29 May 2013

Week ending 24th May 2013

Change is coming – but what change?

Either because there really are some positive signs of growth in the economy or because everyone is bored with being miserable the media are beginning to talk about the possibility of better times ahead.  However, just in case optimism breaks out our attention is also being drawn to some of the implications of economic recovery.
One of these is interest rates.  BoE base rate has been at a record low of 0.5pc for four years now.  Should economic activity pick up then how long can this continue?  The BoE allowed price inflation to rise as they judged correctly that this was unlikely to produce wage inflation whilst the economy remains subdued.  However if the economy really does start to grow then wage increases are likely to be one of the consequences.  If this was to happen the BoE would have to increase base rates to dampen demand so as to head off inflation.  Even base rates of 2 - 3 pc, previously regarded as low could, on the face of it, have significant implications for many already stretched consumer and business borrowers.
So are we damned if we don’t grow and damned if we do?  Well as with many aspects of this recession and its aftermath little is straightforward.  Mortgage lending fell for an unprecedented fourth consecutive month in April with householders paying off £241m more than they borrowed.  There appears to be a change in mindset amongst consumers resulting in little appetite for borrowing.  Similarly with businesses, whilst investment intentions amongst SMEs appear to be on the up this is mainly for replacing older plant rather than for expansion.  A combination of lack of confidence about growth prospects plus a lack of trust in their banks appears to have blunted business’ appetite for borrowing as well.
So an increase in interest rates may not have the effect we might expect.  Furthermore the actual interest rates being paid by many consumer and business borrowers are much higher than the low base rate would imply and was supposed to bring about.  A combination of restricted supply of credit, lenders being more risk averse and attempting to increase their margins has pushed rates up.  Of course if base rate rises then lenders will attempt to pass on the increase to borrowers but this may not be so easy to do.  RBS alone currently has £20bn of deposits for lending to businesses but can’t find any takers.
What it all adds up to is that some change is coming but what changes and what the effects will be are far from certain and very difficult to forecast.  We did not know what the effect of a record low base rate would be or of printing money on the scale we have been.  Now we do, but we don’t know what will happen when (and it is when and not if) these measures start to be reversed.  We don’t know because we have not been here before.
Now is the time to test your business model against a range of possible change scenarios.  Ask what might go up, what might go down, what would the effects be on your business model and could you respond fast enough?  The option of just sitting there and waiting to see what happens is now a high risk strategy.

Getting “radical” at M&S

Talking of sitting and then talking and then talking some more but not doing anything, I noted some comments last week from M&S Chairman Robert Swannell in connection with the underwhelming annual results. He declared that the changes being made in the business were “one of the most radical transformations in British retail or indeed in European retail, any European business of scale”.  He didn’t quite go on to add “or in the world or even the universe”, but what he did say was “the board has spent the last two and a half years talking about this plan”.
Two and half years “talking” about this plan!  I know that oil tankers can take a while to turn round but if you spend two and a half years talking about the plan to turn it round you will likely discover that when you come to turn the wheel you are already stuck on the rocks.  When competitors like Zara can get new lines into their stores in two and half weeks, how on earth can the M&S board think it has the luxury of two and half years to talk about its plan for change!  If that’s”radical"”, then I am a left handed teacup!  Change is coming, get ready now.

Yahoo promises not to screw up

Talking of “radical” in an unprecedented statement on the acquisition of blogging website Tumblr for $1.1bn, Yahoo’s (latest) CE Marissa Mayer promised “not to screw it up”.  By this she meant Tumblr would be operated independently, founder David Karp would remain as CEO and generally they would be left to get on with what has made Tumblr successful to date.  That success however does not include making anything much in the way of profit.
Yahoo’s problem is that they don’t any longer have an audience.  Their strategy now is to buy other peoples’ audiences, which in addition to Tumblr has included Astrid, described as a “get it done” app (or diary to you and me) for an “undisclosed sum” and of course Summly, the mobile news app for $30m.  However Ms Mayer’s promise not to “screw it up” refers to Yahoo’s previous acquisitions which include Flickr, Delicious, Broadcast.com and Geocities.  Remember them, probably not.
The real challenge for a corporate such as Yahoo is that it is not so much will it screw up the business but will it screw up the people?  Tumblr especially is all about David Karp and his team.  Ms Mayer has already upset many Yahoo employees by banning working from home.  With $250m in his bank account how long before Mr. Karp gets fed up with being required to be “in the office” whenever Ms Mayer wants him there?  Saying one thing and then doing something which is completely at odds with what you say will screw up the people faster than anything else you can think of.

He saw it coming, but wasn't watching

Talking of screw ups last week saw the departure of Nick Buckles, CE of G4S.  In spite of the botched attempt to acquire ISS and the Olympics fiasco, Mr. Buckles had retained the backing of shareholders.  However a recent profits warning that took 15pc off the share price was one “misfortune” too many and he realised he had to go.  He went so fast (his successor has only been in the business seven weeks!) that I think he had been expecting that his time at G4S did not have long to go in any case.
The curious thing about Mr. Buckles track record at G4S is that overall it is not bad.  The share price has outperformed the FTSE by 174pc during his tenure.  So what went wrong?
My take on this is that he did not know when to get involved in the detail to make sure a robust process was in place and working to get the intended result.  I know he was the boss of a very big company but there are times when you have to get more closely involved in the ball game in order to win.  On the Olympics I find it staggering that on such a high profile project with huge risk both financially and to reputation if it went wrong that Mr. Buckles was not monitoring it closely day by day.  It is clear that the failings were as big a surprise to him as to anyone.
This is not about doing other people’s job for them but it is about making sure they are doing the job you expect them to do.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.

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