Last year, Australian donut chain Doughnut Time was forced to go into liquidation, leaving dozens of employees outraged, without a job, and owed thousands of dollars in wages and superannuation contributions.
At its peak in 2017, the company employed around 500 staff across 30 stores in Australia and the United Kingdom. By March 2018, that number had dwindled to less than 100 staff and just seven stores.
So, what went wrong? As founder Damian Griffiths told Broadsheet, it all came down to cash flow problems as a result of expanding too rapidly. “I am accepting the blame, I expanded too quickly,” he said.
Although Doughnut Time was initially heralded as a success story thanks to its large following on social media and ability to attract younger consumers, Instagram fame wasn’t enough to sustain a fast-growing business faced with high rent and operating costs.
There are a few key lessons to be taken away from the Doughnut Time scandal:
1. Cash flow is critical
One of the biggest contributors to the collapse of Doughnut Time was a lack of cash flow, meaning the company couldn’t afford to pay day-to-day expenses such as employees’ wages and business rent.
Even if a business is profitable in the short term, it can only survive and thrive in the long term if there’s cash available to pay the bills. Investing huge amounts of money on new store locations all at once ties up vital funds that should be used to support the business’ core operations. Without proper cash flow management, businesses are at risk of making the wrong decisions when it comes to investing in the business.
When a business expands internationally there’s an assumption that the business’ products will be accepted in international markets – but this isn’t always the case. Factors such as global competitors, cultural norms, local trends etc. all come into play when determining whether a business will succeed in going global – which is why thorough research and preparation is key.
A company needs to be willing to evolve to face the realities of a new market. This could involve tweaking a product offering, overhauling business practices, or finding a new niche market entirely. Whatever the case may be, businesses must have a strategic plan for adapting to a new market rather than assuming consumers will accept a product.
3. eCommerce is beneficial for sustainable growth
Generally speaking, running a physical retail store will incur much higher operational costs and rent compared to an eCommerce business. Online businesses typically also require less need for workers, reducing labor costs.
Having a dedicated retail eCommerce store gives you complete control over your sales strategy and product catalog, and cutting out the middleman means you don’t have to share any of your profits. Integrating online channels into a business model as part of an expansion plan can help cut down on costs, support sustainable growth, and avoid potential diseconomies of scale.