RudeVC: The latest local example of how business model can go from sweet to bitter

Nov 19, 2013
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IMG_4868.JPGIt seems that almost on a weekly basis these days an emblematic French company falls into financial distress. The most recent which caught my attention is Hédiard.

It’s impossible to wander through a chic quartier of Paris without seeing a Hédiard store. The venerable French brand synonymous with French gourmet foodstuffs counts nearly 200 years of history. Its products, which include teas, chocolates, foie gras, and spirits, are distributed in 70 sales locations nationwide, and another 100 abroad.

Hédiard officially entered the equivalent of Ch.11 restructuring (redressement judiciaire) on Nov.14. It would be naive for me to attempt to distill the root of Hédiard’s financial difficulties into one simple explanation, as the causes are undoubtedly complex and numerous. But I would suspect that the general economic downturn, tighter lending requirements, rigid labor laws, disruption from new services like SmartBox or GlossyBox, and of course the current environment of economic and fiscal uncertainty which sends many of Hédiard’s French target customers abroad, are all factors. And there’s a lesson here which points to a fundamental tenet of business: cash flow is king.

Say we benchmark Hédiard to another very comparable firm: Fauchon. These two firms offer very similar products to a nearly identical demographic and run organizations comparable in size (179 employees at Hédiard last year, while 230 at Fauchon).

And yet while Hédiard is in bankruptcy, Fauchon is weathering the storm quite nicely (posting 45% revenue growth over a year ago). So why the disparity ?

The most salient difference between the two firms is the business model. Hédiard owns most of its retail outlets, whereas Fauchon now runs predominantly a franchise model. In fact, Fauchon owns only 4 out of its 60 stores (the flagship at Place de la Madeleine in Paris, along with one in Monte Carlo and two in Hong Kong). This means that while Fauchon collects a guaranteed recurring gross margin from its franchisees, Hédiard’s investment in retail locations places a burden on cash flow. Stores require working capital, ongoing maintenance, and a workforce to staff them.

The contrasting financial picture of Hédiard and Fauchon bear out these differences. Fauchon employs approximately 30% more staff than Hédiard, and yet its consolidated revenues (including from franchisees) are over 12 times higher (247m€ revenues and profitable, vs. Hédiard’s 18m€ revenues and 8m€ loss).

Both Hédiard and Fauchon are brick and mortar businesses, one is failing while one is thriving, so this isn’t merely the usual story of disruption from the internet toward high street retail. But the case studies of these two firms do highlight some lessons on the importance of cash flow of which every tech entrepreneur should take note.