Two Weeks ending 30th May 2014

No time for an article last week so looking back on the last 2 weeks in this week’s TWb4TW.  Here are some quick thoughts on:

UKIP if you want – and a lot of people did.

UKIP’s success in both local and EU elections was even bigger than many commentators had predicted.  It appears that the electorate is fed up with smart talking politicians in sharp suits so they voted for Nigel Farage.  Of course he is a smart talking politician who wears a sharp suit but he also drinks pints.  This seems to have persuaded people that he is “just like us” which of course he is not.  However he has picked on two big issues that many people believe really affect them, immigration and the EU.  His argument is very simple.  We can’t do anything meaningful about controlling immigration whilst we are required to follow EU rules and regulations.  So leave the EU and hey presto we can reduce immigration.

Immigration is a topic where opinion is driven above all by emotion, with fear being predominant.  Many people feel deeply uncomfortable about a “multi-cultural” Britain which they perceive has been imposed on them.  Add a widespread feeling of resentment towards the EU and the UKIP offer of a simplistic solution to make the fear go away appeals to a lot of people.  This is why so many think Farage is “just like us”.  Many voters have decided they can trust him even though he has done nothing really to win that trust.  It’s just that the others have done everything to lose it.

For me this is a reminder that “how people feel” can be a significant driver of people’s opinions and actions.  This something that has been ignored by the “we know what’s good for you” politicians and bureaucrats and many voters have demonstrated they have had enough.  For us in business it is a reminder that we don’t always know best with our customers, employees, shareholders etc. and maybe we should look and listen more carefully and perhaps with a little more humility.

Is the EU doomed?

The result in the UK was reflected across Europe where anti EU parties on both the left and right gained seats.  The exception was Italy which was about the only country where a pro EU party won the most seats in their EU parliamentary election.  As usual Italian politics are impossible to explain, so I won’t try.

Whilst the message to the politicians in the EU establishment is that voters want change the question that has to be asked is not what should change, but is the EU actually capable of changing in any meaningful way.  I have an awful feeling that the whole thing has now got so big and complex that is beyond human capability to bring about the change that is needed in an orderly way.  This means that either Europe continues into gradual but terminal decline or, because change will come whatever, the wheels fall off and it will get very messy.  For me this is the one compelling argument that says being out of it might just be a good place to be.

India shows what can be done.

The election in India, where the BJP party led by Narendha Modi won a landslide overall majority is interesting not just for the result but for how the election was conducted.  The 551m votes cast were counted by 1.8m electronic voting machines.  Turnout from 815m eligible voters was over 66% with the use of the new technology virtually eliminating electoral fraud.  This in turn has improved trust in the process and consequently in the election result.  For once the losers are not running around shouting “fix”.

We on the other hand are still putting crosses in boxes on a piece of paper, then folding it and putting it in a box.  Whilst the world’s biggest democracy is demonstrating that it is possible to use new technology to run elections, we still use the same old ways and wonder why we can’t get electoral fraud under control in places like Tower Hamlets and parts of Birmingham.  No one who should be taking responsibility for this appears the least bit bothered.  It is this sort of thing that destroys trust in the electoral system and why people turn to parties like UKIP.

Exclusive inclusive event

Prince Charles, BoE Governor Mark Carney, IMF MD Christine Lagarde and Bill Clinton were keynote speakers at the “Inclusive Capitalism” conference last week, attended by 200 specially invited business leaders.  The theme of the conference was economic inclusion and the integrity of the global financial system.  This all sounds like worthy stuff and Prince Charles managed to slip in quite a bit on climate change.  However it doesn’t sound like a very “inclusive” event to me.  You couldn’t buy a ticket so if you weren’t invited you couldn’t come.  The Inclusive Capitalism strap line is “building value, renewing trust”.  Holding a highly “exclusive” conference doesn’t sound like a good way to start doing this.   Whilst this may be well intentioned until these “exclusive” people start to see themselves as the rest of us see them, they are not going to make much of a difference, because we won’t trust them.

Win/lose

Halfords is the latest company to put the screws on its suppliers by demanding a contribution to its investment in new and refurbished stores equivalent to 10% of suppliers’ sales to Halfords over the last year.  Their (rather thin) argument is that the suppliers will benefit from increased sales from the investment in stores and should therefore contribute to it.

First of all this demonstrates an astonishing lack of understanding about their suppliers businesses.  Most of them will be doing well to making a profit before tax of 10% of sales so the contribution is the equivalent of handing over all their profit on their business with Halfords.

