Virgin Megastores

1. Virgin Megastores Dr. Clive Vlieland-Boddy

3. Key Dates: 1968: Richard Branson produces the first issue of Student magazine. 1970: Branson forms a firm called Virgin, which begins as a mail-order record company. 1973: Branson forms record label Virgin Records. 1984: Virgin Atlantic Airways is founded; first hotel interest is acquired. 1985: Virgin Holidays, a tour operator, is formed; Virgin Group is created. 1986: Virgin Group PLC is taken public through a $56 million stock offering. 1988: Virgin Group is taken private again through an MBO; first Virgin Megastore is opened in Sydney, Australia. 1991: Virgin Publishing is formed; 1992: Virgin Records is sold to Thorn EMI plc for £510 million (US$957 million). 1993: Virgin Radio is launched; 1994: Company enters the soda market with the formation of Virgin Cola Company Ltd. 1995: Virgin Direct is created, representing the group's entrance into financial services. 1996: Euro Belgian Airlines, a low-cost, short-haul airline, is acquired and renamed Virgin Express. 1997: Virgin Rail Group is formed, following the acquisition of two aging, poorly maintained rail lines. 

4. Virgin Atlantic - An international airline flying to many major destinations. Virgin Megastores - Music Super-markets located in major locations in the UK, USA and Australia. Virgin Books - Publisher and distributor of books. Virgin Credit Card - Branson's attempt to provide credit card at a reasonable price. Virgin Holidays - Book a holiday and fly Virgin Atlantic? Virgin Trains - Virgin making trains sexy in the United Kingdom. V2 Music - Largest UK based independent recording label. Virgin Active - Chain of fitness clubs throughout the United Kingdom. Virgin Galactic - Branson's planned affordable flight to space venture. Ulusaba - Luxury game reserve located in South Africa. Necker Island - Branson's own private island located in the British Virgin Islands.

5. History - Virgin Era • Richard Branson started his first Virgin store on London's Oxford Street in 1971. In 1979 the company opened their first Megastore at the end of Oxford Street and Tottenham Court Road. Throughout the 1980s and 1990s, the chain grew, most notably through its merger with Our Price whilst under the ownership of WH Smith. Virgin Megastores had become an international franchise as part of the Virgin Group but during the early to mid 2000s, the Virgin Group decided to sell off most of its Virgin Megastores to various companies, including the French stores to the Lagardere Group and the American stores to Related Companies.

6. Quotes… • A business has to be involving, it has to be fun, and it has to exercise your creative instincts.Richard Branson • I never get the accountants in before I start up a business. It's done on gut feeling, especially if I can see that they are taking the Mickey out of the consumer.Richard Branson

7. Zavvi Entertainment Group, headed up by existing Virgin Megastores MD Simon Douglas and finance director Steve Peckham, will operate all of the existing 125 UK and Irish stores and its online operation. Zavvi will continue to be supplied by EUK, the company's primary supplier. • All UK stores will be re-branded Zavvi by November 2007 with the website and Irish stores following in January 2008. • “For over 30 years Virgin Megastores has benefited from being part of the Virgin Group and from the unstinting support of Sir Richard Branson,” said Simon Douglas, managing director of the new company. “We are delighted to be given the opportunity to build on that legacy. This deal secures an exciting future for Zavvi and for all our staff, with a real belief that despite escalating competition there is still very much a place on an increasingly homogenised high street for an independent entertainment specialist that puts customers, product, service and personality at the top of the agenda." • Virgin Group’s founder and chairman Richard Branson added: “In the last six years we have been withdrawing from entertainment retailing which is no longer viewed as core to the Group's future."

8. Virgin Megastores sold to MBO team Fri, 21 Sep 2007 Virgin Megastores has been sold by Sir Richard Branson for an undisclosed sum to a management buy-out team. The team was led by managing director Simon Douglas and finance director Steve Peckham, which made the acquisition through buy-out vehicle Zavvi Entertainment Group. Some 125 UK stores will now be rebranded as Zavvi.The UK and Irish chain was the last wholly-owned retail business in the Virgin group, as it has been divesting its entertainment retailing operations over the past six years by franchising out its international business. In-store Virgin Mobile and Virgin Media concessions will continue to represent the brand. The deal will not effect any of the 2,500 jobs across the chain.Mr Douglas said of the sale “This deal secures an exciting future for Zavvi and for all our staff, with a real belief that, despite escalating competition, there is still very much a place on an increasingly homogenised high street for an independent entertainment specialist.” 

