Complex Made Simple

Which giant companies have secret financial problems?

By Neil Petch, Chairman at Virtugroup

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?

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 $2.8bn ($68bn net worth).

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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.’

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.

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. April 2015 saw this crash from $50 to $37 when Twitter’s Q1 revenue reports were leaked, showing poor results of $436m against expectations of $456m.

February 2017 saw the company post its slowest revenue growth for four years, with advertising revenue $319m less than expected by Wall Street forecasts.

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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 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 $2.23bn in royalty payments to acquire the rights to the back catalogues of premium artists.

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.

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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 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.’

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.

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2. PR mishaps kill the bottom line:  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.

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.