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Retail Doom And Gloom Part One: Zavvi

By | Published on Monday 5 January 2009

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So, the biggest music industry story over the Christmas break was, unsurprisingly, in the retail domain as, on Christmas Eve, high street music seller Zavvi confirmed it was going into administration.

The news will have surprised no one really, closely following, as it did, the closure of Woolworths and its music distribution sister company eUK and the collapse of independent music distributor Pinnacle. Declining CD sales, increasing competition from supermarkets and online mail order websites, coupled with the credit crunch and recession mean times are tough in music retail just now. And the Woolies situation, of course, impacted on Zavvi directly because eUK was the retail chain’s principle supplier.

eUK’s liquidation forced Zavvi to close its online operations in the middle of the pre-Christmas rush, and also meant the retailer had to start negotiating credit terms with other distributors and record companies directly. Given rumours Zavvi was eUK’s biggest debtor, it was going to be hard to negotiate workable terms with cautious suppliers.

Meanwhile, as Woolworths and eUK moved into full on liquidation, its administrators – Deloitte – would presumably start making demands regarding payment of Zavvi’s debts.

All of this sent Zavvi to and over the brink, just in time for Christmas. Ernst & Young, already called in to advise on the company’s financial difficulties, became the company’s administrators. They are now going through the motions. It’s not yet clear if there is any interest in the Zavvi brand or any of its stores – though the former seems unlikely given it is a relatively new name on the high street, and hardly one that caught the public’s imagination.

There is no word on if and when Zavvi stores will start to close (some closures had already been scheduled prior to the administration, and those are likely to go ahead) though 69 employees at the retailer’s London HQ were made redundant last week.

Media attention regarding the Zavvi story quickly turned to the notice the company’s administrators issued on Christmas Eve, and in particular the section announcing that Zavvi vouchers would no longer be accepted in store. Coming at Christmas time, when such vouchers were presumably dished out as presents all over the country, this was a good tabloid story. Those holding Zavvi vouchers have been told to send them to the company’s administrators with their name and address.

Those with vouchers sold after 27 Nov are likely to get a cash payment equal to the vouchers’ value because, with the future of the company looking dodgy, at that point Zavvi bosses put any money spent on vouchers in a trust fund. Refunds on vouchers sold before 27 Nov, however, are less assured – owners of them will be added to the longer list of creditors and will have to wait some time to see whether they will see any cash from any sale or liquidation of the company.

It’s not clear what Zavvi’s situation will mean for the Richard Branson’s Virgin Group, who maintained some links with the former Virgin Megastore chain after the management buyout which created Zavvi in 2007. In particular, it’s believed Virgin guaranteed some of Zavvi’s credit accounts, including that with eUK, and that they still hold the leases of some of the retail chain’s stores. Virgin Mobile, meanwhile, continued to use some Zavvi stores in order to have a high street presence.

If no buyer is found Branson could find himself footing some of Zavvi’s debts. That said, it could be a small price to pay. While the youthful Zavvi’s credit worthiness may have caused its actual downfall, it is likely the Megastore would have been struggling too had Virgin retained ownership. But Branson may have felt the need to prop the retail enterprise up in a bid to stop one of his most high profile businesses becoming a high profile victim of the recession. The management buyout that created Zavvi definitely did Branson a favour, even if he is left footing some of the bills run up by those managers.



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