Patisserie Valerie

Patisserie Valerie: How to strip out the fat but leave the butter

After Patisserie Valerie’s ignominious fall from grace stories began to emerge of relentless cost-cutting as the company desperately tread water, including replacing butter with margarine in pastries. When a business is struggling, cutting costs is a necessity — but it can be managed without damaging the business, writes Alastair Barlow. 

The Patisserie Valerie story is one that Hollywood could very well have written. After listing on AIM in 2014, Patisserie Valerie held a higher than industry-average price-to-earnings (P/E) ratio, exhibited strong year-on-year growth and, just a year ago, had a valuation of approximately £450m.

However, mere months later the group entered administration and the Patisserie Valerie business was sold for just £8m (other businesses in the group sold for another £7.5m in total) rendering the previous £0.5bn valuation utter bollocks along with many angry shareholders and employees.

A brief recap

In October 2018, HMRC issued a winding up petition to Stonebeach Limited (the restaurateur part of the group) seeking more than £1.1m in unpaid taxes.

It was later discovered that material accounting misstatements had been made in the group’s audited annual accounts (as audited by Grant Thornton for the past 12 years, who have come under severe pressure from the FRC with an unacceptably low percentage of audits judged ‘good or required limited improvements’).

Following this winding up petition, the directors rapidly assessed the cash position and level of supplier arrears at the time and injected £20m cash. PwC were appointed to conduct a forensic review and further assess the impact; the impact of the misstatements had grown from £20m to as much as £94m which included:

  • Tangible and intangible assets overstated by £23m

  • Cash overstated by £54m

  • Prepayments and debtors overstated by £7m

  • Creditors understated by £10m

While you could argue an ‘element’ of judgement around assets and debtors, I have zero sympathy with Chris Marsh (the CFO) or Grant Thornton on the much more factual cash position and creditors. To put this into context, the group creditors were only £5.2m in the last ‘audited’ (ahem, glanced over) annual accounts.

In mid-January 2019, the company couldn’t secure continued funding which led to the group unable to pay its employees that month. As a result, the directors placed five of the group’s companies into administration and KPMG were appointed administrators (which also raised an independence eyebrow or two because they shared the same auditor)

The level of accounting irregularities was so serious that the statement of affairs cited the “mis-statement of the company’s accounts was extensive, involving very significant manipulation of the balance sheet and profit and loss accounts” to the point that it wasn’t possible to complete them.

It’s also alleged that KPMG advised sales and profit data between September 2014 and October 2018 couldn’t be relied upon. You can read more about the administration here.

Lessons to consider when things are going bad

Businesses go bust, it happens, and it happens to many businesses across different sectors. It happens to good businesses and poorly run businesses; this could be due to poor strategies, poor management, fraud, increased competition, macro-economic conditions and many other factors.

In fact, another well-known restaurateur, Jamie Oliver, experienced this recently too when Jamie’s Italian went into administration for the second time.

Clearly the first major lesson is not to commit fraud, but that should be an absolute given! My Theranos article highlights typical fraud indicators to be aware of. Fraud aside, what should the management team at Patisserie Valerie have considered as part of their cost-cutting measures?

Well, rumour has it that the cost-cutting was so severe that teams stopped using butter in their puff pastry. An ‘affordable luxury’ café group selling cakes and pastries that doesn’t use butter in their products seems a little curious. Other stories include broken ovens, unpaid suppliers and a leak in the roof at a key bakery site.

So, if not butter, what are the ingredients for a successful cost cutting exercise?

As well as the obvious of trying to skim back on general headcount, here are my suggestions for a better cost-cutting recipe below:

Strategic internal benchmarking

Administrators are excellent in assessing profitable and unprofitable outlets; KPMG came in and within a matter of days closed 71 unprofitable cafés.

If an administrator that has limited experience of the business can come in and within 48 hours make an informed decision about which outlets are profitable and which are not, why did the CFO, who has years of experience at the helm, not drive this decision? Was it ignorance or arrogance that kept these unprofitable cafés open?

Strategic internal benchmarking is absolutely key in driving profitability, growth, or in a declining business assessing where to cut outlets. Chris Marsh should have had an absolute wealth of information at his fingertips to benchmark each café at every level; revenue per square foot, revenue per available seat hour, EBITDA, labour cost percentage, gross profit and much more, all segmented by café to benchmark against each other.

Procurement analytics

If you’re spending significant sums with suppliers, you should be all over procurement analytics, and if you’re a manufacturing business where cost of goods sold are a significant proportion of spend you should definitely be all over them.

McKinsey believes that procurement analytics can help achieve cost savings of 3 to 8%, compared to traditional pricing models. Advanced analytics wrings more value from purchase data which enables better negotiation tactics, supplier management and purchasing strategy.

Procurement analytics are absolutely affordable to SMEs and pay for themselves many times over, given the value they bring.

