companies,
I knew Maplin was on the way out around 2005 when I went into my local store to buy some 40pin IDC box headers for an drive interface I was building - and not only did the staff respond in puzzled bemuzement, it didn't even exist in the catalog. I then asked a work colleague with a credit card to order me the bits I needed from Farnell.
Gross profit of 50%? That is outrageous. A business ought to be able to be viable with a gross profit of 2% and, indeed, in order to offer competitive prices to consumers, in many lines of business, it should scarcely dare to aim for anything much greater! (All right, 2% is characteristic of grocery stores, and something as high as 20% is actually reasonable for firms selling large-value items like computers or washing machines.)
And out of that 2%, it should be able to pay all the interest on whatever loans it might have, with most of it left for dividends to the stockholders.
Of course, some of it would also be used for expansion.
That is what a properly-run business looks like.
So if a firm could stay in business despite tacking on a 50% markup - no, a 100% markup - on its products, instead of being squeezed down to a much lower level of profit in order to actually sell anything, this means the marketplace is not competitive enough, and the government should start intervening.
I think you misunderstand the difference between Gross Profit and Net Profit (my simplified understanding is below). Retailers will generally aim for a gross margin of 40% which is not far off the 50% gross demanded by Maplin's banking covenants.
Gross Profit is the difference between how much it cost to buy the thing you've just sold and the amount you charged for it.
Net Profit = Gross profit less all business expenses (CapEx and OpEx)*
* - staff costs (inc salary), corporate functions (e.g. HR, purchasing), payments for buildings/vehicles and the like, taxation (business rates, tax on profits), other operational expenses like utilities (power, water, telephone, rubbish disposal), banking facilities (cost of credit/debit card merchant account and transaction processing, cash handling, cost of corporate banking facilities), cost of breaking bulk (buying 10,000 of something then storing them and distributing to stores while you sell them one at a time to customers). Then you have CapEx things like store refurbishment, buying+equipping new sites etc, closing unprofitable sites. This list isn't exhaustive and probably only scratches the surface.
Only once all that is paid do you have Net profit which is a lot closer to your 2% figure. A lot of that will be a payment to the business owners as a return on their investment (e.g. dividends to share holders) and some will be retained for future business development or paying down debt as it becomes due. There may also be exceptional charges on the accounts to cover (e.g. acquisitions, write off of goodwill, etc).
A company will need to generate a net profit higher than 2% otherwise they will struggle to attract capital/investors simply because of the "Why should I invest in your business and get a 2% return when I can invest in that other company with similar prospects and get a 5% return?" problem.
Note retailers will generally work on a 40% Gross Margin. How much of that percolates through to the Net Margin is quite another matter if only because they start to redefine Profit and they'll do accounting shenanigans like loading up with debt as explained here with Maplin. As explained by the article Maplin would have been reasonably profitable had it not been for all interest it had to pay on the debt it was loaded up with by its Private Equity owners!
The Bath Road store was occupied by Maplins ever since Woodwares packed up sometime in the late 80s. It was big for sure but not more than a 10 minute trek out of town IIRC and in it's heyday was heaving with punters in the hour or so it was still open after office hours. I don't recall when the neatly organised component racks moved from behind the long counter by the door to a little cubby at the back of the store and the staff became less knowledgable but it must have been sometime in the new century.
It stole plenty of trade from Jones Radio and Shop on the Bridge (who could get you anything from the Farnell catalogue). They moved all the way out to Tilehurst and stopped doing components at all. Grrr.
/old enough to remember a Halfords in town which employed car people.
1. Lacking in customer service, you walking in the store and had to dodge the pushy sales staff who wanted to bother you all the time (take note PC World)
2. Overpriced 10 quid for a lighting cable for instance
3. Staff lacked technical knowledge of the products they were selling, back in my student days the staff knew what component xyz did and could suggest an alternative.
4. Too many stores, you have to sell a lot of kit to cover wages, rates etc
"You dirty rat.."
</Obligatory meme>
But seriously, when they started selling phones it was clear that they were not long for this world.
People just aren't building as much stuff any more but judging how B&Q have started selling soldering kits maybe they have taken on some of the social responsibility to the next generation.
The look on that guy's face when I asked for solder paste was priceless!
Yes 30 years ago visiting a Maplins was an adventure and they were cheap.
Gradually they became expensive and the stock less technical and more retail.
Sad they could not see it coming happens to so many stores.
Don't know if there was an alternative strategy maybe splitting the company to reinforce their USP in regard to the little things and hobbyist without the high street overheads.
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