Minggu, Desember 3, 2023

Inflation Insights: Lessons from Revlon’s Dive for a Stronge

Often, companies focusing on the demand side expand their sales while neglecting the supply side. This scenario can be illustrated by the renowned American cosmetic company, Revlon Inc, which faced bankruptcy at the end of 2022.

Revlon recorded net sales of US$2 billion in 2022, a slight decrease compared to the previous year’s US$2.1 billion. Despite relatively stable sales, Revlon stated its inability to settle a debt of US$3.5 billion and faced difficulties in paying vendors within its product supply chain.

To comprehend this issue, it’s essential to look back at the journey of Revlon Inc. The second most famous cosmetic brand in the United States reached its peak net sales of US$2.7 billion in 2017. Meanwhile, inflation in the U.S. stood at 2.95%, slightly lower than the previous year’s 3.07%.

Despite the low inflation rate at that time, Revlon still struggled to turn a profit due to high operational costs, low inventory, and inefficient cash management. Post-pandemic, disrupted supply chains triggered more volatile inflation, making it increasingly challenging for Revlon to generate profits, ultimately leading to bankruptcy.

According to Bloomberg, Revlon attributed its deteriorating financial balance not to declining expansion or customer acceptance of its products but to uncontrollable inflation. The inflation directly correlated with the depreciation of the currency, diminishing the company’s cash flow over time since the pandemic.

Another unforeseen issue for Revlon was inventory management. The company stated that if they had purchased more inventory and stock before the pandemic, the lack of cash might not have occurred. After the pandemic and the inflation surge, they practically needed to allocate more funds for raw materials and operations.

When filing for bankruptcy, the largest shareholder was MacAndrews & Forbes, owned by Ron Perelman, the father of Perelman. MacAndrew & Forbes controlled 85% of the company’s shares, with the remainder held by retail investors.

Fortunately, Revlon successfully reached an agreement with its creditors. Glendon Capital Management, King Street Capital Management, Angelo Gordon & Co, and Oak Hill Advisors, as creditors, took over the ownership of the company and ushered in a new era for Revlon, renaming it Revlon Group Holdings.

After the takeover, Revlon managed to emerge from bankruptcy, evident in the reduction of debt to US$1.5 billion. Not only that, the liquidity condition of the company improved by accumulating US$236 million in company cash in the first quarter of 2023.

It’s noteworthy that Revlon’s bankruptcy was more due to the increased debt burden from uncontrollable inflation than the company’s inability to compete with competitors in terms of products. The rise in raw material prices, production costs, and other financial burdens became too heavy to bear.

Inflation is not just a demand issue but also has real impacts on a company’s operational costs. In recent years, there has been a significant change in global inflation trends. Increases in energy prices, raw materials, and labor have added additional pressure to the production costs of companies, especially those dependent on complex supply chains.

Moreover, adequate cash flow management with the right instruments is a point that cannot be overlooked in this case. Efficient liquidity management is key to anticipating significant currency depreciation.

Financial instruments such as money market instruments and liquid securities can help companies manage their liquidity effectively. In emergencies or economic uncertainties, having quick access to funds can prevent more serious currency devaluation.

By understanding the lessons from Revlon’s bankruptcy, companies can improve their cash flow management strategies, choose financial instruments wisely, and protect their currency value from external threats that may arise. Awareness of the importance of effective cash flow management is a crucial step in building a strong and sustainable foundation for business growth.

In business, success may not be a matter of achieving greatness but rather who can survive the longest. The last one standing wins. This is inseparable from the risk of bankruptcy that always looms over companies, whether startups or well-established corporations.

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