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Activia Training: Cessation of Trading

I am very sorry to have to tell everyone that Activia has ceased trading.

I have taken this step because of the unprecedented nature of the collapse in the classroom training market, and this article is to help you to understand this decision.

I have included what may be considered to be commercially sensitive details of our sales and cost structure, not just to illustrate the points I make, but because they could help other companies with their own modelling.   Maybe the only way through this is for a few of them to work together, to pool resources and present a robust response to a situation that has likely changed the market for ever.

Why so quickly?

Well, the decision has been taken quickly because (as you will read) the situation is hopeless, and I have a legal obligation to cease trading if I am unable to protect the people to whom the company owes money.

But I can assure you that, after 18 years in charge of Activia, going to hell and back with the business several times, and facing an outstanding prospect for the year ahead with the best team I have ever had, it has been taken with a sense of utter devastation that you likely can only imagine.

Background

As far as trading is concerned, here are the current numbers.   Our target sales are £10k a day, and our break-even £8k.   The first two weeks of March ran at £7.5k which was disappointing but fixable.   We had our Silver Jubilee Offer running, which was sparking a lot of interest (at those prices, how could it not?) and a newly revitalised campaign of weekly emails to all our contacts. In addition to making our centres as "virus-free" as possible, with responsibility for cleaning being held by trainers as well as centres, on Monday 16th we were about to announce a whole new range of Webinar courses as a way of combating coronavirus head on, and adding a great new and profitable activity to our range.

What happened last week

But the new government instructions over the weekend - necessary as they were - had changed everything.   This didn't just move the goalposts, it relocated them from a Premier League stadium to a Sunday League pitch.   I'm not being flippant; I'm just illustrating the magnitude of the change.

And here's what we saw.   On Monday, sales were £2,113.   On Tuesday they were £3,295.   But the mood around coronavirus was getting worse.   On Wednesday, they were just £209 and on Thursday £417. No, I haven't missed off a zero in those numbers.   So that was £6,034 compared with break even of £32,000.   Or if you count just the last two days, it was £626 compared to £16,000 for break-even.   And I believe these two days were a closer reflection of the true state of affairs: a mind boggling 96% fall in sales.

It was obvious that the classroom training market, where people attend group sessions (although in a very small and controlled way) was being hit every bit as hard as the leisure, hospitality and air travel sectors.

We had not been sitting around: the team here is (was) brilliant: everyone committed and capable.   Salespeople were calling customers, but being told that plans were on hold for "a few months".   When they mentioned the new webinars as a great solution, and even a way of occupying staff who were working from home or self-isolating, people didn't want to listen, responding quite rudely at times.   Still they carried on trying but it was no use.

The effect on our cash flow has been devastating.   The fall in sales represents a drop in cash receipts of £31k for those four days (including VAT of course) and without collections after that, £76k for the remaining eight days - a total of £107k that we fully expected to have by the end of the month. And it's not a blip: it's a new reality with no cash coming in.

This has left us high and dry, over just a few days, with no warning whatsoever.

What about the £330 billion?

I leapt on to the Chancellor's announcement of a £330 billion fund to help businesses, but it wasn't as it seemed: no banks on the British Bank website had signed up, and calls to a number of them confirmed they weren't ready yet.

But here's the thing: the scheme will operate by allowing the banks to decide who to lend the money to.   I'm not complaining, I'm just telling you what I found.   So it won't be a case of filling in a form and bingo, here's your money.   And regardless of how much the government guarantees, the banks will apply traditional, ultra-conservative banking criteria to a once-in-a-lifetime crisis.   Don't complain, it's what they do.   You don't want another banking crisis do you?

I don't think the government has given them any guidance yet that would change it.   I confirmed this in a second round of calls to banks, so it seems that, as things stand, many people with good businesses in hard-hit sectors without properties to use as security just won't get the money.

But in fact, a loan would have been irrelevant, as I explain below.

What about the Government paying 80% of wages?

The Chancellor has further announced that employers can claim 80% of the salary for up to £2,500 per employee, per month and backdated from 1 March 2020, if they ask employees to take a temporary leave of absence but keep them on the payroll. (It's called "furloughing")

Firstly, this is a great move if your business model is suitable.

