What happened to Made.com?
The recent fall of Made.com posed some interesting questions about how such a successful online retailer, once valued at £775m was sold to Next for just £3.4m. What actually happened to Made.com? Are there lessons to be learned for other fast-growth e-commerce businesses?
Made.com was an online furniture and homeware retailer based in the UK. It worked with independent designers and producers to supply goods directly from manufacture to consumers on a just-in-time basis. It’s target consumer was young professionals who were comfortable spending on big ticket items through an online digital experience.
“We’re makers of original homes. On a mission to make exceptional design accessible to all. We’re contemporary, agile and relevant. Daring, playful and unexpected. Obsessive about colour, material, detail and function. We embrace the unique and reject the generic. Elevate the ordinary and celebrate the statement…”(Made.com PLC, 2021 annual report).
Formed in 2010, by founders with a proven track record, the company enjoyed steady growth and landmark moments. So how did Made.com become one of the first casualties of the incoming economic recession?
The history of Made.com
Founded in March 2010
The founders had previous start-up and scale-up experience with fast-growth businesses Lastminute.com and MyFab.
Their ethos was to offer customers good quality, original design at a decent price and putting consumers directly in touch with producers, reducing the price heavily. The website launched initially to showcase new designs before buying any stock, based on a ‘just-in-time’ inventory system which meant they were able to remain relatively lean and working capital efficient. Manufacturing was outsourced to factories to meet commissioned orders.
2012 to 2015 – Continued growth
New York based growth equity investors, Level Equity and founding investor Pro-founders Capital invested £6m in Series B funding to expand the brand within the UK and target international expansion.
In 2013, the business was selected for the Tech Nation programme, an initiative designed to fast-track growing tech businesses by providing it with both public and private sector support. Other well known brands in the class of 2013, included Skyscanner, Just Eat, Huddle and Zoopla. In 2015, Made.com raised £38m as the business targeted European expansion.
Revenue reached £100m in 2017 and in 2018 they received £40m equity funding which supported the creation of eight European showrooms.
February 2020 onwards
A 600% rise in compact desk sales came with working from home becoming the “new normal”. Demand significantly increased which was reflected in revenue growing 30% to £315m in FY20.
The COVID-19 increased demand continued and the brand doubled their warehouse space. The goal was to reduce customer waiting time, increase customer satisfaction and grow sales volume. This strategy increased operational costs but the investment was made off the back of growth during COVID-19. The company listed on the LondonStock exchange (LSE) mid-year with an initial share price of 200p, raising £100m on the listing. The initial market cap was £775m, below the expected £1bn valuation with shares dropping 7% on the first day of trading.
December 2021 – The first signs of challenging times ahead
While product demand was still high, a combination of factory closures (Vietnam) and global port congestion led to extended shipping times and customers waiting for their furniture. Part of the initial value proposition was a clear focus on improving lead time, which was considerably hampered. The shipping lag led to £45m of revenue being deferred into 2022, which didn’t help the share price, which dropped 15% to 140p.
Soon, customer dissatisfaction began to grow, as demonstrated by one review, which was echoed across many more.
March 2022 – The Chairman’s statement
"The dramatic increase in freight costs has hurt our profitability, and the bottlenecks across our supply chain in the final quarter of the year negatively impacted our ability to dispatch products to customers. However, the agility of our business model and the deep relationships we have built with third parties throughout our supply chain has meant that we have been able to adapt more quickly than most. These disruptions are likely to persist into 2022, but through the work we have already completed in relation to reducing lead time to customers and the further sophistication of our supply chain, we entered 2022 in a more resilient position than ever before." (Made.com website).
To stabilise the market while the share price fell to 65.9p, Made.com tried to increase investor confidence by building up its stock of furniture and focusing on warehousing and logistics to reduce customer lead times in 2022 and beyond.
PPE increased from £3.4m to £10.6m from December 2020 to June 2022 interims (an increase of 211%). Right of Use assets (items on lease) went from £12.3m in December 2020 to £36.4m in June 2022 interims (an increase of 195%).
Acknowledgement was made to a falling market and growth was focused on the customer proposition, through improved experience, broader product, and enhanced reach. Revenue was predicted to be £465m to £500m which would be 15% to 25% growth year on year and EBITDA was expected to be £5m to £15m.
(Source: Hargreaves Lansdown, Nov 2022)
The rest of 2022
As the year progressed, the West was faced with a cost-of-living crisis and an incoming recession. Global energy prices were hugely volatile and only went in one direction which only further hurt unit economics. The share price fell to 59.6p.
EY issued a clean audit opinion on 8 March 2022 with no emphasis of matter on going concern. Prior to issuing an audit opinion, an auditor is required to evaluate the company’s assessment of going concern that can continue for at least the 12 months from this date. Audited results were released with the Chairman tapering expectations. Sales forecasts were reduced to £369m - £436m and EBITDA was forecast to be £15m - £35m loss.
