Metro Peech & Browne is one of the country’s biggest wholesalers, it has just built a large new store in Harare, and it is backed by a European private equity fund. So, why has the business failed?
The company has been placed under business rescue because it is insolvent. A new report by the appointed administrator sheds light on how the business was run into the ground, and provides a window into the struggles formal retailers are facing in an economy that is rapidly informalising.
“The company is technically insolvent to the tune of US$8,878,493. This was the major cause for corporate rescue,” says administrator Oliver Mtasa of Crowe, in his report to the Master of the High Court.
At the time the company was put under business rescue, it had assets of US$12.8 million but liabilities of US$21.7 million, leaving a gap of US$8.8 million. Of the US$21.7 million that it owed, it had debts of US$9,835,088 to suppliers, banks US$5.4 million, and US$5 million of intercompany and other liabilities. It owed staff US$ 229,000 in unpaid salaries.
The company in its current form started trading in 2007, at a time when shops were running on empty and hyperinflation was rising. It quickly grew, because shoppers were looking for affordable and bulk basic commodities. Its first store opened in Msasa, and 19 more outlets followed.
In 2013, Spear Capital, a private equity fund from Norway, invested in the company, putting in capital and taking up 39.2%. Other shareholders are Midosa Investments (40%) and Sean Baker, who holds 20% of the firm. Founders include Miles Andrew Peech and Barry Browne.
What went wrong?
According to the Crowe report, the company suffered from inadequate capitalisation which caused negative cashflows. It has too many debts, which turned sour due to high interest rates. In a business that is about high volumes and low margins, Metro had low stocks in its stores. The company also expanded too fast without the capital to back it up, the report found.
“Poor servicing of liabilities resulting in suppliers holding back supplies and moving to consignment stock,” says the report. This left Metro Peech shops unable to stock the high-margin, fast-moving product lines that make wholesalers tick.
Like many players in the industry, Metro Peech was also unable to respond to the rise of informal traders. According to Crowe, there is “competition from the informal sector which is not subject to similar regulatory compliance. The informal sector traders generally do not comply with the payment of tax in comparison with established businesses such as Metro Peech & Browne.”
The company was unable to deal with all these issues because there was a “lack of adequate governance structures and systems around financial discipline, (with no) timeous production of accurate financial reports and timeous payment of liabilities”.
The company’s biggest assets were property worth US$2.2 million and office equipment of US$2.4 million. When it went into rescue, Metro Peech had just Z$1,024,613,601 and US$105,601 in the bank. It had another US$193,833 in cash.
Signs on the wall
The report says the signs of distress came when Petro Peech failed to pay workers on time. The company was paying 50% below NEC rates.
The exchange rate hurt Metro Peech, as the gap between the black market and the official interbank rate exchange rates affected stock valuations. A conversion of Zimdollar loans to USD led to the “ballooning of the debt and interest payments”. Rent payments were late and the company had to ask landlords for rent holidays.
There is no shortage of investors waiting to take over the company, Crowe reports.
“As at the publication of this report, ten prospective investors have formally and informally expressed their interest,” the report says. “Most of the branches of the company are located on good strategic sites. This includes those locations which are under construction. All the small poorly located and invisible branches have been closed.”
The administrator is reviewing the business model and cutting costs to bring the company to a break-even point. The company is talking to suppliers to help Metro Peech recover its stocking levels. Salaries have been cut by half, which the administrator says will result in skills flight. The company has 497 workers; 392 NEC staff and 105 managers.
A new investor could mean Spear Capital selling some of its shareholding. It was the fund’s first investment in 2013. Spear this year also invested in Greeenwave Milling, a Metro Peech supplier. Greenwave is listed among the ‘intercompany’ creditors, owed US5 million. In 2020, Spear Capital managing partner Martin Soderberg, who sits on the Metro Peech board, spoke on the investment.
“Metro was our very first investment from our first fund in 2013. At the time, Zimbabwe was a US dollar-based economy and things were going very well. Metro had revenues of about US$70 million and it has grown significantly every year since then. Since then, everything has been a bit murky. In 2018, for example, all companies still reported in US dollars but were trading in local currency. It has made it very difficult to work out how well the business was performing.”