What happened in Dedoles?
We grew too fast for too big results. We were not capitalized enough. When we started growing so fast last year, there were internal problems associated with it, which every company that grows fast will encounter. But since the season didn’t go according to plan, and that affected the entire e-commerce area, we couldn’t generate enough cash and sell out stocks.
If we had a turnover we had to achieve, which was around 130 million euros (almost 3.2 billion crowns – editor’s note), we would be in profit. But that didn’t happen, we ended up at about zero and we were left with large stocks. As a result, we found ourselves in an awkward cash situation because we did not generate a profit to support our balance sheet. (balance sheet or financial statement, which summarizes all the assets and liabilities of the company at a certain time – editor’s note). We need to sell out the stock range to get it more reasonably.
How do you handle it?
We are gradually trying to reduce stocks. We have a long supply cycle, which means that what we ordered in September is coming to us now. That is why we are under pressure. We are constantly running out of new goods, so we can’t reduce stocks as fast as we need to. Therefore, we need open and transparent communication with suppliers, from whom we expect support to postpone our due date. We are trying to negotiate repayment schedules with them so that we can get through it, break the inventory growth curve and release cash.
As we did not achieve growth plans and the macro-situation worsened, we had to take a responsible approach. We are reducing costs to end up in profit this year. Therefore, we had to reduce the number of employees at the headquarters in Slovakia, but the Czech headquarters was not affected. Now we still need to solve the cash flow, which requires the support of banks and suppliers to have time to sell out stocks.
What will the investment year 2022 look like?
You talked about the problems due to lower growth last year. So why did it go so far as to layoffs, when you knew the situation was getting worse? When did it break?
When the war came, market demand across e-shops fell. At that time, we thought we would step in significantly. We have already reduced costs before, but only then have we taken a more radical step and built it more sensibly. The first two months of this year developed well for us, we grew by twenty percent. In March, however, our sales fell sharply.
So if the war didn’t come, you wouldn’t solve the problems?
That is not 100% true. But it certainly played a role.
Was it a mistake that you did not raise external capital? Companies that grow so fast usually have external capital. Why didn’t you go this route?
That put me in a trap. In relation to margins, we had such a healthy business model that we thought we could build that value ourselves. The company is healthy. But banks have their laws. When you have no profit, they are not willing to finance you as much as you do.
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So have you made bad managerial decisions?
Yes, big growth is always associated with big inefficiency, which is why we got into trouble. In retrospect, I rate this as a mistake. Ideally, we should have invited an investor in the first quarter of last year, when the market situation was favorable. We would not have to deal with these things today. The company is healthy, just stumbled a little. The business model works, it is able to generate cash and margins. But with the fact that the season didn’t work out for us and the macro-factors started to deteriorate, it turned a bit against us. Since we did not have external capital, we also did not have a pillow to rely on. That’s why we decided to try to find a partner who would help us grow with the help of capital.
How much should the investment be?
Basically, we don’t need that much money. Rather, we need to cover long-term liabilities. We have invested in long-term assets, on the other hand, we have no long-term money. It may seem that a company with sales of ninety million euros needs huge capital, but in reality it is only a small fraction. We do not need as much capital to support the stability of society.
How important is the Czech market for you?
Very important, last year was our biggest market. This year, the Czechia and Germany are fighting for the championship. The Czechia has a share of around thirty percent in sales, which is an important market for us.
And in terms of suppliers?
We have several important logistics partners in the Czech Republic, and they are key for us. But we do not produce in the Czech Republic.
So Germany is already at the level of the Czech Republic in terms of sales?
Yes, in April we have a campaign on German television, so the German market will probably outgrow the Czech market.
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So won’t the reduced costs apply to your significant advertising campaign?
We made the mistake that we may have been in too much of a hurry to some marketing channels. Now we see that we have not been effective in this. But this did not happen to us on the Czech market. There will also be rationalization on this side, we want to work smarter with it, but we still have a big marketing budget.
So we’ll continue to see your hamsters, the marketing character of Dedoles?
You will, but less often.
Another way of financing is to issue bonds. Haven’t you thought about that?
They did not think, our financial advisors did not recommend it to us, it seemed unlikely that it would be successful.
You have suppliers from China, about 40 percent of the products you produce there. The situation is currently difficult in China, with the war having a further impact on supply chains. Is this model sustainable?
We are looking for alternatives that are closer. On the other hand, this is not a problem for us at the moment, because we have a sufficient supply of goods. At the same time, we saw last year that problems related mainly to coronavirus started there, so we changed our approach a bit and ordered more in advance. Which means more pressure on cash flow. From this point of view, too, we would like to change the supply chain.
You claim that you do not want to sell below cost, but I see a significant amount of discounts on your e-shop. So how do I understand that?
We are now running a sales campaign in the Czech Republic, thanks to which we want to improve cash flow. We are looking for a golden mean between selling stocks quickly and not weakening them strategically. But we have a different strategy for each country.
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So those discounts are caused by a surplus of goods?
Yes. We need to sell those warehouses. Now our first sales campaign will run on television in the Czech Republic, so far we have done campaigns to build a brand.
When do you expect you to get back to normal?
The season at the latest. In that period, we generate significant sales and we make almost all the profit in the last three months, which are crucial for us. If we agreed with the investor, we could stabilize it in a month, month and a half.
The situation is not generally favorable; according to Heureka, e-commerce sales growth declined in the last quarter of last year. Do you expect the economic situation to deteriorate?
Of course. We had to adjust to be in profit even with lower sales than we had last year. We are counting on it, we have built a plan that also takes into account the declines. But we try to do it so that we can generate cash and profit. Sentiment has not cooled everywhere, we are growing in some countries. The situation across Europe is different. At the same time, we are actively building new sales channels, such as Amazon or Zalando. In this way we can balance the risk of falls. It was an opportunity we didn’t go for. At the same time, brands usually do not have 100 percent of sales through their channels, but they also have sales from online marketplaces.
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So in retrospect, do you consider it a mistake not to expand even more aggressively into the online marketplace?
I do not consider this a mistake, because we did not have the capacity or enough goods for it, we had a problem supplying ourselves. I don’t regret not doing it before. But now we have room for that.
So to sum it up, you’re cutting costs, getting an investor and hoping for at least an average end of the year?
Exactly. We have set profitability so that we should achieve it even if we fall sharply year on year. At the same time, thanks to the fact that we have a strong brand and loyal customers, we can rely on it. However, even if the investor does not come, the company is still able to generate cash, which is in our warehouse, where we have great value.
So the investor is not a necessary condition for survival?
It’s not.
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