Far too many big companies are trying this on and in almost all cases the demands are retrospective on already agreed contracts.  It is not clever, though the companies that do this must think it is, because the proposition is always win/lose which destroys trust so almost always results in everybody losing in the long run.  It is possible to create a proposition of this kind that works on a win/win basis and that could potentially benefit all parties.  However because this requires more effort and the benefits are longer term, too many companies that should know better can’t be bothered and go for the short term hit.

Co-op “committeed” to values

On the subject of good intentions the Co-op Bank announced that Laura Carstenson a former partner in law firm Slaughter & May had joined their board and would be Chairman of their new “values committee”.  The Co-op successfully promoted itself for years as the “ethical bank” which did give it an edge and made it one of the most trusted brands in retail banking.  However the latest Which? Money Savings Satisfaction Survey published in April showed that the Co-op bank’s rating had dropped by 14% to 49%, below the average of 52%.

The bank’s recent high profile troubles have clearly diminished the level of trust it previously enjoyed.  So something needs to be done, but I am not sure a “values committee” is the answer.  Is this committee just a symbol of good intentions or is it actually being charged with achieving specific goals, such as restoring customer satisfaction ratings for its savings products?  Time will tell but given the Co-op Bank’s recent track record of failure to live up to good intentions, I am not confident.

Last one out turn the lights off

Centrica is now short of a finance director and a managing Director for British Gas and will lose its Chief executive when the current CE Sam Laidlaw leaves later this year.  There has been some comment in the business press that given the stick that Centrica top management gets from the media, government and just about everyone else it is not surprising that its top people find jobs in other lower profile companies attractive.

However there was an interesting comment from Martin Brough an analyst at Deutsche Bank.  He is calling for a change in strategy to focus on the core British Gas energy supply business in the UK and away from oil and gas exploration and production in Norway and the US.  At first sight this appears an odd proposal as Centrica have focused on these areas precisely to counter difficulties in its British Gas business where it is under unprecedented political pressure over profits and prices.  Mr. Brough argues that a “reinvigorated” British gas could “engage more effectively with the British public on energy issues than the political parties and could focus on selling home energy products”.  A “trusted and growing” British Gas could be worth 100p more per share claims Mr. Brough.

I do not know if Mr. Brough would be proved right or wrong about this, but there’s that “T” word again, “trust”.  Something that can take years to build but can be lost in no time at all, as the Co-op has discovered, but which mainstream politicians in the UK and the EU have yet to recognise.  The thing about trust is that it is not about good intentions, however worthy, it is about delivering on those good intentions.  To deliver you have actually have to have the capability, so be careful what you promise (Mr. Farage) you might actually be called upon to deliver it.

So that was some of the two weeks 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.

Week ending 16th May 2014

INTERESTing Times

With the Bank of England delivering its latest quarterly Inflation Report last week it was no surprise that the business and political media was focused on what it would say about interest rates.  The level of unemployment had already dipped below the 7% point that BoE Governor Mark Carney had previously indicated could be a trigger for a rise in rates.

In the event Mr. Carney effectively quashed speculation that rates could rise before the end of this year.  He conceded that the day Bank Rate would start to rise is getting nearer but now was not the time to raise rates and when they did start to rise they would only do so gradually.  In the BoE’s judgement that there is still enough slack in the economy to enable it expand further without triggering inflation.  This is based on information from the network of BoE agents based all over the UK who talk to local business people about the prospects for their business and the sector they operate in.  The feedback is that generally most sectors are still highly competitive with capacity to fill and little prospect of being able to raise prices.

The exception seems to be the housing market.  Much has been written and said about this in recent weeks and what this could mean for interest rates and what the authorities should/can/can’t/want to do about it.  The British have national obsession with house ownership and consequently the prospect of even a small increase in interest rates is portrayed as apparent personal and national financial Armageddon.  In spite of all the speculation and bright ideas Mr. Carney repeated what should by now be the “bleeding obvious”.  Whatever the BoE can or can’t do about interest rates to influence the housing market, the core problem is that we are just not building enough houses to meet demand.

We have not been building enough for 30+ years and we know we haven’t.  This has not been for want of trying, or at least for want of target setting for house building by successive governments.  Whatever they said and whatever they intended, it just didn’t happen.  Yet still we have the Labour Party announcing it has the answer because if elected they will build 200,000 houses a year to 2020.  Well, what a brilliant idea, and thank God we have the Eds Milliband and Balls to think of these things for us!

