Week ending 11th July 2014

The value of experience.

Looking back through the business news over the last two weeks I found myself thinking about “experience”.  This is generally perceived to be a “good thing”.  Even when things go wrong we comfort ourselves with the thought that we can “put it down to experience”.  However as I mentioned last week the FA have failed to win the World Cup in 15 out of 16 attempts, with 2014 being yet another opportunity to “put it down to experience”.  They must now be the most experienced (and well paid) supposedly top flight football governing body at NOT winning the World Cup that there has ever been!

For those of us with rather more grey hairs than we would like there is the comfort that these are the result of years of acquired experience.  We like to think that this experience is valuable because that means we too must be “valuable”.  So here are few of last week’s business stories where experience or the lack of it have played a part and from which we can perhaps learn how to really get value out of experience.

Pounding along

Poundland floated on the stock market earlier this year and unlike a number of recent IPO’s has proved successful.  The shares are up nearly 13pc on the IPO price with sales reaching almost £1bn in the year ending March 2014.  But it wasn’t always like this.  Poundland was founded in 1990 by Steve Smith but by 2006 its growth was stalling.  The current Chief Exec Jim McCarthy was brought in to turn things round.  McCarthy had been running Sainsbury’s convenience stores but had left the company to return home to the Midlands because of family illnesses.  He accepted an offer to become CE of Poundland because they were based in Wolverhampton.  So Poundland were able to attract a much more experienced leader than otherwise they might have.

However McCarthy did not solely rely on his own experience, being experienced enough to know he didn’t know everything.  He recruited directors with experience of working with other retailers and a new Chairman, Andrew Higginson, former finance and strategy director of Tesco.  He didn’t stop there.  He travelled to the US to learn from the experience of discount chain Dollar Tree.  Here he learned that Poundland had to learn to work with the biggest suppliers, rather than treating them as the enemy.  Today Poundland works with leading fast-moving consumer brands to develop unique pack sizes that it can sell for £1.

So experience, plus even more experience, plus a willingness to learn from other’s experience delivers success.

Safe pair of hands

Justin King has now left Sainsbury’s leaving the business in far better shape than he found it 10 years ago.  He is handing over to Mike Coupe the groups’ commercial director.  He was one of King’s first appointments when he joined Sainsbury’s in 2004 and has been his right hand man for nearly a decade.  So he certainly has plenty of experience and quite possibly the right experience.

However the times they are a’ changing!  Sainsbury’s has now had two consecutive quarters of falling sales so is feeling the effect of the intense competition.  In King’s own judgement growth in the sector will go largely if not entirely to online, convenience and the discounters.  Sainsbury’s is well positioned strategically in the first two and with the announcement of its joint venture with Netto appears to have created an opportunity in the discount sector.  So the pieces are in play but they will have to be played a little differently and at least one, Netto, is a new piece.

Succession at the top of well-established and currently successful business is a fine judgment.  Is it more of the same, which Mike Coupe’s appointment seems to be, or do you need something completely different?  I think his challenge will be can he do more of the same but differently enough to capture the growth that is not going to come from his supermarkets.  He will need his own and others’ experience to do this.

Slippering away?

M&S went through what is now becoming an annual festival of excuses for not quite hitting the targets it has set for itself.  This time its online business was down 8% due to “teething problems” with its revamped website, compared to double digit growth in retail as a whole.  Apparently customers had “taken time to establish how to use the new site”.  So this is all down to customers’ lack of experience it would seem and sales should rebound when customers make the effort to use the new website properly.

On the other hand just maybe a lack of experience in online retailing within M&S’ management is more the problem.  How else do you explain why existing online customers are required to re-register just because you have spent £150m revamping your website?

One interesting statistic slipped in by style director Belinda Earl was that one in five British men is wearing M&S slippers.  Now given that one of their key challenges is to get the fashion offer right I am not sure that boasting about how you are number one in men’s slippers exactly squares with that.  Is the experience of conquering the slipper market really what’s needed here?  Experience is all very well but it does need to be the right experience.

You have got to be Kiddiecaring!

Morrison’s is selling its Kiddiecare business taking £160m write off in the process.  It bought Kiddiecare in 2011 in an effort to boost its non-food and online offer.  In 2012 it announced the business would double in size as it bought a number of superstores from the failed electrical business BestBuy.  However less than two years later it is losing so much money, Morrison’s are having to offload it at a rock bottom price.

Quite rightly Morrison’s’ management recognised that it lacked “experience” in this sector and decided the way to solve this was to buy someone else’s (Kiddiecare’s) experience.  That is all very well but as this “experience” has shown to do this by buying into a sector where you have no experience at all is not the way to do it.  It is one thing to recognise you need experience, it is another to recognise what experience you actually need and how will you know it when you see it.

On that note

Here is a final thought from me.  I have a lot of experience in business from many years of getting things wrong in order to learn how to get them right.  That wasn’t necessarily the plan at the time but it seems to have worked out and some people have been kind enough to credit me with having a lot of experience.  However I always caution them not to think that all they have to do is to do what I did and they will get the same result.  The thing is that it is MY experience and it was THEN.  You are YOU and the time is NOW.  Some of what worked for me then will work for you now but not all of it.  So the final trick is to select what will work for you now from other people’s experience.  Something Jim McCarthy appears to be really good at.

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.

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.