Why Big Companies Go Bust

Thomas Cook, HMV, Flybe, Debenhams, Mothercare; these are just some of the recent, high profile victims of insolvency, or more informally, ‘going bust’. It’s rarely good news when a company closes, not just for its loyal customers, but also the staff that lose their jobs, and possibly more as a result.

Those affected, and potentially those in government may ask how these long-lasting, well-established companies could end up in a situation where they can no longer pay their debts, and in some cases trade at all.

A Failure to Keep up with the Market

The markets and customers’ expectations are always in flux, and companies need to adapt to these changes or risk getting left behind by their competition. With the increase in online consumption, what worked in the 1990s and even the mid-2000s and the start of the last decade won’t necessarily work for the market today. These days, outlets need to offer something unique to draw customers in, something more than just a lot of stock and massive premises.

A common trend in the retail sector is the failure to embrace online sales or investing too much in high-street stores with low footfall.

Customers Going Elsewhere

Even if an established brand has a large customer base, if a competitor starts offering a similar service for a lower price or with a unique selling point, the company could undergo a haemorrhaging of customers unless they adapt and offer something comparable or unique.

The perfect example of this in action is in the European airline industry. Thomas Cook offered the same all-inclusive holidays and flights from a vast number of brick-and-mortar stores, during a time in which people turned to the internet or lower-costing competitors such as Jet2 to book bespoke holidays. A similar thing happened to Monarch Airlines, which despite facing competition from low-cost carriers such as EasyJet, Wizz Air and Ryanair, failed to adapt to these changes, and consequently went out of business in 2017.

Failed Rescue Packages

Along with the headlines about companies’ financial troubles, terms such as ‘Refinancing’, ‘Company Voluntary Arrangement’, ‘Administration’ and ‘Liquidation’ keep appearing. Once a company becomes insolvent, it can apply for rescue procedures and payment arrangements with the intent of either saving the company or closing it in an orderly fashion.

Although companies go into these arrangements with good intentions, they aren’t always successful. They usually fail because the company defaults on the monthly repayments. If this happens, the businesses can either try and alter the arrangement before it fails, call in administrators to restructure the company, or the liquidators to close it.

Directors’ Conduct and Misjudged Investments

A company’s director should have the company’s best interests at heart. However, there have been more than a few instances where this hasn’t been the case, and directors get accused of spending company funds on inappropriate things, or just treating the company’s bank account as if it were their own personal account.

While this conduct might not always be the result of malicious intent, wasteful spending can occur due to misjudging of costs or required resources for expansions, or overindulgence in salaries and bonuses.

When working in a large business, making decisions is a high-stakes gamble. While the charts and analytics may suggest investment in either a new product or an expansion will benefit the company, reality doesn’t always follow the rules and thus can lead to losses if there’s a change in public opinion or markets.

Summary

If the last few years have taught us anything, it’s that even the biggest brand names aren’t exempt from ‘going bust’, and large-scale companies can fail for several reasons. Whether it’s a failure to act on changing markets, ignoring the emergence of a competitor who takes a chunk of their customers, or general poor management of finances, these big names can soon find themselves in hot water.

Marketme

Marketme

Marketme is a leading small business to small business news, marketing advice and product review website. Supporting business across the UK with sponsored article submissions and promotions to a community of over 50,000 on Twitter.

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