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 7th December 2012

The theme for this week’s TWb4TW is “and now for something completely different” or not as the case may be.

This is the Autumn of our discontent - or should that be Winter?

Last week the Chancellor delivered his Autumn Statement. Now I may be a bit pedantic and old fashioned but for me December is winter. In fact over the last few weeks I kept thinking I must have missed the Autumn Statement, we seemed to wait a long time for it to appear. Given that it required the Chancellor to admit he is going to miss almost every target that he has been telling us are essential to achieve, he may have needed more time to think of plausible excuses.

Much has already been written and spoken about the statement so I am not going to add to that. However one thought did strike me.  Suppose you are on the board of a holding company reviewing the performance of the MD of one of your subsidiaries, which has been making losses for some time. He tells you that sales are static, that whilst he has cut some costs overall they are still increasing and that several new projects he announced either haven’t started or are taking longer to deliver results. However he assures you that everything is on track, but it may take 2 or 3 years longer before profitability is restored. When you quiz him about what he is doing different that might get a different result he mutters vaguely about taking some of the spend from one part of his operation to spend in another.

How long would you put up with an MD who keeps on doing the same things and assuring you that this will deliver a different result? Not long I suspect. Did the Autumn Statement contain anything really different that looked like it might deliver a different result? Well I couldn’t spot it.

What could be different?

Most commentators had some sympathy for the Chancellor saying that he had a difficult hand to play. However I am grateful to Fraser Nelson of the Daily Telegraph who highlighted some countries that have tried something completely different and are getting different results.

Estonia is a tiny country surrounded by large and powerful neighbours, with every reason to blame global forces for its own economic problems. However throughout the downturn it has kept its tax rates low at 21pc. It cut state spending by a tenth in one year compared to our average of 2.5pc a year. The result is Estonia now has the fastest growth in Europe.

Socialist Sweden made a permanent tax cut for the lower paid that encouraged so many people back to work that the extra revenue covered the cost of the policy. The tax cut amounted to a whole extra month’s salary a year. The increase in tax allowances here will benefit about 20 million people, but the tax cut amounts to 90p a week. Not enough to spend in pound shop, much less kick start the economy!

The Swedes also reduced corporation tax from 26pc to 22pc, but they did it in 3 months, whilst our reductions are being phased over several years. So is it time to try something completely different like significant tax cuts, delivered hard and fast that will stimulate significant economic activity that in turn will deliver higher tax revenues and lower government spending? Just a thought.

No change from Tesco

It is now a year since Tesco’s Chief Executive Philip Clarke launched a £1bn turnaround plan. However like for like sales fell again in the third quarter and now around 29pc of UK consumers choose to do the majority of their food shopping at Tesco, down from 35pc in 2011.

Some analysts have said it may be too early for consumers to have noticed the improvements Tesco has been making in staff and products. I believe that the problem is more that they have not noticed anything really different and that’s because it isn’t. Some of you may recall the experience recently of my business partner who when he was unable to access an offer on Tesco’s website reported it to customer services. They insisted first that there wasn’t a problem with their site it must be with my partner’s system. They went further suggesting ways he could spend his time fixing what was their problem and of course “nobody else has complained”. Eventually last week he was contacted by a technical person (significantly not from customer service) who admitted there was a problem with the Tesco website and there had been hundreds of messages about it.

So does £1bn to revitalise stores and products and hire 8,000 extra staff make a difference? Not so far apparently and maybe it’s because it won’t make the slightest difference to Tesco’s attitude to its customers, because Tesco doesn’t think it has an attitude problem.

HP full steam on to the rocks

Last week HP’s market value fell to $27bn which is now below the $31bn it has spent on acquisitions in the last 5 years. Research has consistently shown that mergers and acquisitions usually destroy value. HP’s management seem bent on proving this by setting an all time record for value destruction. Indeed they may have already achieved it.

Market speculation is that the company may be broken up as the sum of its parts now looks significantly greater than the whole. What is clear is that it needs to do something radically different as the current strategy which is to straighten out the huge mess that is today’s HP seems highly unlikely to succeed.

Other stories from last week, worth a mention

Starbucks offer to pay voluntary corporation tax was an appropriate way to kick off the pantomime season and it was different!

Sir Philip Green’s 25pc sale of TopShop leaves his Arcadia Group debt free and with £600m to fuel further growth. Sir Philip doesn’t have to do anything different, just carry on doing what he is really good at. Unlike HP who seem determined not to do what they used to be really good at.

