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 70^th 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 70^th 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.

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.