The truth is that they have no more idea than their predecessors on how to actually achieve this.  There was a time when we could build houses at that sort of rate, so the conclusion is that we should be able to do it again.  However so much has changed since those times that the same approach will not deliver today.  And that is the real problem.  After so many years of repeated and almost continuous failure in this area there is only one possible conclusion.  As a nation we simply don’t know how to deliver enough houses to meet demand.  We did once but we clearly don’t now.  Now all is not lost because it is possible to find out.  However that is not going to happen until our political leadership actually recognises and crucially admits that it doesn’t know but that it has a plan to find out.

Sadly, with an election coming up next year finding a politician who will admit to not knowing how to do anything is about as likely as finding the Holy Grail.  In the meantime though for the rest of us, when we come up against a problem we just don’t seem able to solve, however hard and often we try, then maybe it’s time to ask ourselves if we actually know how to do what needs to be done.  If we can identify what we don’t know how to do then we can start the process of finding out.  Even the most complex problems and challenges can be tackled effectively if we start by admitting and identifying what we don’t know.  Try it sometime!

ONS on us

On the subject of house prices, last week the Office of National Statistics (ONS) informed us that twenty percent of adults who hold at least one university degree now have wealth totalling at least £1m.  Apparently the number of millionaires has risen by fifty percent in four years despite the recent financial crisis and almost a tenth of British adults own assets worth more than £1m.  The flipside of this is a stark gap in wealth between people with different levels of education, with only three percent of people with no formal education qualifications worth more than £1m.  This gap is widening.

David Willets the universities minister seized on this as justification for coalition policies to charge higher university fees and to push more school leavers to go to university.  They also seem to be pushing more people into apprenticeships which is a bit contradictory.  But as long as they are pushing the rest of us somewhere they seem to be happy.  The Labour party were a bit slow off the mark to pick up on the increasing gap between the wealthy and poor, but don’t worry they will!

Strangely the figures from the ONS take no account of liabilities, mortgages and other loans and debts.  This renders the figures meaningless.  A pensioner living in Middlesborough who has paid off their mortgage and with no other debt could actually have greater net wealth than someone living in London with their house mortgaged up to the hilt and in danger of paying a mansion tax.  They don’t FEEL like millionaires whatever the ONS says and that is what really matters for real people.

The ONS has a record of publishing statistics that are either late or wrong or both.  It has now added meaningless to its track record, except of course for politicians.  As we are paying for the ONS to do its work, we should expect something useful to come of it.

Pfizer - all pfizzle?

By the time you read this Pfizer’s bid for AstraZeneca may well have petered out, at least for the time being.  Last week both companies’ top management appeared in front of the Business Select Committee.  Pfizer boss Ian Read was vague on detail about potential job cuts and reductions in R&D investment, though he admitted there would be some.  His main argument appeared to centre on the combined businesses being “bigger” and therefore by definition “better”. He justified the unquantified cuts to jobs and R&D as “part of being efficient”.  As with “bigger” he appears to view the word “efficient” as a "good thing" so no need to spell out what it might actually mean.  He also insisted that Pfizer was a “company of high integrity focused on patients and delivering drugs to patients”.  He seemed oblivious to a track record that gives the perception of exactly the opposite.  His 36 years at Pfizer were definitely showing.

If I was an AstraZeneca shareholder that performance would be enough for me to say “no way”.  Of course that is not the only consideration.  AstraZeneca’s insistence that they would be better off as an independent company is founded on their claims for their research pipeline of products in development.  If a reasonable proportion of these reach the market then the future would look good for AstraZeneca.  The problem is that it is very difficult with pharmaceutical companies to predict whether this will happen.


However there is one party involved that must believe that these developments will be successful and that party is Pfizer.  Why would they be bidding to buy AstraZeneca now if they did not?  If they can buy them now before the pipeline is proven then they would win handsomely and put off the evil day when their own under investment in new product development catches up with them.  It means if Pfizer can buy AstraZeneca at or around their current offer they will either win, or not lose because they could hack out enough savings to redress any shortfall from the product pipeline.  All the more reason for AstraZeneca shareholders to say no, or at least to hold out for a substantially improved offer.

Meanwhile

The French government has moved quickly to block the GE bid for Alstom by creating new powers to stop foreign takeovers of “strategic” industrial groups.  In fact they moved so fast I wonder if they are using some sort of “app”.  Something called “Legislation a Grande Vitesse” (LGV) perhaps.  You just put in what you don’t like the look of and then the app searches through the legal statutes to come up with the necessary legislation for you to put it right.  It also dates everything at around 1849 so it is very difficult for the EU commission to argue against.

