The billion-dollar question – which giant companies have secret financial problems?

7 January 2018 Category :

Whether you’re a new entrepreneur or CEO of a giant multinational, some things never change: financial problems can affect everyone.

So what can we as entrepreneurs learn from the experiences of the major players? After all, they all maintain strong public profiles. Are there really problems which are being hidden from the public? 

Which companies are in financial trouble?

Your future as an entrepreneur rests on your ability to identify mistakes, understand their causes and incorporate the fresh knowledge into your strategy. So let’s look at five examples where we can safely say that the outward appearance doesn’t chime with the balance sheet, and what we can learn from these cases.

1. Uber: Uber’s meteoric rise has secured its place as one of the most successful businesses in the world. The cracks, however, are beginning to show. Towards the end of last year, Bloomberg reported that the global company had made significant financial losses to the tune of USD 2.8bn (USD 68bn net worth). A subsequent statement from Uber founders Travis Kalanick and Garrett Camp confirmed the report, saying that the figures ‘seem to be in line with expectations.’

Towards the end of last year, Bloomberg reported that the global company had made significant financial losses to the tune of USD 2.8bn (USD 68bn net worth).

Uber has frequently weathered controversy regarding treatment of drivers – a factor capable of consistent damage. The Harvard Business Review noted in 2014 that the company’s lack of ‘community building’ among their drivers was of concern and that unionisation was a ‘distinct prospect.’ This statement proved far-sighted, with drivers in different regions continuing to attempt the creation of unions in subsequent years despite fierce contesting by Uber.

As if that weren’t enough of a PR nightmare for the venture, back in September, they were struck with yet another blow. Transport for London (TfL) in the UK declined to renew the company’s private hire operator license, citing the business’s approach to reporting serious criminal offences, the way in which Enhanced Disclosure and Barring Service (DBS) checks are carried out, and how driver medical certificates are obtained.

Uber’s troubles are in part a symptom of the emerging app generation. Labour laws worldwide are now adapting to influence this cutting-edge ‘gig economy’ which blurs the line between a contractor and an employer, but not in time to avoid serious damage to the revenue and brand perception of the company.

2. Twitter: Last year, Twitter officials celebrated the company’s tenth birthday. Twitter dominates the social media space and is massively influential, boasting over 35 offices around the globe.

In the last five years, though, the company has consistently declined in market value. Back in 2014, Twitter had a peak share value of 69 USD. April 2015 saw this crash from USD 50 to USD 37 when Twitter’s Q1 revenue reports were leaked, showing poor results of USD 436m against expectations of USD 456m.

TwitterSince then, share value has seen an overall trend downwards. February 2017 saw the company post its slowest revenue growth for four years, with advertising revenue USD 319m less than expected by Wall Street forecasts. While value has rallied at times, such volatility is never desirable in a company.

One potential cause for the miscalculation by Wall Street could be the lead-up to the American presidential election, in which Donald Trump was a prolific tweeter. Experts may have misguidedly believed that the now-President’s online presence would boost active users and thus revenue. The value of such endorsements, while potentially significant, is fickle.

3. Spotify: Streaming subscriptions have fast taken over traditional sectors of music retail. This year, The Recording Industry Association of America (RIAA) reported that streaming services accounted for 62% of the market’s overall value, with downloads set at just 19% and physical purchases at 16%. This adds credence to the notion that services such as Spotify are the future of the industry.

While many view Spotify as the market leader in this sector, the streaming service hasn’t always been profitable. While Spotify saw a boom in paid users last year, according to the Wall Street Journal it also doubled its net loss. In part, this is because the company has had to pay USD 2.23bn in royalty payments to acquire the rights to the back catalogues of premium artists.

While Spotify saw a boom in paid users last year, according to the Wall Street Journal it also doubled its net loss.

Music streaming is a fast-paced and disruptive industry. Spotify must demonstrate adaptability to survive.

