Friday, July 27, 2012

Wooldridges Fails to Make the Grade

The last nail was hammered in yesterday as administrators Grant Thornton were called in to pick over the pieces of the once-thriving school bookselling business, Wooldridges.  

Many reasons will be given, many excuses trotted out, but the long and short of it is that the private equity owners, Fulcrum Capital Partners, have botched it completely. They have destroyed value on an impressive scale. By ignoring advice, by stubbornly adhering to the wrong retail strategy, and by failing to grasp the fundamentals of the school resources market, they have not only ruined a business and the jobs of its employees, they have set in train a process that may well lead to the end of the booklist system of supply in WA.

This is a sorry saga but one rich in lessons. As the commentary on what went wrong starts to flow, we will hear about pernicious online bookselling, about the GFC and cautious consumers, about failed partnerships with stationery suppliers, about aggressive direct selling by publishers - the carbon tax might even get a run.  But the real problem, as always, has been the owners and directors, in this case the partners at Fulcrum Capital who acquired the business in 2008.

They should be held fully responsible for the mismanagement of a simple, profitable and durable business. They have ruined a good operation and lost upwards of $50 million.  Some of that loss will be borne by suppliers but most will be written off by the two major investment banks which either invested in or lent to the holding company, ESA Holdings Pty Ltd. More fool them. We can only hope that the individual partners at Fulcrum also get to feel a bit of the pain.

The clear lesson in all of this is that good companies are run by good people. Good businesses need managers who understand the market they are operating in, who listen to advice from experienced industry players, who aren’t afraid to look a bit old-fashioned from time to time, if that’s what the market wants. A school booklist business sells books and stationery and other stuff to schools and to parents. It’s that simple. The business challenge is how to make that supply process as efficient as it can be. 

Of course, there is always the need to think about big operational and strategic issues, about exit plans, about competitor activity and about other threats and opportunities, but if only Wooldridges had kept as their first priority running a great booklist business. If it had, it would still be around to ponder and overcome all the worries of cash flow in a seasonal business, the growth of digital learning, and how to grow the business across state borders. If only Fulcrum had hired good managers, listened to them, and let them get on with their jobs. The arrogance of private equity and investment banking involved in this wreckage is breathtaking. But then, how many examples can you think of where private equity flowing into a book business has turned it around and spawned new life? 

There was a fundamental problem with Fulcrum’s investment strategy, and it is a shortcoming of private equity investment in many traditional businesses: they didn’t care about, or care for, the business they had bought; they were only interested in the business they were going to sell. It had to look smarter, and books are old-fashioned; it had to look diversified, but schools don’t put interactive whiteboards on booklists; it had to look national, regardless of market variances.  

It now looks dead. 

And you can bet your boots it will stay that way. Prospective buyers may well steer clear not just of the Wooldridges corpse but of the entire WA booklist market, because the biggest worry in all of this is what might flow from it. Will schools continue to take the risk of handing over their book supply to a private operator?  Will the WA Government continue to ignore the positive (or at worst neutral) effects of the booklist model having been abolished in most other states? Will parents continue to tolerate the failures of the past couple of back-to-school seasons? Quite possibly not. A class-set or book-hire model would save parents thousands of dollars over the 12 years of schooling, and it would avoid forever the mayhem of recent years. And when WA makes the change without significant pain, what about Victoria? How many millions of dollars could this end up costing the educational publishing industry? 

Well done Fulcrum.