One-off costs relating to supply chain issues were highlighted. An ex-director of John Lewis was hired as CFO.
The investor update highlighted trading volatility due to reducing consumer confidence although,“strategic progress in a challenging macroeconomic environment” was their stance even as the share price dropped to 20.8p. Demand had fallen for big ticket items and thus acquiring new customer was challenging. Further one-off costs were made to liquidate excessive stock and manage port disruption. The EBITDA forecast was further revised downward from a £50m loss to a £70m loss. In September, Made.com was put up for sale and the share priced fell yet further to 3.5p.
Shares reached a low point in November at 0.52p when trading was ultimately suspended on the stock exchange by the Board. Made.com was ultimately bought by Next for £3.4m in a pre-pack administration (brand name, website and intellectual property) only 18 months after floating for £775m.
While investors lost out, the worst impacted were 300 employees who lost their jobs via Zoom. And customers? PwC believe about 12,000 orders for UK alone are still in production or yet to leave Asia which cannot be fulfilled. The remaining stock was to be auctioned off by auction house John Pye expecting to include more than 1,000 truckloads containing 5,000 unique product lines.
What are the lessons from the fall of Made.com?
The risk of overtrading
While Made.com had steady growth for a number of years, it experienced significant demand and accelerated growth due to unusual circumstances i.e. compulsory working from home environment driven by COVID-19. Significant growth heightened the risk of overtrading where the business experienced both operational and financial challenges.
Supply chain and logistics is hard enough to manage as demand takes off, but add the impact on working capital of an increase of inventory and additional warehousing set up and commitments, makes it both an administrative and financial challenge.
Were the longer-term investments the right bets? Was it realistic to assume demand would continue at the same pace? Was the growth too much for the strength of the business infrastructure and balance sheet? Being realistic in your strategic planning and expectations is absolutely key.
Risk appetite, agility and ability to pivot
One of the key advantages fast-growth start-up and scale-ups have is the more aggressive attitude to risk. Venture capital encourages this but an agile model means a business can act fast and pivot when needed.
This approach lends itself to faster growth through taking more chances. However, there comes a natural point as the business matures where increased governance starts to inhibit the risk attitude and the pace of growth. Turning public is often the time this takes effect as the business has more rules and regulations to navigate and public investors to report to. It’s important to take stock of how much risk a business can cope with.
Cash is king
In the end, it appears that all roads led to cash. While the most prominent factors were supply chain challenges and the economic downturn, cashflow was the ultimate issue. Net cash outflow is one of the symptoms of overtrading, especially where you increase inventory and tie up valuable working capital.
Cashflow management is critical in any business but even more so when you’re at risk of overtrading.If you experience this, you should reconsider your business model. At the end of the day, the more cash a business has, the longer it can ride out external market factors. Right now, there are a lot of unknowns so having cash reserves will help.
Stay strong to your vision and design principles
The company deviated from what brought it to the e-commerce sector – the original business model of connecting the user to the designer with a just-in-time model was a low-risk strategy and minimised investment in working capital allowing for agility and fast-growth. The shift from this to stocking up was affected by the wider macroeconomic challenges. Consumer confidence fell at the wrong time for Made and their gamble left them overloaded with stock when the market took a turn. Sensible cost benefit-analysis should be done before committing to a change in business model and increase in cost base.
With Made.com’s persistence on continued growth and their deviation from the original business model, the core values of the business took a fundamental hit. Ultimately, this led to the demise of the superior customer experience they once had. With the business so reliant on a buoyant professional class, the combination of poor customer experience and the economic downturn compounded to seal their fate. Sticking to a business model while keeping customers happy and satisfied must always be a cornerstone when long-term success is the goal.
What’s Next for Made.com?
CEO Nicola Thompson offered this final statement at the end:
“I would like to sincerely apologise to everyone - customers, employees, supplier partners, shareholders, and all other stakeholders - impacted as a result of the business going into administration. Over the past months we have fought tooth and nail to rapidly re-size the cost base, re-engineer the sourcing and stock model, and try every possible avenue to raise fresh financing and avoid this outcome.
Made is a much-loved brand that was highly successful and well adapted, over many years, to a world of low inflation, stable consumer demand, reliable and cost efficient global supply chains and limited geo-political volatility.
That world vanished, the business could not survive in its current iteration, and we could not pivot fast enough.’
As alluded to earlier, Made.com was bought by Next on 8 November 2022 for £3.4m. Next acquired the brand name, domain names and intellectual property. Other remaining assets were being sold off separately by PwC and nearly 400 jobs were lost.
Personally, I find it a huge shame that an e-commerce brand that was doing so well had such a quick downfall but it’s a lesson of how important strategy, cash management and risk management is in business.
The piece that doesn’t fit together is the clean going concern assessment just nine months before the company suspended trading. I wonder how long before we see this being investigated by the FRC.