Monday, July 6, 2009

A vast business "success" that wasn't

That good ol' journalistic "fact-checking"

Normally, Lord Bilimoria’s appearance in a business publication would be as remarkable as a bottle of Hildon water in a conference room. The founder of Cobra Beer has, in recent years, become omnipresent, banging on at every opportunity about the early days of the company, when he was delivering beer in a 2CV so battered that you could see the road through the floor.

But two advertisements in a recent issue of Management Today, one informing us that he would be a keynote speaker at the Chartered Management Institute’s 2009 National Conference, and another alerting us to the news that his book, Against the Grain: Lessons in Entrepreneurship, was available for purchase, caught my eye, because in the gap between them being placed and being published Cobra went into pre-pack administration.

Most of the company, which not long ago was touting itself around leading brewers with a reported price tag of £180 million, subsequently re-emerged under the ownership of Molson Coors, having been sold to the American brewer for £14 million, with Lord Bilimoria retaining a 49.9 per cent stake. But unsecured creditors, owed about £75 million, got nothing. Painful.

Something else quite painful: the way in which the business establishment failed to spot any problems. Here, in February 2007, we have the Press Trust of India reporting that “Bilimoria, one of the ten youngest members in the House of Lords, aims to make Cobra into a $1 billion retail brand by 2014”. Here we have Director magazine remarking in March 2007 that Cobra’s strategy “will almost certainly make [Bilimoria] a very rich man”. And here, just months ago, we have a trade publication reporting that Cobra reported a “20 per cent rise in beer volumes for its fiscal first half”, which “contrasts with an 8 per cent volume decline across the UK beer market in the last three months of 2008”.

No one seems to have picked up, until it was too late, that for all Cobra’s glitzy marketing efforts — it spent £40 million on marketing over 20 years — people rarely drank the stuff unless in Indian restaurants, that the company had never been profitable and that, in the year to July 2007, the latest for which accounts are publicly available, Cobra lost £13 million.

Indeed, the story of Cobra highlights a number of awkward truths for the business world, the first of which is this: business journalists rarely get the full truth about companies. The fact is that, despite all the awards we enjoy giving ourselves, with the exception of one or two individuals, we failed to predict almost all the crises enveloping us: the Ponzi schemes, the frauds, the credit crunch, everything in fact, including Cobra. Not that it’s our fault: journalists are only as good as their sources and if there’s one thing we’ve learnt this year it is that the people running businesses are as clueless as everyone else.

The second painful truth revealed by the Cobra debacle is that the business world is hugely susceptible to the influence of public relations. This is, in part, because business is overrun by PR people — and Cobra was more image-obsessed than most, announcing plans to sponsor this year’s Bafta awards as part of a £8.4 million PR and marketing drive only months before it went into administration — and, in part, because business is a bit boring and a good story, such as Cobra’s, gets seized upon.

I’m not guiltless in this respect. I was one of the hundreds of journalists who wrote positively about Bilimoria in recent years, penning a piece a decade ago that mindlessly cited growing sales without mentioning the lack of profits. Frankly, I should have realised when the company subsequently sent me some Cobra wine to try — a beverage that tasted like fermented mouthwash — that its attempts to diversify were going to get it into trouble.

Which brings me to a third painful truth revealed by the Cobra debacle: Asian entrepreneurs get away with more than most. I don’t mean this in a way to suggest some kind of politically correct conspiracy. But in my experience Asian companies don’t get subjected to as much critical analysis as they should be because: a) a huge number of Asian entrepreneurs are very successful and it is just assumed that they all are; b) the rags-to-riches tale is a seductive and romantic one; and c) people want to write about and hear about Asian entrepreneurs doing well, as it is one of the things that shows that multiculturalism and immigration can work.

As it happens, Bilimoria is not the most extreme example of the phenomenon. This unhappy accolade must go to Reuben Singh, who, as a schoolboy, founded Miss Attitude, the fashion chain, and was listed as the youngest millionaire by Guinness World Records, publicly fêted by Tony Blair, made a government adviser, dubbed “the most powerful man in Britain under 30”, had his picture hung in the National Portrait Gallery and named entrepreneur of the year at various awards ceremonies, but who in 2007 was unmasked as a serial fantasist, branded a “liar” by a judge and declared bankrupt.