Industry Minister Arnaud Montebourg stated “With this reform, France will have a clear and efficient legal framework comparable to other open economies within and outside Europe”.  Whilst our government talks about what they should/can/shouldn’t/can’t do the French just do it and then issue statements like this with a straight face!  As I said last week it helps if you know clearly what you want.

You heard it here first

In my previous article I said I did not like the look of the proposed Dixons Carphone Warehouse merger.  Well it seems I was not alone because when they officially announced the proposal for the merger last week, Dixon’s shares fell more than 10 percent and Carphone Warehouse 8 percent.  David Alexander, retail analyst at Conlumino acknowledged that “Although there are plenty of reasons to view the merger in a positive light, the history of M&A is littered with the corpses of failed unions”.  Says it all for me.

So that was some of the week 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.

Week ending 5th July 2013

What’s Ocado?

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.

That was week ending 14th December 2012

This is the last TWb4TW until after the Christmas and New Year break. I started writing these articles in April and can hardly believe it is now nearly the end of the year and I am still writing them. I have been encouraged by the kind responses from you the people that read them and I thank you for those.

This week I thought it appropriate to produce my Christmas wish list, wishes for myself and others.  Here goes.

Cable not able

Last week Vince Cable took yet another swipe at big global companies that don’t pay enough or any UK tax. For Mr. Cable it is still the moral high ground that matters so no mention of our unfit for any purpose tax system. If the companies concerned are obeying the law then it is clearly the law that needs changing if it is not producing the result the country needs and that is the job of government.

Whilst Mr. Cable has done some good work at BIS underneath he is fundamentally anti business, or if isn’t he certainly sounds like it. I once heard him speak and claim that he was experienced in business because he had spent time as an economist at Shell. Anyone who knows anything about what economists do in organisations like Shell will know this doesn’t count as business experience.

So my Christmas wish for Mr. Cable is that he should get another job.  Minister for Overseas Development might suit his moralising better or perhaps being made to run an SME for a year might give him some “real” business experience.

It’s the economy stupid

Talking of experience my Christmas wish for George Osborne is that he too should find an opportunity to get some real experience. He is an example of yet another politician who is no doubt very intelligent but has done nothing but politics almost since he left primary school. This was demonstrated in the Autumn Statement and its aftermath where he was clearly more interested in scoring political points over Ed Balls than coming up with radical policies that would really get the economy moving. You can usually leave Ed Balls to score political points over himself, so why not get on with the job we pay you for, George because it really is the economy that matters and you are not stupid.

Does one more make a difference?

After the announcement that Canadian Mark Carney is to succeed Sir Mervyn King as Governor of the Bank of England last week we heard that Hector Sants was to join Barclays as head of compliance. Sants was previously Chief Executive at the FSA.

Now you can’t blame all the FSA’s failings on Sants. However he did step up to Chief Executive in time to rubber stamp RBS’ acquisition of ABN AMRO and he did publish just a 12 line press release on the FSA’s investigation into RBS, rather than publish the full report.

I understand that Barclays already have around 1800 compliance officers. So whilst Carney’s appointment does represent a new direction at the BoE you have to ask what real difference appointing a regulator to head up compliance will really make at Barclays.  My Christmas wish for Mr. Sants is good luck, but I have a feeling he will end up between a rock and a hard place with this one.

Train the trainers

The investigation into what went wrong at the DfT over the West Coast Mainline fiasco continues but with growing signs of avoidance tactics from anyone in the DfT who could possibly be blamed. My Christmas wish is that anyone at senior level in the DfT should be given a train set for Christmas and  required to assemble it in to a working model of the West Coast line in 30 minutes or be shown the door. Simple and effective.

HP used to work

I own an HP printer which I bought in the days when you could truly say buy HP because you just plug it in, turn it on and it works. What’s more my printer still does work, even though HP has had about 5 CEOs since I bought it. My Christmas wish for HP is that they should make me an offer for my old printer, with a suitable Autonomy sized premium and I would be delighted to sell it back to them. Then they could examine it and discover what it was that they used be really good at.

Oh no it's Silvio

You could not make it up; Silvio Berlusconi is running for Prime Minister of Italy again. This proves the view of a previous British ambassador to Italy who said “it is not difficult to govern the Italians, it is simply unnecessary”. Sr B’s first public pronouncement was to state “who cares about how much interest we pay to people who invest in our debt obligations compared to Germany”. This will be music to many Italian’s ears but maybe this time not enough of them will buy the message. So I wish Silvio Berlusconi everything he deserves.

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. TWb4TW will be back in the New Year so have a great Christmas and New Year holiday.