After the Fire

November 30, 2011
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When he heard the news about the destruction of the Sony DADC distribution centre, 4 Digital Media MD Tony Tagliente thought it was the end of his business.

“By 4pm the next day, it was, ‘Problem? What problem?’ and Sony was back in business. I have nothing but praise for Sony DADC and the way it reacted after the fire,” he says.

Wienerworld owner Anthony Broza says, “I thought that Sony did a spectacular job. To have a whole warehouse erased suddenly as if it never existed with 25 million units of stock gone; it was horrendous. The overriding thing that comes through is that Sony is a professional operation, an absolute quality company, and that is the reason we are part of the family. Yes, of course there will be problems working out the SKUs, whether they have got the slots, and whether they have got fork-lift trucks to reach the upper levels but when you look at what they tried and succeeded in doing, it’s amazing.”

Broza says that Sony was on the phone the day after the fire to schedule key titles for manufacture the following day: “We gave them a list of between 12 and 20 titles and they said they would replicate 300 or 500 discs, rather than the normal minimum order of 1,000 units. They told us, ‘Don’t worry, we want to try to get you back on track.’ By working with them and alerting them to some of our problems, they have managed to help us out as much as they could.”

Others are not so sure that Sony’s offer to replicate a minimum of 300 units will prove worthwhile. “We have continually asked what the charge will be for 300 units. Is it the 1,000-unit price or the 500-unit price? Once we know that, we can make a decision on how many we order,” says one client.

This issue has proved one of the most controversial to confront the customers that lost most of their inventory in the fire. The replenishment price per unit is a guideline for Sony, its clients and the insurers, not an offer price for the acquisition of additional stock. Units lost and not replenished will be credited at the original invoice price, top-up orders over and above the stock in the warehouse on Aug. 7 will be charged at the current price. Where fewer than 300 units were in the warehouse, Sony will remanufacture that number as the minimum quantity.

While Sony DADC’s customers are almost unanimous in their approval of the way the company handled the aftermath of the incident, several company bosses are less than happy about the progress of what seemed like a straightforward insurance claim.

Nearly half the companies that lost stock in the fire are specialist publishers owned privately with a relatively small annual turnover. Many hoped for a rapid pay out for destroyed stock to ease cash flow issues and compensate for business interruption claims that could take a while to settle. It soon became clear, however, that to sort out the paperwork was no simple task.

One executive frustrated by the delays says the claims overwhelmed the insurers: “The loss adjuster sent an email saying, ‘Please, no more calls, we can’t handle them’. Then they said, ‘We’ll get back to you by the end of the week.’ That’s not good enough, this is our busy period.”

Eureka Managing Director Ron Benson says he cannot understand the delay given the comprehensive records held by Sony DADC: “Our claim is 99.9% accurate, we haven’t put in for any extras or anything. I don’t know how others do it but Sony knows exactly what it replicated and invoiced, so I don’t think there is a problem.”

Tagliente agrees: “Sony has all the documentation for the stock that it held. It can clarify for the loss adjuster when it came in and when it went out. The proof is on its system. There will be titles with special packaging — three-DVD and five-DVD box sets — but the invoices are there, they were paid, it is easy for Sony to double-check. Most people just want to get this out of their way and get on with their business.”

Part-payment

Sony DADC VP Sales Siegfried Obermayr says that the company is aware of the pressure on its clients and it had urged its insurers to agree a part-payment to get cash into their accounts quickly.

This has now been made, he says: “We have developed a formula to guarantee that every case is covered, whether there is no replacement, part replacement or full replacement of stock and it is intended to be as fair to all sides as possible.”

The company set the interim amount at between 40% and 60% of each potential claim, depending on its complexity and value, Obermayr says. From this figure, it deducted a notional charge for stock replenishment using an average value per unit worked out from the claim value in pounds and the number of units lost. This provided a basis for the part-payment, which the insurers accepted.

He says, “We know that our customers need help with their cash flow and this formula allowed us to make that initial payment. Companies have received that replenishment stock and are trading with it, so it is only right that the appropriate amount has been held back. No-one has been invoiced for replenishment stock, which is effectively free of charge. The insurance principle is there should be no loss and no gain.”

No claim has been rejected, Obermayr says, but to examine each one in detail is a lengthy process — all but two are still are under discussion — and Sony has had one-to-one hearings with clients to examine each claim, decide if it is too high or too low and make it acceptable to the insurers.

“Even if you calculate a half-day of discussion for each, this means two full weeks for the meetings. Once our own insurer is happy, loss adjusters representing the police will audit every line once more. We have to make sure that we can stand behind each claim,” says Obermayr.

As of late November, the loss adjuster had approved two of the smallest claims of around £20,000 each and passed it on to the insurers. Obermayr confirms that the aim is to have the process completed by Christmas, “We do not want it to run into the New Year,” he says.

Part of the problem is that there is no consensus on the nature of claims. The insurance payment relates only to the replacement cost of the assets and does not include any notional premium for the collectability or rarity of the disc — even though some have tried to claim for this.

“When one person told us that a single disc in the warehouse was worth nearly £4,000, we offered to buy a copy and give it to him. There was also a claim for around £250 each for 25 units but we had to politely point out that it might not be accepted by the loss adjustor,” says Obermayr.

