Week ending 18th January 2013

Once again a number of stories and themes to choose from for this week’s article in a week when finally snow arrived in quantities vaguely in line with apocalyptic Daily Mail weather headlines. I shall start with:

Confusion over the Community

Delivery by David Cameron of his long trailed speech on the future of our membership of the EU and a possible referendum was postponed due to the tragic events in Algeria. This was the right thing to do. In the short term at least there are some things that take precedence even over something as significant as our future membership of the EU.

However voters (or this voter anyway) must be completely confused as to where our leaders stand on the EU. Should we be in, should we be out or even, should we be shaking it all about? The referendum issue is making it worse as there are now two arguments going on. The first is about whether or not we should remain in the EU and if so on what terms. The second is about whether we should have a referendum and when. Add in Messrs Milliband and Cable who maintain we must stay in Europe but reform it (and the chances of succeeding on that are ...?) but don’t want a referendum and the confusion is complete.

It’s a bit like watching Morris dancing in the fog. You have been told a troupe of Morris dancers is going to perform. You can see shadowy figures moving about in the gloom and hear the occasional chink of bells and clack of sticks but whether there is any actual dancing going on and what sort of dancing is impossible to tell. Let’s hope that Cameron’s speech makes things clearer when he finally gets to deliver it. However that is more hope than expectation and I suspect on this one he prefers dancing in the fog right now.

Business on the Community

All this confusion worries business leaders because “business does not like uncertainty”. Personally I can’t remember when we last had the sort of certainty in business, the economy and politics that this seems to imply but perhaps others lead a more sheltered life than I do.

Roughly business opinion appears to be split between those that want us in the EU and don’t want to rock the boat with any talk of re-negotiation and those that want to see change and think that if this resulted in us leaving then we could manage very nicely thank you. The first group tends to be people who make things and sell a lot of them to Europe (like the UK MD of Honda) whilst the second don’t (like Simon Wolfson of Next). Further dire warnings come from the financial sector about the consequences for London as a financial centre but are then countered by others who see little or no threat even if we were to leave the EU.

One problem for the pro EU business lobby, especially for those who don’t want the boat rocked is that their warnings are very similar to those used to argue the case for us joining the Euro. As none of those dire consequences came to pass, in fact the opposite, it rather makes you think that an alternative relationship with the EU, including being outside might work in the same way that staying out of the Euro has.

In fact we could make any outcome work for us if (i) we were clear about the outcome we wanted, (ii) we had the will to make it work and (iii) we had the freedom of action to do what was needed to make it work.  Right now we have none of these.

Well burger me!

Sorry but I can’t let the “horsemeat in burgers” debacle go by without comment. Like many my first reaction was surprise that a pack of frozen “value burgers” contained any meat at all. They are not, after all labelled “beef burgers” just “burgers”. Burgers are grey, flat, round things made of mashed up “stuff” held together by God knows what.

What was not a surprise was that Tesco were the main focus of the problem. Other retailers withdrew burger products from their stores as a precautionary measure but Tesco’s value burgers did actually contain horsemeat. You would think that if a retailer puts its own name on a food product then it would have a pretty tight specification on what went into it. It seems this is not the case and that as long as they were “cheap” Tesco didn’t bother to check what they contained. This is just another manifestation of how far the change in culture has to go at Tesco with regards to its perception of what “customer care” really means. Throwing £1bn at the business is no substitute for “caring about your customers”.

It also makes you wonder what all those regulators in Brussels have been doing. They can tell us what light bulbs to buy but appear to have missed the opportunity to bring in “euro burger” regulations. Given all the expensive restaurants in Brussels and Strasbourg that they all eat in at our expense they may well have not come across the “value burger”.

How many channels in “multi-channel”?

More results from retailers last week and more administrations. Invariably the comment on the failures is that they were not quick enough to change (which is right) and did not get into online and multi-channel quickly enough (which is not necessarily right).

I was interested to come across a small chain of Danish homeware stores called Tiger, who added 5 new stores to its UK chain taking their total to 18. It plans to add another 8 in 2013 with demand for its products showing no sign of slowing down. All the shops are profitable. They achieved 55% sales growth during the Christmas period without any online sales at all! Whilst they have a website where you can browse products and find out where the shops are located they have no plans currently to go into online sales.

This makes sense right now because with an average transaction value of around £7 and many items which are bulky and fragile selling online presents more of a problem than a solution for both Tiger and its customers. Tiger concentrates on getting stores in the right locations where the footfall is sufficient to bring high volumes of potential customers into its stores. Then, to quote Managing Director Philip Bier “to be successful now you need to offer good value and a pleasant experience”.

So “good value and a pleasant experience” is this the real “multi-channel”? If you get these two factors right, whether in store, online or from your garden shed then you will win. Online retailing is valid only when it enables you to offer “good value and a pleasant experience”. Tesco, please note, it is both and.

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 11th January 2013

Best wishes for the New Year everyone from me and this first article of 2013.  Usually a first article in a new year starts with predictions for the coming year. I am not going to do that for three reasons. First everyone else has already done this. Second I haven’t a clue (at least not a useful clue) about what is going to happen in 2013. Third TWb4TW is about looking back and drawing lessons from the recent past to use in the future. There were plenty of these from last week’s news and here’s a few that caught my attention.

Super not so super anymore?