9. Branson’s Comments • Branson, said to be “slightly sad” at the sale of the business he established in 1970 that set him on the road to riches, commented: • “There’s no question that with online sales and cheap supermarket prices that music retailing has become a different business than it was 30 years ago when I started.”

10. More Comment • "We now choose to franchise our global entertainment retail operations, rather than own them, and this was the last significant Virgin wholly-owned retail business in the world. With that in mind we have agreed to a management buyout with the excellent management team led by Simon Douglas and Steve Peckham," he said.

11. There were the reports – condemned by Zavvi as “pure speculation” – that Sir Richard Branson had paid £57m into Virgin Megastores ahead of the MBO to create Zavvi, following a year in which the retailer lost £46.9m on an operating level.

12. Since emerging from a management buyout of Virgin Megastores, Zavvi has proved doubters wrong by posting double-digit profits for its first 12 months. Music Week reports on a good year of trading • In short, many in the industry were expecting a disaster. However, as the retailer blew out the candles on its first birthday cake, Douglas was in typically robust mood, having released figures that showed a 10.2% like-for-like increase in sales across its first year of trading. Friday October 10, 2008

13. In theory MBOs are a ‘safe bet’ – management know the business well and should up their game with the added incentive of equity. • One of the features of MBOs before the credit crunch of 2008 was the increasing debt levels. This meant that small reductions in profit and cash-flow, created substantial problems. • In the last couple of years there have been some notable MBO collapses – including the high street store Zavvi. • MBOs in the current climate, generally involve reduced multiples and a larger ongoing financial involvement for the original owner of the business. (usually known as vendor loan note) or through the retention of an equity stake.

14. Simon Douglas Zavvi Group • “I am delighted,” he tells Music Week. “The cynics said that we would only last until January 2008. We have outlasted the cynics. When we did the MBO we put the best plan together and we are on track with that.”

15. Why Zavvi failed? • Zavvi has joined a growing list of High Street casualties in the run-up to Christmas. • These include the closures of MFI and Woolworths, which were confirmed last week, while Whittards and The Officers Club went bust on the 23rd December. • The outlook for Zavvi's 3,400 staff is not clear, although the stores will be open on Boxing Day for the traditional start of the sales.  • Ernst and Young, the administrators called in by Zavvi, blamed its failure on what what they called "the dire trading conditions on the High Street," which led to a "material fall in sales". • The final nail in the coffin has been the collapse of Woolworths. Zavvi had effectively been crippled by the collapse of Woolworths group, whose wholesale arm EUK had been its main supplier, and it had struggled to find an alternative source of stock, incurring the wrath of consumers when it was forced to cancel orders shortly before Christmas.

16. There had been speculation that the collapse of Zavvi could cost Virgin up to £100 million as it had guaranteed the cost of stock Zavvi had bought from the Woolworths group.  • A spokesman for Virgin, Nick Fox, said that a deal had been done with the administrators of Woolworths who were accepting £40 million to settle the debt. And Virgin was "confident" that cash could be found within the Zavvi group.

17. The Effect of EUK Failure • The company relied on Woolworths' distribution business Entertainment UK to supply its DVDs, CDs and computer games and has therefore stopped selling them online. • "In addition, to avoid any uncertainty, we will be cancelling existing customer orders where delivery cannot be guaranteed," Zavvi said in a message on its website. "This will take place in the next few days and you will receive email confirmation if this applies to you." • The company said it would refund anyone whose order could not be guaranteed. The move means shoppers will have to go elsewhere for gifts. • Zavvi said it was dealing direct with suppliers to ensure stock of new releases such as Take That's The Circus was available in its 125 high street stores.

18. In Zavvi's case, its problems have come early because they look like a direct consequence of the collapse of Woolworths. A Woolies subsidiary, wholesaler Entertainment UK, supplied most of the CDs and DVDs that Zavvi sold, and when it went into administration a few weeks ago Zavvi's supplies dried up. • It had to find new suppliers who, in the current trading environment, will have demanded more stringent payment terms for stock. It also had to pay its outstanding Entertainment UK debts to the administrators of Woolies. • The end result was a double whammy: falling sales because of lower stock but more cash going out of the business to settle a big bill and buy in new stuff.Hence the appearance of the suits from Ernst and Young this morning. Not a happy Christmas.