But take a look at Activia's; I'm happy to share these numbers if it helps anyone.

Annual sales are circa £2 million.   We earn 60% gross profit after costs of trainers, workbooks, laptop hire, etc, so that gives us £1.2 million to cover costs.   Sounds a lot?   Well, marketing expenses, with masses of Google advertising and SEO, come to £350k.   (I've tried to reduce it over the years, even employing outside "specialists" to take over, and every reduction hits sales.)   Now we're left with £850k to cover rent (£300k), wages (£480k) and all the other bills.   Which works ... and gives us a great platform for next year with a new pricing structure and the Webinar product launch.

An 80% subsidy on wages is worth £32k a month to us, though that's maybe only for three months.   I'm absolutely sure it will be a good option for many businesses, but it doesn't scratch the surface in our market, because our sales have collapsed to an extent that even eliminating wages altogether, for ever, still doesn't solve the problem.   And if we continue to trade, we will have ongoing costs and derisory income.

But it also means that unspecified information will need to be provided, and on a portal which isn't actually open, but will be "by the end of April".   I assume this means that employers will need to fund this themselves in the meantime, and hope that they don't fail to qualify due to an unannounced hurdle.   Sorry if I sound cynical, but honestly, doesn't the uncertainty of these schemes work against the expectations they create?

What else did I do?

Well, I never sit still, so I emailed the office of my local MP, who happens to be Theresa May, but I didn't get a response.   I emailed again.   No response.   The emails were pretty desperate, but I guess she was busy.

I did the same to the BBC suggesting a provocative line of questioning to get a bit more realism to this line of "We'll do whatever it takes" but it wasn't taken up.   And I emailed again, but it wasn't taken up.   I'm not saying they should have done anything: I'm just saying that I tried.

And I researched like mad.   Wow, did I consume everything: every news item, every interview, every contradictory opinion from every expert (?), pressure group or lobbyist.   I use the internet all the time, but I must have broken all my records for the hours I spent on news, government and NHS sites.   What did I get out of it?   Simply, a sense that we've not been here before so people (understandably) don't know what to do ... but they're voicing their (understandably) uninformed opinions as fact.   The government is trying like mad to sound authoritative when they are (understandably) guessing.   It's a hell-hole of "fake knowledge" that, in totality, serves to muddy the waters even more.

The only thing we know for sure is that we need to stay in as much as possible, wash our hands a lot, and do what's right.

We may all be in this together (it's actually true this time around), but when it comes to making business decisions, we're really on our own here.

Can't this be turned around?

No.   The classroom training market hasn't wobbled, or pulled back: it's fallen off a cliff.   You can't turn around in this situation.   Let me illustrate this.

Modelling the effects of this drop in sales

Although it is prudent to say that we have lost 96% of our sales (see above) let's just take an optimistic (possibly foolish) view and say that we "only" lost 80%.   That's better than we saw this week, remember.

Well, annual sales would fall from £2 million to £400k.   Training is an "occupancy" model, like airlines, hotels and offices, so the gross profit depends on getting bums on seats (a term I've always hated, but that's what it is).   So our gross profit would fall frighteningly from 60%.   But let's just take the (frankly idiotic) view that it stays the same.   This would leave us with just £240k, which won't even cover rent, let alone wages.   We would of course need to cut marketing but that would drag down sales even more.   And don't forget other costs.

If this seems too pessimistic, let me offer the scenario where sales recovered to 50% of their previous level, and we were somehow able to weather the storm until then (I have no idea how, by the way).   OK, that's £1 million in sales, £600k in gross profit (assuming the idiotic 60%).   With marketing at £350k, rent at £300k, wages at £480k and other costs, could you really cut these costs (rent is pretty well fixed) to avoid a heavy loss? I don't think you'd stand a chance.

You can see that nothing would change this.   Regardless of our business structure, the complete collapse of sales would have destroyed us anyway.   We were already super-efficient in our margins and our cost structure: the numbers I have given would stand scrutiny by pretty well anyone.

How long will this last?