Communicate and consult

The most important thing to do during hard times is to communicate. Communicate with your management team, communicate with the board, communicate with suppliers and seek to consult with specialists.

In the case of Patisserie Valerie, it seems that few of these happened and Chris Marsh buried is head in the sand. For the avoidance of doubt, this does not help!

HMRC issued what was supposedly a surprise winding up petition for £1.1m. As CFO, Chris Marsh would have been fully aware of this way before he received it – we all know HMRC are big fans of sending out brown envelopes so the company would have received a lot of communication before the winding up petition.

Suppliers were left unpaid, while new ones were sought. The wider finance team would have (or should have) been aware of the supplier situation. The fact that suppliers were continually being pushed back and invoices weren’t even accounted for on the finance system must have raised significant suspicion from anyone in the accounts payable function.

They say, “a problem shared is a problem halved”. Communication should be at the top of any list when the going gets tough and cost-cutting exercises need to be put in place.

Task force

Set up a specific team focused on cutting costs; the emphasis here is on team, because no one person should do this on their own.

Cutting the costs of butter is a false economy in a business where, literally, the key ingredient for their ‘affordable luxury’ pastry is butter! The task force team should comprise operations, finance and, given the severity in Patisserie Valerie, the CEO along any other relevant functions to truly identify the best and least impactful areas to cut costs.

Any good consultant has a 3×3 matrix in his pocket; exploring all costs across the business and bucketing them with impact to customer on one axis and ease of implementation on another with value to the business as the third weighted dimension. This simple exercise incorporating all functions can really highlight the areas which can be cut without affecting the business too much. 

Simply looking at the largest costs and switching them for a poor-man’s alternative isn’t always the right answer.

Corporate governance

Ultimately, corporate governance was the area of greatest failure; the weak control environment spanned across Grant Thornton, CEO Paul May, CFO Chris Marsh and the wider finance function and poor oversight from Luke Johnson as executive director. Quite how these parties didn’t have a clue is pretty unbelievable.

Interestingly, Grant Thornton were Patisserie Valerie’s auditors for 12 years; were they complacent, negligent, ignorant or just too close to the group and CFO to maintain a suitable level of professional scepticism?

Equally, Paul May and Chris Marsh worked together since 1998; was Paul too close to Chris to challenge him or did he know what was going on?

And as executive director, did Luke Johnson ask the right questions of his management team, or was his management team the right one? Ultimately, the buck stops with him.

Good corporate governance should identify that costs need to be cut early on and put a plan in place; the earlier along the corporate demise curve the better and the more options available.

Procure to Payment (P2P) controls

Following on from good corporate governance is specific process controls. Before you can understand where to cut spend, you need certainty of what spend is and what your current supplier liability position is. In Patisserie Valerie, both of these were allegedly out of control with £10m of creditors completely unaccounted for.

A robust P2P process, enabled by the right technology and clean data, should provide a clear supplier liability position at any point in time (whether through PO accruals, GRNI accruals, three-way matching or accurate invoice processing) and the right information to act on. Certainly, a business of £100m revenue should have had a strong set of process controls in place.

The big question in Patisserie Valerie is, did they have the controls in place or was there a complete management override or worse, collusion? Either way, I’m surprised Grant Thornton didn’t pick up on any of this in their audit.

It’s absolutely vital you have a clear position, strong controls in place and good, clean data to make informed decisions.


While the AIM listed business may have had multiple (reasonably homogenous) businesses operating across 200 sites, Patisserie Valerie really wasn’t a large or complex business in the grand scheme of things.

The most recent filed results showed group revenue in 2017 was only £115m with profits of £16m. The group had very little complexity in its structure, product or services and it was selling only in the UK. They made cakes and sold them; pretty basic as a business goes.

This failure is disappointing on many levels; hugely disappointing that an accountant could potentially have manipulated the books and records to such a degree – both the motivation and carry it out undetected.

It’s disappointing the auditors were blind to it; they may not be there to detect fraud but seriously, a material error of this magnitude should have been staring them in the face if the right questions were asked. They even awarded Patisserie Valerie IPO of the year in 2015!

Thirdly, it’s disappointing that the executive director, Luke Johnson, British entrepreneur, Sunday Times columnist, self-proclaimed ‘projector’ didn’t have the executive oversight he should have.

It’s never easy when a business is making a loss or running out of cash but there are a great number of ways to remedy this equation; having the right experience is one of the key ingredients and leveraging just some of the examples I mention above.

It was too little, too late for the incumbents at the time to change the course of the business through cost-cutting, despite their extreme measures. Chris Marsh was suspended, subsequently resigned, then arrested, bailed and is currently under investigation by the Serious Fraud Office. Paul May also resigned in November 2018 when Stephen Francis was appointed as chief executive,

For all those wondering, I can put your mind at ease that the new owners (Causeway Capital Partners) have since changed back to real butter.



©2024 Sloane



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