Last week’s theme for TWb4TW was the reality of unreality in business, economics and especially politics today. Along similar lines a few of last business stories I noted prompted the thought “what is really going on here?”. The first of these concerned Ocado the online grocer.
Launched a decade ago and yet to make a full year profit Ocado claimed it would revolutionise the supermarket sector. The foundation for the launch of the business was the deal with Waitrose. This gave Ocado some scale in its early days and provided Waitrose with a short cut into an online business. This all looked good at the time but since then Ocado somehow never seems to be quite getting there. It is always the next investment, systems, distribution centre or whatever that will crack it, but still no profit.
So some excitement a few weeks ago when Ocado announced its deal with Morrisons giving them more or less the same leg up into online as it provided for Waitrose. On the face of it this could provide the extra scale through Ocado’s operations to lift it into profit. One small problem could be Ocado’s existing contract with Waitrose. “Not a problem” they say, “we will have to look at this carefully” say Waitrose. What this has prompted though is a change of view on where the value is in Ocado. Perhaps it’s not in being a stand alone online supermarket, but in its technology, systems and the facilities that Ocado have developed to power an online business.
Ocado Chief Tim Steiner has previously hinted that his company has developed superior systems and facilities to other online supermarket businesses. I say “hinted” because he has not really spelled out precisely what is the competitive advantage this gives Ocado. Nor have we seen a clear demonstration of this competitive advantage in action. Perhaps Morrisons have seen it which is why they have done the deal with Ocado, although they have been surprisingly quiet since the deal was announced.
Last week Tim Steiner said that since the Morrisons deal Ocado has been visited by companies from around the world and “there was a lot of interest” from those looking to launch their own online ordering services. So what is going on? Is Ocado a stand alone online grocer or could it become a service provider? Is it worth more for what it does or what it knows? If it is worth more for what it knows does it know how to turn that into shareholder value? So far it has failed to prove itself in this respect as an online grocer or service provider, a problem often found in businesses that are uncertain of what they are there for and what they are good at.
Battersea déjà vu
Last week we had the latest launch of an £8bn redevelopment project for Battersea power station, attended by the Prime Minister, Mayor of London and the Prime Minister of Malaysia. The latter attended because last year a Malaysian consortium bought the derelict site for £400m.
David Cameron promised that this time the redevelopment will definitely happen. Mr. Najib the Malaysian Prime Minister declared “we are partners in prosperity”. Boris asked “Does anyone seriously doubt that this amazing scheme is actually going ahead? No is the answer”.
Well Boris, I for one do have doubts, because some of us are old enough to remember we have been here before - several times. Since being decommissioned 30 years ago there have been three previous failed redevelopment proposals that never passed go and numerous discussions with interested parties that got nowhere either. The main parts of the existing building are listed and some of the scaffolding on the site has been there so long it is probably listed as well by now.
So my question is what is so different this time? What is going on with this deal that makes it any more likely to proceed and to be completed than any of its predecessors? There was nothing in the political rhetoric at the launch last week that even hinted at what this might be and the event itself was no different to those that have preceded it.
One question I would like to know the answer to is has the Malaysian consortium actually paid over the £400m for the site? They may well have in which case that would be the first step completed, some of the previous attempts didn't get that far. Or they may not have, which may be for perfectly good reasons at this stage. However when projects like this unravel it is not uncommon to find that the basic first steps were never completed so unreality never got close to becoming reality. We really need to know if this significant and important redevelopment project, with all the implications it has for jobs and growth has more than Boris’ enthusiasm behind it.
Business rates – the elephant on the high street?
Bricks and mortar retailers are getting hot under the collar about business rates. Boots, John Lewis, Tesco and Sainsbury’s have all called for a rebalancing of the system, claiming the current system unfairly penalises retailers with physical stores compared with online retailers.
Last week Sir Philip Green, owner of Top Shop and
Arcadia waded into the
argument at a hearing of the Commons Select Committee on Business. However rather than just continuing with the
“unfair” line, he claimed that government is using the uniform business rate
mechanism to keep business rates high and ensure they don’t lose any
revenue. For years retail property rents
went only one way, upwards and upward only rent reviews were common in rental
agreements. Business rates went the same
way as they were linked to valuation which in turn is determined by rental
yield. Time went on and business rates became a major source of government
revenue. No one seemed to question this,
even though it was clearly unsustainable.
This was proven to be unsustainable when following the financial crash in 2008, valuations and rents on retail properties in many areas went down, as tenants threatened to close units if landlords did not lower rents. However business rates did not because, as Sir Philip pointed out the government “can inflate the uniform business rate above RPI, so keeping their tax revenues in line. They fix it so they don’t lose any revenue”. He gave the example of one of his stores where the rent has come down from £500, 000 to £125,000 over a 5 year period but the rates have stayed the same at £277,000. Sir Philip believes this should now be nearer £50,000. He also proposed a business rates freeze and that small retailers should only pay a nominal sum, both of which could be achieved without any legislative change.
The government claims to be concerned about the decline of the high street and has put up £1.2m under the High Street Innovation scheme to finance a number of “Portas Pilot” projects to revitalise a number of selected high streets. Also the Chancellor has brought forward phased reductions in corporation tax claiming that this will give the
UK one of the most competitive business
tax regimes in the developed world. However as Alex Gourlay, Chief Exec of
Alliance Boots pointed out that for his company of the total of corporation
tax, business rates and employment taxes, two thirds is now made up of the
indirect business rates and employment taxes.
Reducing the tax on profits which the government is making more
difficult to earn by inflating occupancy and employment taxes is not a low
business tax regime.
So what is going on? Has it not occurred to those in government that they can reduce costs of occupancy and employment for shops? Or perhaps it has occurred to them but they want to preserve the tax revenues, so teaming up with a TV personality to launch yet another “innovation” scheme is an attempt to distract us from what is really going on? Sir Philip may well have lifted the lid on something really significant here. Namely that it is the government itself that is making the disparity in operating costs between physical shops and online greater than it needs to be.
One for the Guvnor
Once again the BoE left base rates at an historic low. On the face of it the first act by the new governor Mark Carney was to do exactly what his predecessor has been doing. However there was a big difference because he followed up by stating clearly that interest rates would remain low for some time to come. The reason for this is that the economic recovery remains weak so any upward move in interest rates would be highly detrimental for the foreseeable future.
So in stark contrast to his predecessor who never commented on the future path of interest rates, Mr. Carney has told us plainly what is going on and why. What is more it all makes sense so a good start from the new governor.
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.