Digital Village

On May 10^th, White Rabbit Records Limited – the owners of the Digital Village music retail chain – quietly announced that they had gone bankrupt and called in an administrator. But then, as if by magic, a new company, DV247 Ltd, rose like Phoenix from the flames, promoting a flashy new website and claiming to be bigger and better.

Should anyone care about the latest company restructuring to hit the high street?

Well, yes. Because there’s more to this than meets the eye. And there are a lot of losers from this carefully planned, cynically premeditated business sleight of hand. There are scores of loyal hardworking staff, for instance, who turned up to work at eight of the nine Digi Village shops to find the doors locked and the business closed forever. Only one ‘Superstore’ will remain open in Romford. Or should that be ‘Supershowroom’? Because by and large, all sales processed by the new company will now be handled and shipped from Germany rather than the UK. Goodbye jobs and goodbye UK taxes. Or should that be auf wiedersehen, mug.

This prepack administration (whereby a new structure has been carefully prepared behind the scenes so that the company can fold and write off debts but then resurface minutes later under new ownership with a clean balance sheet) leaves plenty of people out of pocket – staff, who must now hope they’ll one day receive some or all of overdue wages, holiday pay and other benefits, the VAT and tax authorities, suppliers and possibly landlords of the now defunct shops facing unrecoverable rent arrears. And of course, DV’s loudly trumpeted ‘four year warranty’ isn’t worth the paper it is printed on (not that it ever was). Indeed, all warranty on goods sold by the company are now invalid. Thirty days sale or return? Forget it. If your gear breaks down, you’re stuffed.

There may well be other losers – time will tell. For example, as a supplier, Funky Junk received and shipped valuable orders just three days before the bankruptcy. I’m sure these were prepaid by DV customers and the proceeds safely banked, but we’re most unlikely to be paid. We’re now in a long queue of suppliers classified as ‘unsecured creditors’, despite the fact that our invoices make clear that we retain ownership of the goods until the invoices are paid.

"...the administrator sells the business before the creditors have an opportunity to say whether or not they approve of the sale transaction. It is this aspect that has brought some pre packaged sales into some disrepute." --Purnells (read more)

By most reasonable definitions, this verges on fraud. The DV directors had been planning this for some time. The new (German) owner had been in place and a new website built for weeks if not months. The directors knew full well that there was no chance of suppliers being paid for orders shipped in the days before administration. They must have known that staff wouldn’t be paid (and no doubt hid the knowledge behind friendly smiles as they passed longstanding employees in the office, the shops or the car park) and must have known perfectly well that the VAT they were collecting on behalf of the government (and paid by their customers and suppliers alike) would never be handed over to the relevant authorities.

These prepack bankruptcies would not be legal anywhere else in Europe. And nor should they.

So how did this state of affairs come to pass, and what are the implications for the future?

For the last few years, Digital Village have pursued a policy of aggressive pricing and discounting, attempting to force down pro audio and instrument prices and drive the competition out of business. It was a crazy policy and had the opposite effect from that intended. At times, DV advertised prices equivalent to or only marginally above their buying prices. And the result? Irrespective of sales volume, the company has been unable to generate enough profit or margin to pay their bills. Hence bankruptcy. Most well run businesses in the same sector saw this coming, and like us have had to grit our teeth and shrug our shoulders when clients asked us to match DV’s prices. No, we can’t price match, we said politely. Not if we want to stay in business, anyway. But of course customers neither know nor care about the business nuances of pricing in a competitive market. Damn it, I even had pressure from within my own company to match DV’s prices on our website, as otherwise we would appear ‘expensive’. And much as I understood the logic and the pressure, I always resisted. To pay good wages to keep the best crew in the business and to continue to give our unique service report, we have to make a modest margin. No one drives a Mercedes at Funky Junk (my wheels are a screwed onto a 1990 BMW 320 which cost me £300 six years ago. I love it though – that’s a different story). I take no pleasure in having been proved right about pricing, but then again, it didn’t need John Maynard Keynes to work out that any company that tries to sell at cost or marginally above is destined for Carey Street.

So what about the future?

The assets of White Rabbit Records Limited (trading as Digital Village) have been purchased by the owner of Thomann-stylee Cologne music supermarket, Music Store, via a brand new company called DV247 Limited in a carefully planned and executed ‘prepack’ administration. As I said earlier, DV have effectively written off all their debts to suppliers, customers, staff, landlords and the taxman, retaining their profile, trading name, website (revamped to provide a new front page for the English version of the German Music Store site), mailing and customer lists and stock – all purchased for a pittance from the receiver for a previously agreed amount (almost certainly well below open market value).  And a careful study of the website makes crystal clear that orders placed with DV will be shipped directly from Germany (taking two to three days to arrive). Want specialist advice? Learn German. Need to return or exchange faulty goods? Allow at least a week for international shipping. Need gear repaired? God knows what you’ll do – the new glitzy website is strangely silent on the matter. And what about warranty support? That certainly isn’t going to happen in the UK. Almost certainly DV will be buying all their gear in Germany. And as official service agents for Royer, Manley, Tube Tech and others, we certainly won’t be authorised to repair equipment supplied directly by a German company, even if ordered via a UK intermediary.

It’s interesting to note that DV’s website prices have risen overnight, by anything up to 30%. Well, they had to of course. But keep an eye on the value of the Euro. We may well see prices flopping around like The Pet Shop Boys in a hurricane as exchange rates wander too and fro.

