Leiden Law Blog

V&D and the arbitrariness of rescuing businesses

V&D and the arbitrariness of rescuing businesses

The essence of business life is the quest for value. A business can only survive if it creates, delivers and captures value. Generating value is the outcome of an uncertain process. Businesses that do not create value ultimately fail and are liquidated or sold. In principle the market selects value-creating firms to continue their business, but sometimes authorities facilitate failed businesses to recover. This is done directly – support by way of injecting cash – or indirectly - via business rescue supportive insolvency regulations. This policy increases the subjectivity and arbitrariness of facilitating insolvent businesses to recover. The question runs deeper and is more fundamental: what is the purpose of aiding insolvent businesses? Comparing department store group V&D with the ABNAMRO bank and football clubs turns up remarkable correspondence indicating various reactions to insolvent businesses. 

Peter De Waard (column in De Volkskrant 29 December) compares the V&D insolvency with the ABNAMRO case. The Dutch government nationalised ABNAMRO (but not DSB) because of the dangers of the financial sector becoming contaminated. Considering the complex connections between financial institutions, a chain reaction – a financial meltdown – was possible. This could have paralysed the real economy with severe effects for growth and employment. 

How harmful is the collapse of V&D for our society and cities? It could be disruptive for city centres and affect the attractiveness of other retail stores – a city centre melt down? Many high streets will empty and pauperise, ripping out the heart of these cities. They will become less attractive for other shops and visitors; a downward spiral which cannot be stopped easily. This will have consequences for the 10,000 employees and 1,800 suppliers of V&D – another chain reaction? According to De Waard V&D could be labelled a “system warehouse” because of economic, infrastructural, social and security reasons. Isn’t V&D too big to fail? Minister Kamp of Social Affairs proclaimed to do everything to keep V&D alive, but of course he cannot take action because of state aid problems. 

Another comparison can be made between V&D and football clubs. The ultimate goal of a football club is the number one positon in the premier league or, even better, to win the Champions trophy. Football clubs cannot score by making a profit; they can only “score with goals” and their rank in the competition. In most cases communities have a stake in their football club’s stadium. A report by KPMG in 2003 concludes that communities are the “twelfth player”. If a football club goes bankrupt, its stadium becomes somewhat useless (see for other problems with football clubs my 2010 article in Economisch Statistische Berichten, in Dutch). A lot of football clubs have ‘sugar daddies’ – like the Chinese Hui Wang at FC Den Haag. They incidentally invest a lot of money, but influence the policy of football clubs and demand sportive success. Usually expenses increase structurally. So football clubs run into financial troubles again and again, “L'histoire se répète”. Financial support of a football club is justified on the grounds that a city “needs” the football club; it influences the “wellbeing” of the city – the football club promotes the city. Because of problems with state aid, a lot of constructions emerge that emphasise the infrastructural character of the football club. But as with ABNAMRO the origin is the same: Football clubs do not create (enough) value.

Because of the local city-bound character of football clubs this also corresponds to V&D which has 62 branches dispersed throughout cities and towns in the Netherlands. It attracts 100 million visitors a year! – a kind of forum or platform that draws people in. (The Dutch premier league attracted 5.7 million visitors during the 2014/2015 competition). Like FC Den Haag, V&D has had a capital investor and owner since 2010: Sun Capital Partners. Sun Capital invested 170 million euro in V&D but in December 2015 withdraw their support because of poor performance ascribed to warm weather conditions. 

V&D was founded by Willem Vroom and Anton Dreesman in 1887. Their strategy was revolutionary at the time: to sell for low but fixed prices. During its lifetime V&D has belonged to different groups (e.g. Vendex and KBB). Its business history reveals a fascinating perspective of the complexity of doing business. Although they did not change their formula, V&D managed to survive – under different umbrellas. In the last twenty years (!) V&D has never realized a profit. They could compensate the losses with the profits from La Place, its successful restaurant chain. This was detrimental for the development of La Place. Immediate emotional reactions followed after the demise of V&D. The major of Haarlem stated that “he cannot imagine a city without V&D; it would be a severe loss to the city. Other economic activities would be severely hampered. V&D Haarlem attracts 1.7 million visitors who also promote other economic city-bound activities. The city ‘needs’ V&D. If we can contribute to keeping V&D alive, we will not hesitate to do so. However it is not for us to decide”. This harps back to ancient times when cities were highly specialised in goods such as beer, herring, or drapery and were usually subsidised by local authorities, or the VOC which was monopolised by the Dutch State. 

Of course the cases do not match 100%, but there are similarities in the origin and the consequences of failure and the way authorities are involved or have responded. This raises the fundamental question: what is (or should be) the purpose of insolvency proceedings? Usually support is based on emotions and fears. We are inclined to believe that businesses are or should be successful, prosper, grow and survive. However businesses have a limited lifetime. In principle authorities can save every firm, directly or indirectly. It can always be asserted/justified that a business is viable, valuable, needed or necessary. However the government should not select viable firms; the market can do that. Many connections exist in the economy -  it can be considered a complex business ecology. Governments should not add complexity, but should try to reduce complexity with simple rules. Arbitrary state aid (directly through financing and indirectly through new business rescue regulations) to insolvent businesses adds complexity. 

These comparisons show that state support is arbitrary. Aiding insolvent businesses is subjective, arbitrary, complex, distorts competition and can be detrimental to healthy firms.

I used a range of press sources from various newspapers and, shame on me, Wikipedia for the historical overview of V&D.

2 Comments

David Bjornson
Posted on August 15, 2016 at 18:03 by David Bjornson

Great article about V&D and the arbitrariness of rescuing businesses. I’ll surely spread this information to everybody.

Jayne
Posted on February 8, 2016 at 23:46 by Jayne

Holy shziint, this is so cool thank you.

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