Also, as it happens, Bilimoria is not your typical Asian entrepreneur, arriving in Britain with £5 in his pocket and subsequently building a huge company. For all the talk of delivering beer in a 2CV so battered that you could see the road through the floor, he comes from a privileged background. His father was a general in the Indian Army, he left India for England at the age of 19 to train as a chartered accountant, attended Cambridge and speaks with an accent that would make the Duke of Edinburgh sound chavvy.

But his ethnicity was undoubtedly one of the reasons he had a profile that far outstripped his achievements and one of the reasons he was so ludicrously overpromoted, being enobled and, among other things, being made deputy president of the London Chamber of Commerce and Industry, chairman of the UK-India Business Council and Chancellor of Thames Valley University.


Anonymous said...

Lord Karan Bilimoria of Chelsea is a smooth talking incompetent who ran what is one of the world’s most fascinating Ponzi schemes. Recall that a financial Ponzi scheme is where in essence the third person entering the scheme has his capital used to pay interest to the second person, and so on. The scheme continues till the nth person doesn’t enter and then collapses.

Cobra beer presents an interesting case study. The business never made a profit in its 20 years of existence. Massive amounts were spent on “marketing the brand” - both above the line and below the line. As a results, sales grew, but given the high marketing spends, there wasn’t a penny in profits in its 20 year existence.

Of course, if this continues over time, the business net worth erodes every year and it runs out of cash. When this happens, it takes on more debt or sells equity. It continues the marketing spends with the cash it receives from the debt/equity issuances, and builds profitless sales. Finally, this source of funding dries up. It then resorts to riskier financing like factoring and payment in kind notes. This too reaches its limits. As the business goes into a death spiral, and keeps burning cash, it withholds payments to suppliers – in this case Wells and Youngs the brewers who actually made Cobra beer. (Recall that Cobra owned nothing and made nothing, it being basically a marketing and PR machine for “building” the Cobra brand).

Finally, the company/Ponzi scheme is incapable of sustaining itself. The outside financing entering the scheme is impossible to sustain the amounts spent on marketing. The inflated profitless sales are used to entice a buyer but no one bites (obviously). This despite one of the most well oiled PR machines in the business. The business goes bankrupt. Due to the intricacies of UK bankruptcy law, secured creditors and the man himself got something out of it. Unsecured creditors – the long suffering Wells among them - got shafted to the tune of 75 million pounds.

What is shocking is how such a man, a smooth talking incompetent who ran his business into the ground, could write a book on entrepreneurship – a second one to be published this week - and be lauded as a role model by Labour. And now he’s trying to raise cash for his Indian operations !!! This is shamelessness.

Anonymous said...

Lord Billimoria succeeded in duping numerous people despite knowing that the whole Cobra Beer empire was bound to come down crashing in one almighty mess. Such men essentially run a sophisticated Ponzi scheme and usually get out in time by selling a company whose value has been artificially inflated. He could have sold it if he had priced it at a quarter of the 180 million asking price. One time he would have been classed an undischarged bankrupt but the new rules allow him to escape unscathed.
It is vital that unsecured debtors publicise his corrupt practice so taht he fails to be a serial Ponzi sceme architect

Anonymous said...

As an Indian, I am ashamed of this cheat. He was born with a silver spoon in his mouth and many of us feel let down

Anonymous said...

Just as salaries, rent, and interest are the rewards for successful deployment of labour, land, and capital respectively - so are profits the reward for successful entrepreneurship.

Lord Bilimoria of Cobra Beer never made a penny in profits in the twenty year life span of his business. By any measure he was a disaster as a businessman, and paid the price by bankrupting his company, defaulting on his debt, and wiping out his shareholders. Yet this very same Lord Bilimoria won every award worth winning for successful entrepreneurship in Great Britain.

Even more astonishing is the bizarre, delusional behaviour of the man himself. Just weeks before his enterprise went bust, as the enterprise was haemorraging cash and the investment bankers were struggling to save the company, His Lordship was lecturing on his success in the august environment of London Business School. He published his second book on successful entrepreneurship – and on his, and Cobra’s success – the week he went bankrupt! The Chartered Management Institute has him listed as a keynote speaker at its upcoming October convention, the invitation being extended a month before Cobra went bust.

What is going on here?

But the prize for being conned goes to John Mullins, professor of entrepreneurship at London Business School, no less. This is his comment/blurb on the back of Lord Bilimoria’s second book “Against the Grain” …

“Inspiring!... worth the cover price for the ‘Financing Cobra’ chapter alone. ”
Professor John Mullins - London Business School.

I, for one, will not be buying a Cobra Beer ever again.