Tagliente believes the process should be “very simple”: “We put in a claim based on what we and Sony know was in the warehouse at the time of the fire. Sony pays us that, less any replenishment costs, so we might claim £50,000, for example, have £30,000 of replication charges and actually receive £20,000.”

Another issue concerns a lack of information about the progress of claims. Not all the companies involved are direct customers of Sony DADC and some of the smaller labels, which have had to file through their third-party sales houses, have felt excluded from the process and almost overwhelmed by its complexity. As a result rumour and misinformation created problems that should have been averted by clearer communication earlier in the process.

Sony responded to these concerns in mid-November through a daily status report to all clients in the “Distribution by Sony DADC” (DBD) model. It also encourages recipients to pass on all relevant information to their clients.

One such is Metrodome, which lost more than 600,000 units in the fire. Finance Director Deborah Brown, who has collated claims on behalf of the company’s clients, says that dealing with the insurance company has proved a complex matter not helped by communication problems.

“Sony made sterling efforts to get back on track after the fire, although it probably could have done more to help us with the insurance claim. At first, the loss adjuster asked for copies of every invoice but that soon went away. Eventually we established a single point of contact with the insurers and that really helped,” she says.

Sony DADC’s liability does not extend to business continuity insurance or trading losses incurred as a result of the fire, which individual companies must take up with their own insurers.

Brown, who notes that Sony’s is the single largest claim under the Riot (Damages) Act, is less than hopeful about a pay out. She says: “There is no indication of when or if that will ever be paid. I am not holding my breath!”

BBC Worldwide-owned 2entertain has much to gain from a successful claim under the police compensation scheme but Operations Director Alasdair Ogilvie says that the last claims under the Riot (Damages) Act 1886 were back in 1981 and the whole business world has been transformed since then, which further complicates the situation.

An Aug. 12 statement from the Association of British Insurers (ABI) said that insurers would cover policyholders for business interruption and lost trade. It estimated that payments to customers affected by the riots could exceed £200 million.

It said the police compensation scheme would recompense people, businesses and organisations for loss and damage incurred as a result of riotous events but that this only covers the cost of physical loss or damage to property and not business interruption or trading losses.

“The priority for insurers is to pay claims to people as quickly as possible and that is what the insurance industry is doing,” the ABI says, but the complexity of the claims arising from the Enfield fire could stretch the definition of “quickly”.

One company MD says that business interruption losses are a massive problem for everybody and he would like to see industry pressure on Sony DADC to be an umbrella organisation in any claim for compensation.

Supply chain delays

While the insurance claims grind on, peak-season delays have led to concerns about the robustness of the temporary supply chain. Obermayr acknowledges that there were picking delays of up to five days in early November but says there was an unexpected lull in orders from some retailers at the end of October, followed by a sharp spike in the first week of November.

“In normal times, this would not be a problem but this year they flooded not only us but also the whole of the industry with thousands of orders. In an operation that is not as robust as usual, such extreme peaks present additional hurdles,” he says.

Benson says that five days’ delay could be more of a problem for Eureka as the order cut-off date of Dec. 17 approaches: “The problem is not so much with new releases but with reorders. We have two very good titles, ‘Silent Running’ and ‘Touch of Evil’, which we shipped out on new release but retailers are having to wait five or six days for replacement stock. Because of the delay in picking, I don’t think we are going to reach our targets. It’s not a lack of manpower, it is the storage room available.”

Obermayr agrees that the move from the 215,000sq.ft. Enfield warehouse to the 65,000sq.ft unit in Hoddesdon has been a challenge.

“Our clients are very loyal, they do understand the situation we are in and we get a lot of support. We now have manufacturing capacity reserved on a weekly basis for top new release titles of all customers, in anticipation of possible reorders,” he says.

Tagliente, however, says the fact that orders had piled up and were not delivered meant smaller labels were concerned retailers would cancel them: “That was our worry. It is not as bad as it was but Sony knew that the rush was coming and it promised us that it would be ready. What can you say except they are doing their best.”

Preferential treatment

There is also a predictable suspicion that the bigger distributors are treated better than the smaller ones, who have been heard to voice complaints.

As Sony’s largest distribution and manufacturing partner in the UK, 2entertain is adamant this is not the case. Ogilvie says, “We have insisted that we do not want anybody to be disadvantaged to our benefit. We are also several days behind in our picking and Darren Houghton, who is running the plant, says that other clients face similar delays. We have not asked for any special treatment, just that we be treated equably, and we recognise that our customers need stock from all the labels distributed by Sony.”

To ease the pressure on the Hoddesdon site, 2entertain has agreed with Sony that new releases will go through Cinram from Oct. 31 and for the time being it will distribute through both warehouses.

Sony DADC says it has worked seven days a week since the fire and used weekends to try to catch up with the backlog. For those clients with manufacturing and distribution contracts, Sony’s ability to ship campaigns and new releases direct from the replication plant has eased the problem.

4 Digital Media Director Sally Wood sums up the general view: “I don’t think any of us quite realised the vastness of the task. If we had been with a lesser company than Sony, we would all have been in much deeper trouble. They say it will be wrapped up by Christmas but we will have to wait and see.”