Week ending 3rd May 2013

The purpose of TWb4TW is to comment on business related stories from the previous week so as to highlight the lessons these contain for the rest of us, before the stories and the lessons are gone and forgotten.  Here’s a few from last week.

City Link decoupled (finally!)

Last week Rentokil finally got rid of its loss making parcels delivery business City Link, selling it for £1 to Jon Moulton’s private equity group Better Capital.  Rentokil took a further £40m loss on the deal, taking total losses and write downs to over £300m since it acquired City Link in 1993.

The problems with City Link really started in 2006 when Rentokil acquired Target Express for £210m and attempted to combine the two businesses.  However whilst both delivered parcels, the two businesses were very different.  For a start City Link was a franchise business, so the franchises needed to be all brought in-house.  Then it had to integrate 70 different IT systems with the Target systems and then rationalise the depot structure as many depots were not suited to handling the volumes needed to make the acquisition work.

Chief Exec Alan Brown arrived in 2008 to turn round Rentokil and has been predicting a return to profit at City Link since 2009.  However this was not to be and recently the company were forced to admit that losses would continue in 2013.

However at least Brown and his team managed to get City Link into a state where it could be sold, even if it was for £1.  They are to be congratulated on recognising the reality that they had to get rid of this business and focus on what they are much better at.  Having done all the hard work it is tempting to carry on to reap a reward that looks within reach, but in reality is unlikely to be achieved.

The biggest lesson from all this is why did Rentokil ever get into the parcels delivery business in the first place?  Their main businesses are in pest control, hygiene services and work wear, all of which are services, using people with vehicles to deliver the service to customers.  So on the face of parcels delivery is pretty similar.  However Rentokil’s other businesses are based on a contract model.  For the most part they know what they have to do, who for and where and when they are required to do it.  The parcels business is different.  The customers could be anyone.  The parcels could be all shapes and sizes, to be picked from and delivered to almost anywhere.  Even contract customers’ business involves significant variables to cope with.

When you have made a mistake (or your predecessors have) and you have managed to extricate yourself from the consequences it is not enough just to say “we won’t do that again”.  It is well worth looking at exactly what you did, how you did it and why.  Hindsight, as they say, is a wonderful thing, so don’t ignore the lessons it provides.

I didn’t expect that!

The most astonishing news from the Eurozone that I came across last week was that the Germans are drinking less beer.  Beer sales slumped to their lowest level in 20 years in the first quarter of 2013.  What is even more astonishing is that this is not due to German consumers choosing to spend less, but that they are switching to alcopops instead, despite a tax aimed at curbing sales.

It just goes to show you cannot rely on anything in this world.  Who would have thought that German drinkers would switch from beer to alcopops of all things?  The picture of buxom frauleins with two fists full of Bacardi Breezers just does not work somehow.

What is actually happening is a combination of an ageing population and younger drinkers changing their drinking habits.  Quite simply beer is going out of fashion and if that can happen in Germany then something similarly unthinkable can happen anywhere.  What this illustrates is that change is going on all the time and that nothing is for ever.  Changes often manifest themselves some time after the forces that brought them about actually came into play.  So ask yourself these three questions

1. Why do the customers you have today buy from you and why would they still buy from you tomorrow?
2. Who might tomorrow’s customers be and what will they want to buy?
3. Have you got the Changeability to respond?

Supermarket King

When Justin King took over as Chief Exec of Sainsbury’s in 2003 a city analyst sniffily remarked “King has good retail experience but whether he has the credentials for a more radical task is open to question”.  An odd remark considering that Peter Davis, King’s predecessor as CE who had no retail experience spent £3bn on new distribution centres and IT whilst letting the retailing basics deteriorate to the point where Sainsbury’s lost their number two position to Asda.  Last week it was reported that King will announce sales up 1.8pc and profits 5pc when he reveals annual results this week.  This is nine consecutive years of rising profits.

It’s the word “radical” in the above remark that interests me.  I am not sure what was “radical” about King focusing Sainsbury’s on “great quality food at fair prices” or listening to customers, or simplifying the supply chain or offering bonuses to staff for high store standards, or cutting prices and improving stock availability.  These seem to me (with no retail experience) to be what you need to do to be successful as a mass market retailer.  However what was radical, within Sainsbury’s anyway at the time, was that King helped the business learn how to execute effectively, how to actually deliver what it needed to and what it said it would do.

This didn’t just fix the problems the business had created for itself but it also helped it acquire the Changeability to deliver effectively on “radical” opportunities like convenience stores, online selling and introducing general merchandise and clothing which is growing at three times the rate of food sales.

So the lesson I draw from Sainsbury’s and Justin King is that if you can identify the simple things that will lead to success and get really good at doing them this will also set you up to tackle the “radical” challenges effectively.

UKIP – tipping point?

In the end UKIP’s success in the local government election last week came as no surprise.  However what we may have forgotten is that just a few months ago, especially before the Eastleigh by-election, it would have been considered a surprise.

Sudden and significant change like this can be a long time coming.  The first signs of this emerged in 2010 when the electorate decided not to give a mandate to any one party to form a government, resulting in a coalition.  For the ordinary voter UK politicians have continued to behave as they always do and give the impression that it was the voters who got it wrong.  The excesses and nonsense coming out of the EU, especially from their politicians have become more and more frustrating and alarming.  We have seen similar behaviour from shareholders where after years of acquiescence they have now started to punish directors for failure.

So I don’t see the success of UKIP as a “protest vote” in the conventional sense which is then expected to right itself at a general election.  It is more an indication that more and more of us are getting so hacked off with our leaders that we have started to hit them where it hurts to get them to take notice.

What this will actually mean for UK politics is impossible to predict at this stage and we will probably only discover what this is to be at the election in 2015.  The only certainty is that there is more change coming and we will all need high Changeability to respond to what it brings with it.

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.