4. Avon: Although turbulence in revenue is expected due to Avon’s current restructuring ‘Transformation Plan’, a significant decline is occurring. At the end of last year, the company announced that their revenue had plunged by 7% in the 2016 fiscal year.

Sheri McCoy, CEO of Avon Products Inc, spoke further on the changes earlier this year. ‘As we move into 2017, we are taking actions to deliver more consistent performance across our markets, with Representative engagement remaining a key priority in our growth plan, while navigating continued challenging global economic and political headwinds.’

The sudden transformation in the retailing sector is likely the cause of this downturn. With the rise of online shopping soaring, former market leaders suddenly find themselves playing catch-up.

5. Abercrombie and Fitch: Despite being a major fashion retailer, Abercrombie and Fitch’s value has been steadily declining since 2015. This year the company saw some of its lowest figures in years with a major dip in June – an unwelcome result following a consistent drop in stock value throughout 2016. Over the past five years, the brand has undertaken numerous store closures globally.

The most recent results suggest that the finances of the global brand are not as stable as experts previously thought. The reason could be the advent of ‘fast-fashion’ and disposable brands, which has meant that many consumers are turning away from pricier alternatives.

To add salt to that wound, CEO Mike Jeffries caused a serious PR mishap upon being quoted that ‘we want to market to cool, good-looking people. We don’t market to anyone other than that.’ The comment meant that very demographic – the most valuable to the brand – took to social media and boycotted the company in the years afterwards. 

Abercrombie and Fitch

What can entrepreneurs learn from these companies?

Few would expect the companies mentioned here to have any financial woes, which is why their lessons are so pertinent. Their failures offer us a new opportunity for success. So here are four key points to incorporate when thinking about your business.

1. The importance of a steady cash flow: Whether running a startup or a billion-dollar company, proper cash management is essential. The start of an entrepreneur’s career is benefited greatly by finding and bringing in expert knowledge on this subject. Hiring an accountant is a sound option that will help to avoid financial problems as the business grows. Value this knowledge and its importance as an investment.

2. PR mishaps kill the bottom line: Underestimating the power of PR is a startlingly common mistake. In the case of Uber and Abercrombie and Fitch, public relation issues contributed significantly to a downturn in sales. While growth is a pillar of success and worthy of much of your attention, it’s important to also simultaneously manage your brand’s public identity. Scandals can be avoided by engaging with and truly understanding your workforce and key customer demographics.

3. You can’t rely on celebrity endorsement: If the Twitter case teaches us anything, it’s that we cannot rely on the power of celebrity alone to sell. Plunging cash into endorsements – or basing your strategy on them – may seem like a savvy marketing move, but is a weighty investment with unpredictable outcomes.

Plunging cash into endorsements – or basing your strategy on them – may seem like a savvy marketing move, but is a weighty investment with unpredictable outcomes.

4. Agility is key: Markets, particularly commercial ones, tend to change rapidly. With the advent of new technology, it is understandably difficult for businesses to keep up with trends. Avon, for example, will need to diversify in the coming years as the retail sector continues to evolve. Through diligent study of the latest news within your sector – and the development of practical strategies as a result – you as an entrepreneur can prevent this problem.

How to move forward

Understanding that even the largest businesses in the world struggle is a step in the right direction.

We cannot avoid adversity – we should not. Success hinges not on the absence of difficulty, but on understanding its underlying causes and adapting in the face of it.

For that very reason, it’s crucial to take on board the above lessons and apply them to the management of our ventures. In doing so, we may avoid the major mistakes that the giants of the business world show us each and every day.

About the author: Neil Petch, Chairman at Virtugroup

About the author: Neil Petch, Chairman at Virtugroup

With a history of business successes, Neil Petch is well known in the UAE and beyond as a visionary entrepreneur with a passion for helping others establish and grow their own businesses. Neil founded Virtuzone in 2009 and quickly established it as the region’s leading company formation expert, before launching Virtugroup, a holding company that has a wider mandate of supporting startups from establishment; to successful market entry; and all the way through to exit.