Drip Footwear’s financial crisis - a cautionary tale

Rapid Expansion Backfires

Drip Footwear, a once-promising South African sneaker brand, is facing a severe financial crisis that has sparked intense scrutiny and debate. The company’s rapid expansion into shopping malls has backfired spectacularly, leaving it with a R20 million debt, a foreign exchange blunder, and the looming threat of liquidation.

Misguided Expansion into Discount Retailing

In the midst of its financial problems, owner Lekau Sehoana revealed that the company has branched into discount retailing with a new business called Sneaker Outlet, targeting lower-income segments in township and rural malls.
Independent Business Analyst Sinesipho Maninjwa argues this expansion is misguided, stating that “you can’t expand when your house is on fire.” She believes stabilization and compliance are needed before further expansion.

Lack of Internal Controls and Financial Mismanagement

According to Maninjwa, Drip Footwear’s biggest problem is its lack of internal controls, leading to severe financial mismanagement. The company’s business model involves manufacturing sneakers in China and importing them to South Africa, which carries inherent foreign exchange risks. Drip Footwear failed to implement adequate internal controls to manage these risks, leading to a foreign exchange blunder that resulted in a two-year investigation by the Reserve Bank.

Foreign Exchange Blunder

Maninjwa disputes Sehoana’s claim that the foreign exchange blunder was a mere mistake, suggesting that the prolonged nature of the investigation indicates a more systemic issue. Drip’s business model of purchasing in dollars and selling in rands adds complexity to its financial management, requiring robust internal controls to mitigate exchange rate risks. The absence of such controls has exacerbated the company’s financial woes, making it challenging to manage its finances effectively and comply with regulatory requirements.

“You can’t expand when your house is on fire.” Sinesipho Maninjwa’s poignant critique underscores the urgency for Drip Footwear to stabilize its financial situation and address internal controls before pursuing further growth. Image: The Speakers Firm

Extravagant Lifestyle and Government Intervention

Maninjwa criticizes Sehoana’s extravagant lifestyle, questioning why the government should intervene to support a business whose owner enjoys a lavish lifestyle. This could be seen as unfair and set a bad precedent.

Asset Freeze and Liquidation

The Reserve Bank has frozen Drip’s assets due to foreign exchange control violations, following a two-year investigation. Drip Footwear is also grappling with several liquidation applications and non-payment of rent, further exacerbating its financial woes.

MEC’s Stance and Government Intervention

Finance MEC Lebogang Maile has called for Reserve Bank intervention to save Drip Footwear, citing concerns about the company’s potential impact on employment and the local economy. This move has raised eyebrows, as Drip Footwear is a private company facing severe financial mismanagement and compliance issues. Maninjwa questions why a whole MEC in Gauteng is advocating for Drip Footwear, suggesting this could set a harmful precedent where government intervention is seen as a bailout for struggling businesses.

Consequence Management

Maninjwa emphasizes that consequence management is necessary, and rules and regulations are in place to protect consumers and all stakeholders. Compliance is not optional, and businesses must prioritize it to avoid severe consequences.

Responsible Promotion of Entrepreneurship

Drip Footwear’s financial crisis serves as a cautionary tale about the dangers of rapid expansion and poor compliance. The company must address its internal controls, stabilize its finances, and prioritize compliance before any further expansion plans. Responsible promotion of entrepreneurship, youth employment, and women’s employment is important, but it must be promoted responsibly, with consequence management and compliance in mind.
By addressing these issues comprehensively, Drip Footwear may be able to work towards resolving its current crisis and building a stable and compliant business.

Let’s Connect
I’m Tinashe Mandirahwe, Senior Retail Analyst at Retail Fundi. I’m passionate about retail, particularly footwear and leather goods, and help brands break into the USA and Canadian markets. Feel free to reach out at FundiRetail@gmail.com or connect with me on LinkedIn.