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.

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.