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William Tod
11/30/2023

Why Patisserie Valerie Went Into Administration

On the Money Maze Podcast, Simon Brewer interviews the forensic accountant, author and podcaster, Stephen Clapham.
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Steve highlights the case study of Patisserie Valerie as a warning against what he sees as the proliferation of earnings management tactics as the era of free money comes to an end. Stephen’s key advice from the interview suggests that:

‘Anything that has debt today you need to be wary of’

So, what is Patisserie Valerie? And why did it fail?

What is Patisserie Valerie?

Patisserie Valerie was once a respected and popular cake and coffee company stylised as a French cafe and marketed to young mothers and the elderly. It was once valued at £450 million and listed on the alternative AIM Market since its inception in the 1920s. The franchise expanded under the management of three Italian brothers and later caught the attention of Luke Johnson, a reputable operator known for his success with Pizza Express, taking the share price from 40p to 900p.

Patisserie Valerie as a holding group grew to over 170 stores, generating sales exceeding £100 million, creating spin-off brands such as Druckers Vienna Patisserie, Philpotts, Baker and Spice, and Flour Power City.

Is Patisserie Valerie Still Open?

The Patisserie Valerie business was sold for just £8m - other businesses in the group sold for another £7.5m in total - rendering the previous £450m valuation baseless, creating a legion of angry shareholders and employees. The downfall of Patisserie Valerie and its CFO led to the loss of 900 jobs and the shutdown of 70 stores when the company entered administration.

The financial irregularities discovered during this period revealed a massive black hole in the firm's accounts, eventually valued at £94 million. After the KPMG approved management buyout funded by Causeway Capital Partners in 2019, Patisserie Valerie had been rumoured to have cost-cut to such a degree that they even replaced butter with margarine in their products and have since closed more stores. After the merger with Causeway Capital’s Bakers and Baristas business, Patisserie Valerie lost 21 stores and has since lost 9 more in September 2022.

What happened to Patisserie Valerie?

The downfall of Patisserie Valerie can be traced back to a colossal financial manipulation scheme.

‘Patisserie Valerie was subject to one of the biggest and most lucrative frauds in the history of high street franchises.’

The Serious Fraud Office (SFO) launched an investigation, codenamed "Operation Venom," into the conduct of key individuals involved in the company. Four suspects were charged with conspiring to inflate cash in the balance sheets and annual reports between 2015 and 2018, providing false documentation to auditors.

The collapse revealed overstated cash positions, undisclosed debts, and a failure to disclose overdrafts, painting a grim picture of financial mismanagement. Grant Thornton, the sixth-largest accountancy firm in Britain, faced fines for its role in signing off the flawed accounts.

It was found that:

- Tangible and intangible assets were overstated by £23m

- Cash was overstated by £54m

- Prepayments and debtors was overstated by £7m

- Creditors were understated by £10m

Why did Patisserie Valerie Fail?

Stephen Clapham, speaking on the Money Maze Podcast, suggests that the final warning bell was rung by Dan McCrum of the Financial Times, who similarly took down the German fraudulent stock of Wirecard. Dan's article stated that: 'Upended and suspended Wednesday morning on AIM, London's tax-advantaged small investor derangement mechanism market, was a chain of French inspired cafes. The Patisserie Valerie accounts appear to have been over-baked.'

Patisserie Valerie's failure can be attributed to a sustained and collusive fraud that went undetected until the discovery of the financial irregularities. The company's accounts were found to be wildly at odds with its actual financial position, reminiscent of a similar failure with Carillion, a giant construction and services group, just 10 months earlier. The collapse led to calls for changes in audit practices.

Who Owns Patisserie Valerie Now?

In the aftermath of Patisserie Valerie's administration, the company's assets were sold, and its shareholders, including Luke Johnson with a 37% stake, were wiped out. The business was sold for a mere £8 million, a stark contrast to its previous valuation of £450 million. The once-iconic brand, now stripped of its former glory, serves as a cautionary tale of financial mismanagement and the importance of robust auditing practices.

Following a 25-year career as an investment analyst, Stephen Clapham decided to put that experience to good use and offer training to professional investment analysts and portfolio managers. More recently, they have launched an online school offering training to private investors as well.

Will Campion, of Campion Capital, described Stephen Clapham’s financial education platform; Behind the Balance Sheet as:

“A lifejacket for years to come”

Conclusion

On the Money Maze Podcast, Stephen Clapham identifies the case study of Patisserie Valerie, which he says were reporting margins higher than Starbucks.

Starbucks he says, did coffee and Patisserie Valerie did cakes. Coffee is one of the highest margin products in the world whereas a cake is much more complicated to produce. Starbucks’ product was majority take-away whereas Patisserie Valerie was selling predominantly in-house so there was no way they could be making higher margins. Stephen argues this offers an obvious mismatch that could and perhaps should have been picked up by auditors sooner.

The Patisserie Valerie scandal stands as one of the biggest and most lucrative frauds in the history of high street franchises, leaving behind a trail of boarded-up shops, job losses, and significant investor losses. As financial experts like Clapham emphasize, this case underscores the need for vigilant scrutiny of companies with debt and the importance of effective auditing to prevent such financial meltdowns in the future.

In the world of finance, lessons from Patisserie Valerie serve as a stark reminder that even the sweetest success can crumble when financial integrity is compromised.

By William Tod, who is undertaking an internship at The Money Maze Podcast. William is a recent Master’s graduate from The University of Amsterdam, who studied Literature, Culture and Society.  Outside of his degree, William is interested in long term investment in education through digital skills having spent the past two years as Managing Director of a non-profit web design agency, recently winning a position as one of the Top 100 most influential disabled people in the UK from The Shaw Trust. Will is also an avid pool played having captained his SOAS varsity team on two occasions.

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Further Resources

To help improve your equity analysis and access world-class training videos, consider signing up to Steve’s Analyst Academy Course. As a festive thank you, he’s offering Money Maze Podcast listeners a 10% discount on the course. At checkout, add the code ‘MMP10’ to enjoy the Black Friday discount. Learn more and sign up here! (Offer ends on December 15th 2023). You can browse further financial education & learning materials via our our Money Maze Learn directory.

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