The report into the West Coast rail bid fiasco was published confirming what we already knew about the levels of incompetence and dishonesty at the DfT. Now it’s official will it make a difference? Not holding my breath.

The Tchenguiz brothers started their claim for £200m against the Serious Farce Office for losses incurred as a result of their wrongful arrest. This is the largest claim ever brought against a government department. You could almost wish them well until you remember it is us the taxpayers who will have to stump up the £200m. Those responsible for the mess at the SFO at the time have all left with large payoffs, again paid by us. So no change there then.

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 22nd June 2012

Carr crash

The story that attracted a great deal of the attention last week was Jimmy Carr’s tax avoidance scheme. Left to itself this story would not have had made so much of a stir.  However the Prime Minister chose to single out Carr, calling his perfectly legal tax avoidance scheme “morally wrong”.

Trust me - I'm in business

I don’t intend to add anything more to the debate on this but it connected in my mind to the results from an Ipsos Mori poll published last week. This indicated that fewer than one in twenty British people think “business” is a reason to be proud of the country. The connection is that a number of prominent UK businesses (i.e. Vodaphone) and business people (i.e. Lord Ashcroft, Philip Green etc.) don’t appear to pay the taxes the rest of us think they should be paying.

At a time when UK government and business are banging on about the need to “rebalance” our economy from public to private sector it is of some concern that most of us don’t appear to think much of  business or business people. The Ipsos Mori poll is just the latest indication of a widespread mistrust of business and of business people in general.

Now you might think a general mistrust of business is hardly surprising given the effect of the credit crunch and subsequent recession on people’s lives. However the Edelman Trust Barometer which assesses levels of trust in business across the world shows that the British public are becoming more distrustful of business. This is in contrast to the global trend which shows trust in business rising overall.

Ultimately business will pay a price if customers, employees and the wider population perceive business as some form of parasite rather than as a valued member of the society in which it operates. In particular politicians become tempted or even compelled by public pressure to intervene. This invariably results in higher costs, disruption and unintended consequences. For example the government announced its proposals last week to separate investment banking and retail banking. This will make life more difficult and costly for the banking sector but taxpayers just cannot trust the banks not to screw up again.

Trust matters

"Trust” does matter and what's more it works. The Edelman research shows that people are far more likely to believe good news about a company they trust and far more likely to disbelieve good news about a company they distrust. The implications for the long term sustainability and success of any enterprise are both obvious and significant and last week saw a particularly outstanding example of this.

In 2007 Stefano Pessina took Alliance Boots private with a £11.1bn leveraged buyout, the largest ever in Europe. The deal was done at the top of the market and could easily have to come to grief as many others have in the subsequent financial crisis and recession. Boots was and is one of the most trusted brands in UK retail. Pessina did not muck about with what he could clearly see was working and in particular made sure that any changes he did make enhanced the trust factor. Profits have shot up by 88% since the buyout. Last week they announced an agreement to sell a 45% stake to Walgreens the largest pharmacy chain in the US, representing a 2.7 times return for the investors in the buyout and huge new opportunities for the company.

Building Trust

So how do you build, maintain and enhance trust to drive levels of business performance and success to these standards? Based on experience and research I believe it’s about always “doing the right thing” by shareholders, employees, customers, suppliers and society. No business, including Alliance Boots is perfect in every respect on this but those business that stand out as highly trusted do seem to constantly strive to do “the right thing”. When my wife was in Boots recently she had forgotten to bring a money off voucher with her, but without hesitation the assistant gave her the discount anyway. A small but significant sign of how this business tries to think and behave.

However there is one other factor that in my view is crucial. You must do the right thing but you must do it ”really well”. Attempting to do the right thing but not doing it well invariably results in compromise, short cuts, short term thinking and before you know it you are not doing any of the right things. What this means is that doing the right thing may be simple as a concept but it definitely is not easy to do.

Carr repair

Back to Jimmy Carr, did he do the “right thing” by apologising and cancelling his tax avoidance arrangements? Well he was certainly at risk of losing the “trust” of his fans and with a high risk of damage to his reputation and his livelihood.  He also did the apologising rather well at his first live show after the story broke and it looks like he has pulled things back for himself.

And finally

I had a small chuckle to myself about the downgrades for some UK banks announced by the “Big Three” credit rating agencies last week. RBS criticised the decision by Moodys to downgrade its credit rating, saying the agency was “backward looking”. I am sure the response from many small business owners would be “now you know what it feels like”! Oh yes and then came the IT failure.


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.