Scotch & Soda saved by US investor after it failed because of Sun Capital’s hubris

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Scotch & Soda, the Dutch fashion brand, that recently filed for bankruptcy in Amsterdam, the Netherlands, due to “serious cash flow problems“, is saved by US investor Bluestar Alliance. The investor is know for sports brand Hurley. The US investors will likely reduce the global and local footprint of the fashion brand.

The bankruptcy of Scotch & Soda was caused by inflation, the consequences of the corona lockdowns, and high energy prices. This was bullshit, of course, as inflation caused by high energy prices can be typically charged through to the consumer as long as a brand’s products are still attractive. The corona lockdowns have indeed led to high debt for retail chains. But, in this case, the previous owner, Sun Capital Partners, had converted €200 million in debt to shares to heal the balance sheet. Still, that was insufficient to save the brand, which generated €343 million in revenues in 2022. The failure happens in an uncertain period where banks are more risk averse given high-profile bank bailouts in Europe and the US during the last two weeks.

What caused the bankruptcy, then? It’s actually the aggressive expansion that brought the fashion company in trouble. Currently, the company has 230 shops worldwide. The ecommerce outlet helped to spur growth, but given the high returns and logistic costs, it is still very hard to run an online fashion activity profitably. Although the vast majority of them are not yet in bankruptcy, the appointed trustee for the Dutch branch was urgently trying to find a buyer for the non-bankrupt stores as well, as “the foreign stores need the Dutch branch to operate properly”. By now it is clear that he succeeded.

Sun Capital’s hubris

Sun Capital Partners, the American private equity firm, acquired Scotch & Soda in 2011 through its European affiliate. Since the acquisition, Sun Capital provided strategic and financial support to help grow and expand the Scotch & Soda brand.

Sun Capital expanded Scotch & Soda’s global presence. The brand opened new flagship stores in major cities worldwide and expanded online.

It is now clear that Sun Capital overestimated its turnaround capabilities with Scotch & Soda. The typical financial hubris of an equity investor relies on outdated competences in a competitive digitizing retail market. It’s not the first failure of Sun Capital in Holland. Also, the famous department chain store V&D filed for bankruptcy in 2015. The new owner will likely use the bankruptcy to size the expensive international network down quickly.

Brand history

Scotch & Soda, founded in Amsterdam in 1985, started as a men’s clothing brand. But, eventually expanded to women’s and children’s clothing as well. The brand’s founders, Laurent Hompes and Eric Bijlsma, named the company “Scotch & Soda” after two classic drinks that were popular at the time.

In the early years, Scotch & Soda was known for high-quality, vintage-inspired clothing. The brand’s aesthetic was influenced by classic styles from the 1950s, ’60s, and ’70s. Its signature item during this period was the classic striped shirt.

In the early 2000s, Scotch & Soda began its international expansion. This accelerated when Sun Capital took over. The brand opened flagship stores in Paris, New York, and other major cities worldwide. It also introduced more contemporary styles and modern cuts into its collections while still maintaining its vintage-inspired cool.

Today, Scotch & Soda is a popular global brand. The company is now known for its unique and eclectic mix of styles, which blend classic and contemporary elements to create a distinctive and individual look.

Founder and CEO of Icecat NV. Investor. Ph.D.

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