Well, let me tell you a story.   Eleven years ago we had the financial crisis, and although we were destined (doomed?) to lose 50% of our business in six months, I was heartened by the news that the recession would only last 18-24 months.   Yes, ever the optimist.   So I set up a business plan that would see us take up occupancy of some amazing offices at stupidly low prices on 4-year agreements (yes, landlords were panicking...) and when the upturn came, we'd be in pole position to earn a great deal of money.   Well, after two years we had actually doubled our sales (though it had cost us dearly) but the upswing didn't happen, and while I don't want to go all political here, from where I sit with an overwhelming focus on the SME market, ordinary businesses and people are still waiting.   Eleven years on.

So please remember what we're being told now, in that context.

This time around, we have seen a loss of let's say 80% of sales, but in just a week.   I spoke to some competitors; one said they hadn't had an incoming phone call all week.   Another said they were thinking of going 100% online.   No-one actually knows what to do.

So beware.   It's supposed to be a 12-week wait (though that could change tomorrow) but that's just when we'll be "on top of" the virus ... whatever that means.   Even if it's not delayed, how long before businesses can repair the damage they have suffered?   Only after that will they even start to look at training again.   I'm no sage, so don't quote me on this, but I'd say it'll be well over a year before it's back to looking even remotely like the situation we were used to.   And it may never return to this.

And what if there is a second, or third, wave, as is often mentioned?

And how long will "social distancing" be advised?   If delegates need to be two metres apart on every course, what effect will that have on class sizes ... and the "bums on seats" we all depend on?

In the meantime ...

Meanwhile we will need to support the losses with loans that even if we can get them, we need to repay, presumably with interest, over a time period that will suck away our cash flow and maybe drive us into default further down the line.   A lifeline sounds great now, but be truthful about whether you can honestly afford to support it all the way - will your business reliably generate the cash needed to meet the repayments?   The banks have a job to lend money, but also to collect it later. The politicians will have moved on to the next episode in their silly soap opera, and it will be for the rest of us to sort things out.

I hope I've explained enough

So that's why I have taken the decision so quickly: it's actually obvious that no amount of hard bargaining with landlords, pruning a compact and hard working team, or scything through productive marketing spend will change it.   After what I think you'd agree is quite a long time in the market, I've managed a fair number of crises in very different ways, and though it absolutely breaks my heart on a number of levels, closure is the only practical course of action now.

The alternative is to carry on, losing money and eventually letting down my creditors on an even bigger scale.   That's not just hopelessly over-optimistic, it's actually illegal.

What should customers do?

The offices are closed.   This is one of those situations where something happens overnight and no-one is contactable.   But nothing underhand or illegal has gone on: we have simply seen a shortfall of over £100,000 in receipts this month and with diabolical levels of ongoing business in the future, I am obliged, by law, to stop trading.

If you have a course scheduled, it won't go ahead.   If you have paid for a course, you will become a creditor of the business, and you will receive a proportion of the funds available on wind-up, in alignment with how much you are owed.   It won't be much.   I'm sorry.

What should suppliers do?

The same thing applies: as a creditor of the business, you will receive a proportion of the funds available on wind-up, in alignment with how much you are owed.

What am I going to do?

I don't matter in all this, but for the record, I have not just put heart and soul into this business for ages, drawing a derisory salary, but I've also loaned the company over £500,000 - stretching my finances to the limit - and I will lose it all.   No properties, no flash cars (a 14-year old diesel actually), so pretty grim really.

Absolutely not part of the plan but that's where we are.   Take it on the chin, Steve.

And I'm sorry

For anyone outside the business who may feel let down, I'm truly sorry, but you won't know just how much effort and sacrifice I, and my great people here, had put into this over a very long time period.   If I may say so, I know my business absolutely inside out, and there was nothing I could do.

And my team?

For my team, of whom quite a few felt as much (more?) concern for my own wellbeing as for their own, I am heartbroken.   There were tears in the office all round last week: it's a bereavement.   Thank you for the lovely things you said to me (and apparently about me).   No-one in the market could have better people.   But for the foreseeable future, the classroom training market is a place for businesses with alternative income streams or unbelievably deep pockets.   Their time for great profits will come, when the market has improved and most of the competition has gone, but for us, it's the end of the road.

At least we'll have our memories of each other and the mission we were on.   Bless you all.

Steve Warren

23rd March 2020