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Administrators have delivered a sobering analysis of the failure of fashion retailer Mosaic Brands (ASX: MOZ), describing it as high-cost business with a lack of product differentiation that competed with itself in retail malls in Australia and New Zealand for the custom of "mature shoppers".
It’s part of the reason why Mosaic Brands, which was placed into voluntary administration in October last year, was unable to find a single buyer for any of its iconic brands, which included Noni B, Rockmans and W.Lane.
In their report to creditors, administrators from FTI Consulting revealed that Mosaic had struggled in the aftermath of the pandemic, but they noted that the rot had set in well before that - during a fast-paced expansion between 2016 and 2019.
That’s when the group made several acquisitions, including the Specialty Fashion Group’s stable comprising Autograph, Crossroads, Katies, Millers and Rivers.
“The group expanded rapidly through the acquisition of a number of brands some of which had been performing poorly under their previous owners,” says the creditors’ report.
“In respect to the women’s clothing brands there was a lack of differentiation in this expanded brand portfolio in product offering and target market.
“That target market of the brands was predominantly the ‘mature shopper’ in the 40 and 50-plus age bracket and the group’s business strategy relied on analysis and predictions regarding wealth, spending habits and spending growth rates, particularly in online sales, of this market.”
The administrators say that while these acquisitions delivered a significant boost to revenue, they also carried a big fixed-cost base, including store rents, as well as the inefficiencies of “multiple legacy purchasing, point of sale and operating systems”.
“Given the lack of product differentiation we speculate the brands co-located together in shopping centres were competing with each other for the same customers,” says the report.
The administrators reveal that this is among the reasons that buyers pulled out of plans to acquire some of the Mosaic Brands businesses earlier this year.
The administrators say they were in contact with 86 parties, leading to confidentiality agreements with 27 of them.
Six non-binding indicative offers were received for some of the businesses and four parties had progressed to stage two and were preparing to undertake further due diligence.
Potential buyers pulled out
Despite their best efforts between December and January to get a deal over the line, the administrators say all of the parties had pulled out of the sale process by 29 January this year.
Among the reasons cited is that they “could not satisfy themselves as to the future strategy of the brands”. The buyers also had significant concerns over the “historical indebtedness” of the business and the impact that the insolvency had on the brands.
The administrators failed to find a single buyer for any of the businesses in the Mosaic Brands stable, leading to the closure of the last of the company’s brands, Millers and Noni B, in April.
The administrators note that “significant losses” incurred by the company in FY20 due to the pandemic proved to be the final nail in the coffin and one from which the group was unable to recover.
A rebound in FY21 was “insufficient to cover prior losses and the required reduction in secured debt facilities”.
A subsequent restructure also failed to get the business back on track to generate enough profits to fend off insolvency.
“A significant turnaround of the business was required to deliver profits to catch up for past losses, pay creditors when they fell due and provide sufficient working capital to manage the business,” says the creditors’ report.
Moves by suppliers to collect outstanding payments for invoices and the withdrawal of support by the bank due to covenant breaches “were in our view a consequence of the failure of the group but not the cause”.
Mosaic had accumulated losses of $346 million in the FY25 year to date with net assets deteriorating from $103 million in December 2019 to negative $170 million in October 2024.
The report reveals that Mosaic Brands had collapsed with debts of between $361 million and $392 million - including debts to secured creditors and employees. About $5.6 million has been paid to 684 employee claims processed by the administrators.
The company owed $41.33 million to about 343 trade creditors while landlords are owed about $35.8 million comprising rents and outgoings – a figure that includes early termination of leases.
“We are aware that there may be additional contingent claims which we have not included in our estimate,” say the administrators.
“The most material of these claims of which we are aware relates to proceedings commenced by the Australian Competition and Consumer Commission (ACCC) in March 2024 prior to the administration.
“These proceedings allege the group breached Australian Consumer Law by failing to deliver several hundred thousand products to customers within the delivery timeframes advertised on its websites during September 2021 and March 2022.”
The ACCC needed the written consent from the administrators to proceed with its court action.
“The ACCC communicated its intention to apply to court to continue the proceedings on the basis of strong public interest,” says the report.
“Our initial position was consenting to continuation of the proceedings was not in the best interest of creditors while we were undertaking a process to sell or recapitalise the business of the group.
“However, on the basis we were unable to achieve a sale of the business, we provided our consent for the proceedings to continue in late January 2025.”
The administrators note that should the ACCC succeed in its court action, any penalty imposed will sit alongside claims by other unsecured creditors.
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