19. The fate of Zavvi, the music retailer that formerly traded as Virgin Megastores, was in the balance today when it emerged that Ernst & Young has been called in to help rescue the struggling firm, which has been hit hard by the collapse of Woolworths' distribution arm. • Entertainment UK (EUK), Britain's biggest DVD and music distribution company and part of the Woolworths group, went into administration last week along with the rest of the group. The reverberations from EUK's collapse have been felt at Zavvi, which said it had run out of stocks of key Christmas sellers as EUK is the chain's main supplier. • Deloitte, the administrator of EUK and Zavvi's biggest creditor, has brought in an emergency restructuring team to save Zavvi, the Times reported today. Zavvi's management team, which bought the 125-store chain from Sir Richard Branson's Virgin Group last year, has reportedly approved the appointment of E&Y. • It is thought that E&Y could step in as administrator of Zavvi if it cannot repay its £106m of debt to EUK. • Zavvi's problems were underlined by a message it posted to its customers on its website yesterday: "We are currently experiencing supply problems, and have temporarily suspended online orders until the supply situation is resolved." The firm said it has cancelled orders that it cannot fill and notified customers by email. Any payments taken will be refunded in full. • Virgin Group backed the management buyout of Zavvi and could be liable if the retailer goes under because it has guaranteed Zavvi's orders with EUK, the Times said.

20. High Street music, DVD and video games chain Zavvi has called in an emergency restructuring team from accountants Ernst & Young to help it through its current trading troubles.

21. Sir Richard Branson's Virgin Group is stumping up millions of pounds to keep High Street music retailer Zavvi in business. • Helping hand: Sir Richard is betting Christmas will allow music chain to stay solvent • The fallout from the collapse of Woolworths saw its music distribution arm EUK halt supplies to retailers including Zavvi, which has had to go direct to record labels such as EMI to keep the stores stocked. • Virgin is funding Zavvi in batches of £5m a time so it can get supplies. The money will be repaid as sales are made. Zavvi also owes EUK about £60m, which Virgin would be on the hook for if the music store went under. • Zavvi today said it was not in immediate difficulty, and the stores are trading well. It claims to have enough cash and stock to cover any liabilities, but has moved to shut down the company website, admitting to supply issues • As part of the deal, Virgin agreed to act as a lender - it has a 'contingent liability' in industry jargon. By loaning it money for supplies, Virgin is betting that Zavvi will bring in enough money over Christmas to keep it solvent. • A Virgin spokesman would only say that the company has been 'supporting Zavvi over this crucial Christmas period'. There are Virgin Mobile counters in Zavvi stores, giving the Branson empire another reason to keep customers flowing into the shops. • A last-ditch rescue bid for Woolworths was being launched today, but analysts fear it has come too late to save the beleaguered chain.  

22. Zavvi was forced to close its website and turn to other suppliers after its major supplier EUK was put into administration at the same time as its ownerWoolworths at the end of last month. • Ultimately, the team from Ernst & Young could become Zavvi's administrators if they and the management team cannot ensure repayment of its debts. • Formerly Virgin Megastores, Zavvi has been relying on Sir Richard Branson's Virgin Group to keep it in stock in the run-up to Christmas with a rolling loan of between £4 million and £5 million. • But the retailer also owes a total of £100 million to EUK, whose administrators Deloitte asked for the E&Y team to be brought in, with the agreement of Zavvi's management. • Virgin, which sold Zavvi to its management for a nominal £1 just over a year ago, has since then stood as guarantor to stock supplied by EUK on 60-day credit terms. Those terms ceased when Woolworths went into administration on 28 November. • So far, it is reckoned that Zavvi has sold about half the £100 million of stock supplied by EUK and therefore has £50 million of cash to pay its supplier's bills when they finally fall due towards the end of January. • But in the meantime, the retailer will also have to find payments for its shop rents early in the New Year and sort out a longer-term solution to replacing its supplies. • Ernst & Young's team is focusing on a wide range of options for the business, from a full-scale restructuring to immediate ways to improve cashflow. • Meanwhile, at Woolworths, the closing-down sale continued for a second day. Yesterday, when it kicked off, administrators Deloitte said that it resulted in the highest daily turnover in the company's 99-year history.

