Family Biz: How Spring Gully got into, and out of, a pickle

For Kevin Webb Thursday April 11th was the sort of day the inheritors of family businesses have nightmares about. Kevin was the third generation CEO of Spring Gully Foods, the Adelaide pickles and honey business, and he knew it was all over: he would have to recommend to his all-family board that a voluntary administrator be appointed.
 
The night before he had sat down with his children, 26-year-old Russell and 23-year-old Tegan, both of whom are in the business and passionate about it, to tell them what was coming. As he got into the car that morning, his kids’ tears still on his mind, he must have felt like a living cliché – the proverbial third generation that loses it all.
 
Spring Gully had been a marginal proposition for a few years. In 2012 it turned over $25 million and made a profit of $100,000. The family had never taken any cash out of it - never bought wineries or blocks of apartments, or even fancy cars.
 
In fact all five family directors had had to put their houses up to secure the bank debt. In short, the descendants of Ted McKee, who started Spring Gully Foods in Spring Gully in 1946, were battlers.
 
Their branded products had a loyal following (including your correspondent – especially for the green tomato pickle) and they had a few decent contracts to produce other brands, but it was a hand to mouth existence. And now it was over.
 
On April 11th the local insolvency practitioner Austin Taylor of Meertens arrived in the morning to talk to the board. It was a somber meeting. He took them through the process of voluntary administration and then said: “I’ll go back to my office now and leave you to decide what to do.”
 
So the five directors then had what they thought would be their last meeting. Kevin’s 81-year-old father Eric, stepson of the founder, was chairman, and in the room were Kevin, his brother Ross, Ted McKee’s son-in-law Gary McMillan and his son Bryan.
 
There were tears and long silences, but the patriarch, Eric, declared: “Listen, we’ve always been a family that did the right thing, and we’re not going to stop now. The right thing is to ring Austin and give him the business. It would be irresponsible to try to go on.” So that’s what happened.
 
But then something miraculous happened.
 
The press release went out on Thursday afternoon. On Friday morning local Adelaide media camped outside the factory and as Friday went on, local radio stations began to run campaigns to save Spring Gully. Social media swung into action with a Facebook page headed “Save Spring Gully” that immediately got thousands of “likes”.
 
Unlike with most cases of a company going into administration, Kevin did interviews and talked about what had happened, he didn’t hide inside behind drawn curtains.
 
By 2pm on Saturday there wasn’t a single Spring Gully product left on any supermarket shelf in Adelaide. The city had rallied. On Sunday all the supermarkets were on the phone demanding more stock; Austin Taylor said that in 30 years of insolvency he’d never seen anything like it.
 
Perhaps most important of all, the bank – Westpac – didn’t immediately appoint a receiver to take control and protect their position, as they could have. The local manager, Mike Churchett resisted enormous pressure from head office and stood back, letting Austin Taylor run things for a while.
 
Both Austin and Kevin were worried that that amazing weekend wouldn’t help in the end because of what they were calling the “pantry fill effect” – that everybody who was going to buy a Spring Gully product would have done so, and then orders would completely dry up the following week.
 
But it didn’t happen – the orders kept coming. Coles’ management ordered immediate payment of outstanding invoices, put up campaign signs in the stores and awarded a 12-month contract for pickled onions. Aldi’s management flew to Adelaide to ask what they could do to help. The local independent chain, Foodland, provided pivotal support.
 
And crucially, the orders kept coming. For the first time in its history Spring Gully is now running two shifts a day in the factory instead of one and the business has gone from losing $200,000 a week to being strongly cash positive. Austin Taylor has said he thinks creditors will get 100 cents in the dollar.
 
The “perfect storm” that hit the descendants of Ted McKee seems to have passed.
 
Why did this business go bust? Well, it had been marginal for a few years but then in 2012 the loss of a couple of contracts meant that it had to shift some production from honey to lower margin “cooked” products, like pickles. (Leabrook Farm Honey, acquired a decade ago, had become the company’s most important line – the second biggest honey brand in the country).
 
Costs were rising as well. Kevin says that electricity costs tripled in 2012 and so did water.
 
In February, Kevin went to the bank and asked for a $600,000 increase in the overdraft because his cash flow forecasts showed that he would go over the limit within a few months. The answer was no. The company had already mortgaged its debtors and all the directors’ houses. There was nothing to do but hope sales improved.
 
And then, after Easter this year in early April, Spring Gully was hit a by a “whiplash”. That’s when your retailers increase their stock to deal with an expected sales increase that never comes: for the next few weeks after that, they don’t have to order any more.
 
In the weeks after Easter, orders for Spring Gully products simply stopped dead because the supermarkets had stocked up for the holiday – in everything – but sales turned out to be slower than expected.
 
Having already been turned down by the bank for an increase in the overdraft, Spring Gully could only last two weeks with little or no cash flow. By April 11th it was all over.
 
But Kevin and his family, having been in the depths of despair, are now full of hope. They are working with a local investment bank, Equity and Advisory, to put a proposal to the second creditors’ meeting on July 1st for bringing the business out of administration and back under family control through a Deed of Company Arrangement (DoCA).
 
By the way, apart from the bank, most of the creditors are the beekeepers who supply Leabrook Farm with honey.
 
Kevin is negotiating with a potential equity investor (a British family company) but it’s also possible that selling part of the business might not be required: the free cash flow is now so strong, with two shifts a day, that Austin Taylor says creditors could be paid out simply from that.
 
So the future of this great little Australian business now rests with Westpac bank and a bunch of beekeepers who will vote on July 1st, but the signs are good that it will not only survive but also revert to family control, if not full ownership.
 
It turns out that going into administration was the best thing that’s ever happened to the business, although if you’re thinking about trying it yourself, don’t.
 
The resurrection of Spring Gully has been a unique event, requiring a very unusual bank manager, supportive supermarkets and, most of all, a caring community that is prepared to rally round, and then to keep rallying round.
 
Then again, maybe this event, combined with the falling Australian dollar, will prove to be a turning point for Australian manufacturing. Let’s hope so.

Alan Kohler will be hosting two Ashes lunches with Gideon Haigh and Stephen Fay (former editor of Wisden and author of books about The Bank of England and the collapse of Barings) on June 25 in Sydney and June 26 in Melbourne. To book a table click here.