Lest you wonder, these words don’t reflect professional jealousy. I wouldn’t engage in such sharp business practices even if the roof over my head depended on it. Maybe I’m old fashioned, but I believe in honouring my word, whether that means paying my bills (if not always bang on time), honouring warranties, commitments to staff and customers or being straight with colleagues as to my business plans and strategy.

Overall, this shave-down is very poor practice, verging on fraud. But ultimately, all that really matters to you, the customer, is that you can get good prices and a professional level of service and support.

That remains to be seen. But I, for one, will neither buy from nor sell to this dodgy outfit. You can’t divorce morality and honesty from business (or life, come to that) irrespective of what the lawyers and accountants tell you.

Eccentric (11.05.2013)

UPDATE 14.05.2013:

MIA questions DV247 deal

The MIA has issued a statement following the purchase of Digital Village's business and assets by German-based Music Store.

In the statement, MIA chief executive, Paul McManus, voices his support for the 31 Digital Village employees who have been made redundant due to store closures and announces that the MIA legal team will be reviewing the SIP 16 report that is set to be published shortly by White Rabbit Records administrators Grant Thornton.

The full statement reads as follows:

“This is a bad day for UK MI. There is no pleasure to be taken in the falling of what was our largest UK retailer. There are many, many staff today without a job who have given years of loyal service to the industry and I would encourage any of them to send me their CV’s so that we can act as a resource centre for the industry. We did this with Sound Control and managed to bring affected staff together with employers.

Aside from the tragedy of the staff, there is, naturally, the wider issue of what this means to UK MI. The many millions that DV brought to the UK economy and industry in terms of sales would now appear to have gone offshore.

Our first priority is to ensure that the due diligence applied by Grant Thornton under SIP 16 has been correctly discharged. This Code of Conduct is there to ensure that the sale of the business was achieved in the best interests of both Digital Village AND the creditors.

The MIA legal team looks forward to viewing the SIP 16 report that Grant Thornton will shortly publish, accordingly. There may well be good reasons highlighted in this report, but it is a huge shame that, as far as we are aware, no UK retailers or suppliers were given the opportunity to make a counter bid for the business in order to keep it UK-owned”. 

For more information, contact Paul McManus via e-mail or the MIA office on 01403 800500.

http://www.mi-pro.co.uk/news/read/mia-questions-dv247-deal/017713

UPDATE 18.05.2013 from Music Industries Association:

Urgent MIA update on Digital Village

The MIA recently held a meeting of major creditors of White Rabbit Records Ltd (DV) where a number of issues were raised, as well as some important points of action that may be to the advantage for creditors to consider:

1) The MIA feels that the only practical way to have a reasonable chance of creditors succeeding in recovering what is rightly due to them under their 'retention of title' (ROT) clauses is to join together as a single voice to put the case to the administrator or liquidator.  Recent experience with large retail insolvencies have shown that for creditors to maximise their recoveries in respect of ROT stock, it is essential that they join forces together, paying lawyers/accountants as necessary to achieve the required result. Without this leverage and action taking place without delay, it is likely that creditors will not be as successful in recouping as much of their debt as they are entitled to.  This is because the new business continues to trade and is, in all likelihood, using creditors' stock to bolster their sales.

2) The industry is waiting for the SIP16 report from the administrator to confirm that the pre-pack arrangement was carried out on a valid basis allowing for the best return for creditors and the UK industry in general.  It has been reported that the DV web site had been managed by the purchaser prior to the company going out of business/ceasing to trade. This would seem to be contrary to best practice and possibly illegal.

3) There seems to be confusion regarding the marketing of the pre-pack, as no UK Company appears to have been advised of it.  It will be interesting to see the administrators' reasoning for this lack of marketing as it may be contrary to best practice and ultimately, if proved, there may be a potential to bring claims against various parties because of the concern that the sale may never have been marketed through the appropriate channels and therefore effected at an undervalue.

4) A critical element that can't be overstated is the fact that the facilitators for the liquidated company, iforce group (distribution), are currently holding the bulk of the stock that will be subject to ROT and are themselves a major creditor. As such, they are highly unlikely to allow any access to our industry stock until they have been paid all outstanding debts.  This is immaterial to any promises from the directors of the new or old company and/or the administrators.

5) There remains much confusion and mixed messages amongst the UK's distributors about the structure, purpose and format of DV247 Ltd. Many companies are hesitant about signing any fresh distribution agreements until clarity is established.

6) It is advisable for MIA members to insist that a creditors committee be set up to consider and question the actions of the directors and possibly the administrators as without this there will be little leverage that can be applied to achieve a successful outcome for the UK MI industry.

7) Ultimately, MIA members may conclude that they are unhappy with the actions of the directors and/or the administrators in effecting the pre-pack sale of the business in the manner they have.   Accordingly, subject to the having the support of creditors, which is only really achievable if we stick together, it may be necessary to consider appointing other independent insolvency practitioners to look into the actions of the directors and the administrators so as to confirm that the sale has been at arm's length and carried out to an acceptable standard.

In conclusion, we believe it is essential to resolve the ROT position as soon as possible and creditors are urged to contact the MIA with a view to us co-ordinating matters.  We hope to write to you shortly after receipt of the SIP 16 report but, in the meantime, should you require any further information or explanations, please do not hesitate to contact us.

MIA - Music Industries Association

For those interested, please now see my follow up blog -

http://theeccentricblog.blogspot.co.uk/2013/05/dv-or-not-dvzat-iz-ze-question.html


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