Avoiding contagion

The Malta Independent on Sunday Avoiding contagion

The Price Club problem has been in the news for quite some time. Solutions are proving elusive.

In market economies business failures are the ultimate test of market efficiency. Those enterprises that` cannot earn their way have to bite the dust. In a super-micro economy like ours the efficiency of the market is very questionable and problems like Price Club cannot just be allowed to come and go as if nothing has happened. In such a small market it is relatively easy to build market share by undercutting competition and than try to use that dominance to rake in the profit. But if those seeking such dominance mismanage their own affairs or run out of resources to see their strategy through to its full cycle the consequences could be disastrous not only for themselves but also for the whole business community and for the whole economy.

It is disastrous for business operators who were thrown out of business by predatory pricing. It is disastrous for suppliers who supplied their goods in good faith extending their credit terms beyond normality justified by the volume generated, who are presently suffering a breakdown in their cash flow cycle.

It is disastrous for the banks who lent their money and for prospective borrowers who receive credit decisions from banks undoubtedly clouded by the Price Club experience. And finally it is disastrous for employees who at the very least have to go through the unpleasant experience of having to change jobs unwillingly and in several cases through the hardship of losing employment altogether for several months.

The major risk of the Price Club saga is however its contagion effect.` Whilst we can argue till cows come home whether the regulators, the banks and the suppliers have discharged their duties with due diligence which could have avoided the build-up of the problem to it current proportions what`s important is finding a true solution to Price Club`s financial chaos to avoid damaging contagion.

Whilst one hopes that` acquisition by cash rich long term investors` could be a snap way out of the current impasse, contingency plans must be` made to seek an honourable way out if the acquisition offer does not materialise with the punctuality which the situation demands.

Government can`t simply wash its hands off the problem and pretend that` mal-functioning market mechanism will take care of the problem.` If the problem develops into contagion the problem will fall straight into government`s lap, so it had better participate actively to engineer a fair deal.

The first sacrifice has to be made by the original shareholders and directors. They messed up their business strategies and turned a promising bubbly discount store business into a colossal failure. Their wrong strategies are clear even for an outsider. Opening up several stores to the original three Price Clubs` was a grave error absorbing much needed capital without providing value added. In the discount store concept people travel to find the discounted price. Opening Stores in Paola competing with the own store in Marsa and keeping the Valley Road store competing with the Swatar flagship makes scant` commercial sense.` The discount concept involves building loyalties with existing clients by deepening the relationship rather than spreading the organization thin to attract new clients.

The shareholders should take the honourable way out and pass on management and shareholding control` to the unsecured creditors.` The creditors have to accept that their best prospect for recovering their exposure is by converting their dues into interest free obligations with options to convert it into equity. Then new professional management has to be engaged disposing of the non core assets of the group other than the three original Price Clubs and operating the discount concept by attracting clients by the discounted` prices and offering a no frills efficient service deepening the relationship through loyalty schemes.` Additional new funding should be minimized by operating a consignment operation where sourcing logistics are shifted on to suppliers who replace merchandise on their shelves at the end of every business day and get paid instant cash for the day`s sales of consigned goods.

This may sound like presumptuous free advice. It is meant as` a painful but practical way out of a financial mess limiting the economic risks of business failure by contagion.

The Price Club problem is however symptomatic, in an almost sarcastic way, of the macro-economic problems plaguing our economy. Excess capacity, low or no profitability, wasteful investment and little or no tools to manage with. Structural budget deficit leaves no room for using fiscal policy to manage demand effectively, monetary policy tools (interest rate reductions)` are rendered unusable or risky` due to loss of foreign exchange reserves, and the economic managers have committed themselves not to use the rate of exchange as an economic policy tool.

The only economic tool left to save Price Club` and the economy in general is prayer.` Let us pray!