23. On 5 December 2008 The Daily Telegraph reported that Zavvi was seeking help from the Virgin Group to guarantee millions of pounds worth of its stock payments to Woolworths' Entertainment UK (EUK) as EUK had entered into administration.[21] On 12 December The Times reported that Ernst & Young may step in if Zavvi could not pay EUK the value of the stock which amounted to a £106 million debt.[22] Later that day, a spokesperson from Zavvi clarified this position by stating that they had called in Ernst & Young in an advisory capacity. They were not, as The Times reported, called in by anyone to take the company into administration. Zavvi were forced to shut down their internet operations, as they entered talks with EUK and Deloitte & Touche, EUK's administrators.[23] Nick Fox, a spokesman for Virgin, said that a deal had been done with the administrators of Woolworths who accepted £40 million to settle the debt.[10] Zavvi had been trading well, prior to the collapse of Woolworths in November.[10] Zavvi was left without a batch of some of the main Christmas best-sellers, and had to obtain the products from other sources, paying cash up front.[24] • On 8 December 2008, Zavvi suspended its sale of gift cards citing the problems with its supplier, EUK as the cause.[25]

24. IT seems amazing that not very long ago Richard Branson was eager to buy Northern Rock as it plummeted into a financial black hole. • Now the chain Zavvi is shutting shop with no signs of a reprieve and where is Richard Branson? • Branson's Virgin group sold off Zavvi to make money and now thousands of jobs are to be lost. • It is Zavvi, and formerly Virgin Megastores, that helped to give Branson his vast wealth. • It seems unfortunate that he now looks unwilling to buy back the failing business to help those staff who worked so hard for him to make and keep his wealth in the first place. • SCOTT LOMAX Chesterfield

25. It was the UK's largest independent entertainment retailer before being placed in bankruptcy protection on 24 December 2008. • Store closures took place from January 2009, with the last to cease trading on 20 February.  • HMV purchased 19 Zavvi stores to be merged into the HMV chain. • Former managing director Simon Douglas and business partner Les Whitfield purchased five of the stores to form Head Entertainment. All of which eventually closed in early 2009, after less than a year of opening. • On 2 March 2009, The Hut Group relaunched the Zavvi website.

26. Branson escapes Zavvi debts • 14.01.09 | Philip Jones • Richard Branson and his Virgin group have escaped shelling out millions to cover the debts of collapsed music store Zavvi, according to the London Daily News. It was expected that administrators, Deloitte would go after Virgin for £80m, who had reportedly guaranteed Zavvi's credit facility with failed Woolworths distributor eUK. • These debts have been drastically negotiated down by Zavvi administrators Ernst & Young to £40m. A good Christmas and £20m in reserve should be enough to satisfy Deloitte and save Virgin a packet. • Meanwhile, Zavvi's administrator Ernst & Young has announced the closure of another 18 stores with 353 positions being made redundant. Last week, 22 Zavvi stores ceased trading.

27. HM Revenue and Customs are understood to be investigating tax paid by the failed music retailing group. • It is believed that the Revenue are unhappy about how £55m, injected into the company by Richard Branson a year before the chain went into administration, should have been treated under tax rules. • The money was paid to the former Virgin Megastores company as a dowry and treated as non-taxable income.  Immediately after receipt of the cash the shops were relaunched as Zavvi, but fell into trouble almost exactly a year ago. • Ernst & Young’s progress report warned that if the Branson money was deemed taxable it would have a significant impact on the return to creditors. Jack added that this would affect only a small number of creditors who were owed money by Zavvi Group Limited as opposed to Zavvi Retail Limited, which is where most claims lie.

28. Comments What do you think? • Dave Roberts | 17:37 8 January 2010 • Complete scam this. Remember thinking at the time it was a joke. Basically Branson fiddled it so he could change the name of Virgin Megastores to something else then crash the company so it didn't tarnish the Virgin brand. Remember the fanfare, then it turned out he sold the whole thing for £1.

29. Zavvi, the record chain that collapsed last year, over the tax treatment of a £55m cash injection by Sir Richard Branson. Zavvi management to treat the money, a dowry given by Branson to support a management buyout, as tax free. The report said: “The funding has been treated as non-taxable income

31. Northern Rock sold to Sir Richard Branson's Virgin Money in £747m deal  Northern Rock will be sold to Sir Richard Branson's Virgin Money in a deal worth at least £747 million, the Treasury announced today.

32. The problem with the management buyout option is the financial capital. Three years ago Nick Fry and Ross Brawn would have been able to go to a bank like RBS, or to a venture capital business like Apax or Bridgepoint and would probably have been able to get a deal which brought in working capital, in return for a 40% shareholding. But F1 is no longer very fashionable in the City, too many banks have lost money in the sport and it would be a very hard sell to any major bank at a time like this. They could look to the investment arm of an Emirate government, like Dubai or Qatar, but these too have become much more wary.