Last week the big and not so big retail names reported on Christmas trading. In the supermarket sector winners appeared to be Tesco (+2.5pc), albeit having thrown £1bn at the problem, Waitrose (+4.3pc) and Sainsburys (+0.9pc, so only just). A significant loser appeared to be Morrisons where like for like sales fell 2.5%. Interestingly Booths, a privately owned supermarket group with just 28 stores all in the Northwest managed +3.5%.

Those of us who have thought “do we really need another supermarket” every time we saw yet another planning application for one can begin to feel a little smug as overall in the UK it now appears we don’t. The market is not just “mature” it’s becoming pretty much dormant as far as overall growth prospects are concerned. However much of the financial media and comment from financial analysts is still focused on like for like sales. But is this what is really going to matter?

In an insightful article in the Telegraph on Thursday Damien Reece pointed out that what really matters and always has is return on investment. i.e. profitability. Sales growth can drive profitability but when this is hard to come by then maybe other factors matter more. He contrasts Sainsburys profitability prospects with Morrisons.  On £23bn of sales Sainsburys is expected make around £752m. Whereas Morrisons, the apparent loser over the Christmas period is expected make £888m on around £18bn sales.

Justin King at Sainsburys has done an admirable job in growing market share, including moving into online and convenience stores. However this has been primarily a sales led strategy and is maybe running out of steam. Morrisons CEO Dalton Philips has been criticised for not moving fast enough into online retailing and convenience stores but this does not seem to have done significant damage to profits. He has started the move into convenience with his “M” Stores and is working on the online offer. Coming at these later than his competition may prove to be no bad thing in the long run.

However the lesson from all this is neatly summed up by Damien Reece in his article. “The conclusion is that neither company has got things quite right and both need to change. The reality is that only one of them admits it”. The world has and is changing, are we admitting that we and our businesses need to change as well?

Highs and lows on the high street

Contrasting fortunes on the high street over the Christmas period as well. An example of how you can be both a winner and a loser was Debenhams who reported their highest ever Christmas sales. However this was achieved largely through heavy discounting and a big increase in online sales. The discounting and extra costs incurred combined to produce only a tiny 0.1pc increase in margin. So all Debenhams got for its record sales was a reduction in its share price of 6.5pc.

The real low however was the collapse of Jessops the specialist camera and photography chain.  All its stores will close with the loss of up to 2,000 jobs. I am both frustrated and angry about this because it really did not have to happen.

The demise actually started back in 1996 when Alan Jessop retired and sold the business to a venture capital backed MBO. The business had grown from one shop to become a nationwide chain of over 200 stores and was consistently a “first mover” in its market. The buyers thought all they had to do was to buy the market leader, add more stores and then float the company to make a juicy profit. Unfortunately along with Alan Jessop a number of his senior team also left clutching nice cheques for their shareholdings. What walked out the door with them was the understanding of what it was that had made Jessops so successful.

The MBO did not get it and neither did the venture capital arm of ABN Amro when they bought the business in 2002. The company floated in 2004 with a deeply discounted IPO but the investors did not get it and were wiped out in 2009 when HSBC rescued the business with a debt for equity swap. HSBC didn’t get it either and is likely to lose £30m.

The collapse of Jessops is nothing to do with recession on the high street. It steadily declined even during the retail boom. Nor was it to do with camera phones or any of the other trite conclusions being trotted out. I am in no doubt that if the ethos that had driven the success of the business up to 1996 had been allowed to continue to flourish then the company would have as well. Instead the collapse became inevitable but it did not have to be this way.

Time to pay

One of the key business principles of the Jessops business under Alan Jessop was that suppliers were always paid on time, every time. Suppliers were expected to perform but if they did they knew they would get their money when they expected it. Consequently Jessops got the best prices, the best products and service from their suppliers and were always offered new technology first. This practice faded under succeeding managements. So much so that the reason there was no chance of selling any of the business as a going concern is that the suppliers were not prepared to support the business any longer.

This brings me to something I don’t do often, saying “well done” to a politician. This goes to Michael Fallon, Business and Enterprise Minister who has written to 350 FTSE companies asking them to sign up to the prompt payment code (PPC). What’s more he is threatening to “name and shame” any business that refuses to comply.

This is a good start but he has a big challenge on his hands and just how big is illustrated by the response from some big companies. Sainsburys' response was “We already abide by the spirit of the code and will be responding in the coming weeks”. Morrison’s claimed that it already paid suppliers within a “mutually agreed time frame”. GSK has just changed its payment terms to “within the first five calendar days of the month following the expiry of 60 calendar days from the date of receipt of the relevant invoice”. This is gobbledegook for “we have just pushed our payment terms out to 90 days plus”.

Pushing out payment terms to suppliers is not clever at all and in fact is bad business practice and verging on the dishonest. It pushes up costs as the customer employs people to spend time delaying and disputing payments and the supplier employs people to try to counter this. However the biggest disruption is to the business process down the supply chain as the end customer hoards a pile of cash that should be put to work through the system. In effect this causes blockages and interruptions to the “blood supply” which at the very least weakens the effective operation of the process and sometimes kills it off altogether. If the majority of businesses paid their suppliers within 30 to 45 days maximum this would release a huge lump of working capital into the business sector and is consequently in the national interest to do so. So good luck Mr. Fallon but you will need to be uncompromising and tenacious to push this one home.

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.