18 June 2014

Week ending 13th June 2014

This week's TWb4TW looks back over the last “two weeks before this week”, partly due to me being on holiday.  I could extend this to “three weeks before this week”, but if I missed that deadline the next opportunity would then be “ten weeks before this week”.  That is not going to work, so as long as something from the last two weeks inspires me to put digits to key board TWb4TW will continue to look back over the last one or two weeks.

When will they ever learn?

War has been a feature of the news over the last two weeks, especially with 70th anniversary of the D-Day landings and 100 years since the outbreak of World War I.  Also a little known group of religious fundamentalists conquered a third of Iraq in a weekend, helped by the opposition simply running away!  I don’t mention a particular religion because the combination of “religious” and “fundamentalism” has consistently meant big trouble throughout human history.  These people seem to be able to build an effective fighting force from a disparate bunch of people, united only by a common cause which makes some kind of sense to them, however twisted that sense might be.  The UK equivalent would perhaps mean recruiting from a group of people who go to the same dodgy pub, support the same continuously underperforming football team and like fighting.

What this has done is to throw years of Western diplomacy in the Middle East out of the window.  Suddenly we are best mates with Iran.  After this and the Ukraine crisis, which is still rumbling on, you wouldn’t think there would be anyone left who does not now know why we need to push on with fracking and nuclear power.  However there are plenty left who will continue to oppose this.  I can only think that, even in this 70th year since the D-Day landings, these people still don’t understand that people just like them could have stopped Hitler in the 1930s, but they chose not to.  I wonder if any of the troops who jumped off those landing craft on to the Normandy beaches ground their teeth in frustration at having to do that job for them – the hard way!

It were better in my day

Talking of battles there has been a lot of news and comment about UK retailers over the last two weeks – who is up, who is down and who is going round in circles.  Tesco reported the biggest drop in sales (3.7pc) in the whole 40 years of CE Philip Clarke’s career with the retailer.  You would think this would lead Clarke straight to the exit but he announced “I’m not going anywhere”.  The analysts, commentators and Tesco’s major shareholders just about came down on his side for the time being, saying it is too early to judge whether his turn round strategy will work or not.  Bit like my tennis at the moment!  However for me there is one single thing that will tell me if and when Tesco has really changed.  Right now the staff in their stores do not look like they really want to be there.  If one day they do, then the strategy is working.  But if they continue to look like they have left most of their brains and motivation at home, then Tesco’s decline will also continue.

Former CE Terry Leahy announced that “as a shareholder I am very disappointed”.  You have to give full marks to Leahy for executing a strategy that built the Tesco ship into the world’s third largest retailer.  He gets less than full marks for not judging when this strategy had to change due to unforeseen rocks, such as discount supermarkets, online, Justin King at Sainsbury’s etc.  Same goes for launching the good ship Fresh ’n’ Easy in the US that went straight down the launching ramp and under the water.  He can probably quietly award himself full marks for handing over the ship just before anyone noticed these rocks.  He gets no marks at all for not keeping his mouth shut!

Morrison’s also had its previous Chairman and now Life President Sir Ken Morrison laying into current CE Dalton Philips after the company reported a loss of £176m and warned that profits this year would be half what the city had been expecting.  Sir Ken didn’t mince words saying that Phillips strategy was bulls**t and that he wasn’t capable of running the core business much less a chain of convenience stores.

Sir Ken conveniently forgets that it was he who was leading the company when Morrison’s bought Safeway.  Whilst the company could run the Morrison’s business effectively as it was then, it was not capable of pulling off the integration of Safeway, which dragged on for years.  Morrison’s antiquated systems, quite literally pen and paper systems in many cases were wholly inadequate for the larger business.  This produced a drag on the business that Sir Ken’s successors have been wrestling with ever since.  The consequences have included being very late getting into convenience stores, still having no online offer in spite of the fanfare announcement of the deal with Ocado and completely forgetting what used to make the business successful.

This is a classic illustration of a business that only finds out what its limitations really are when it has gone past them.  Dalton Phillips may or may not be the man to turn it round but in his shoes my response to Sir Ken would be “you are right about the bulls**t, I am still digging” and Philip Clarke might say “me too”.

No guarantees

Two weeks ago the shares of online fashion retailer Asos lost a third of their value after a fresh profits warning. However to put this in context Asos was trading at more than 100 times earnings, compared to Next, one of the most consistent retail performers whose shares trade at just 17 times earnings.  Fear and greed rule on the stock market with common sense only making rare and brief appearances.  Clearly greed drove the Asos share price to an unreal and unsustainable over valuation as if future growth was guaranteed.  Fear has kicked in now the totally predictable has happened.  We may be in for a brief period of common sense at which point the Asos share price will be about half of what it was at its height.

I sometimes wonder what it would be like to be the CE of a company where you know the market has massively overvalued your company.  It seems most go with the flow.  One who does not is Simon Wolfson of Next.  He has consistently down played market expectations and then consistently out-performed them.  I know where I would put my retail investment.

Is there a right business model for a retail business?

Current opinion amongst retail industry analysts and commentators on retail is that the only viable retail business model now is multi-channel - a combination of in store, online, click and collect etc.  It follows therefore that as Asos is only online it may be vulnerable to the likes of Next with their multi-channel offer.  British fashion brand Ted Baker has a multi-channel offer and recently reported a 19pc rise in sales with online sales up by 48pc.  So more support for the “multi-channel is the way to go” argument.  However Primark, whose sales grew by 14pc is about to close a deal to buy the Pavilions shopping centre in Birmingham.  Half the centre will be a Primark store (three times the size of its current Birmingham store) with the rest sub-let to other retailers.  This is a £60m investment in traditional bricks and mortar retail space from a company that has no online sales at all.

What this all tells us is that concentrating continuously on making your business better and better is the only fundamentally viable business model for any business in any sector.  In today’s fiercely competitive and fast moving business world if you are not getting better you are getting worse.  This is what Next, Ted Baker and Primark understand and Tesco and Morrison’s really don’t.  As for Asos it is more difficult to tell because that third of the share price that was lost was clearly never really there in the first place.  So we will have to wait and see how they respond.

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

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