The collapse of Patisserie Valerie, the UK café chain that grew rapidly under Luke Johnson, executive chairman and major shareholder, is sobering not only for its investors but for British enterprise. A publicly listed group that seemed to be trading highly profitably has gone into administration with the loss of up to 3,000 jobs after the discovery of a £40m fraud last October.
Mr Johnson, former chairman of the PizzaExpress chain and Channel Four, is one of the UK’s most prominent venture capitalists and his stake in Patisserie Valerie was worth £190m at its height. The company, its auditor Grant Thornton, and its banks now face inquiries from regulators including the Financial Reporting Council into how the debacle occurred.
The manner in which Patisserie Valerie grew, expanding from eight stores in 2006 to more than 200 today, is under scrutiny. We have often blogged about how to achieve sustainable growth but we have also warned against the ‘Growth at all Costs’ mentality. Patisserie Valerie’s failure also show that ambition and risk-taking need to be accompanied by strict business processes and financial and ethical controls.
Smaller companies are not the only ones at risk of weak controls. Both BHS, the retail chain that collapsed in 2016, and Carillion, the outsourcing group that went into liquidation last year, faced searching questions.
We wrote about Carrilion last year and concluded that “no company is “too big to fail”. Also that however big you may be, you can still get too greedy and spread yourself too thinly”.
Companies such as retail and restaurant chains that steadily open new outlets face particular challenges. A chain that expands at 20 outlets per year, which was Patisserie Valerie’s growth target last year, soon becomes a much larger challenge for directors to manage. There is a natural temptation to prioritise growth above ensuring that controls keep pace.
According to last year’s interim accounts, it was a reliable growth machine, with 99 per cent of new cafés profitable within a year of opening. Uncannily smooth and untroubled growth can be a sign of hidden trouble — Patisserie Valerie turned out to have a £40m gap in its finances. The Serious Fraud Office is now investigating, along with regulators.
It is too soon to know what happened at Patisserie Valerie, but it is possible to draw one lesson. Optimism is a great quality in entrepreneurs and risk-takers; caution is equally valuable in auditors and finance directors. Both are needed in a sound enterprise.