Week ending 24th May 2013

Change is coming – but what change?

Either because there really are some positive signs of growth in the economy or because everyone is bored with being miserable the media are beginning to talk about the possibility of better times ahead.  However, just in case optimism breaks out our attention is also being drawn to some of the implications of economic recovery.

One of these is interest rates.  BoE base rate has been at a record low of 0.5pc for four years now.  Should economic activity pick up then how long can this continue?  The BoE allowed price inflation to rise as they judged correctly that this was unlikely to produce wage inflation whilst the economy remains subdued.  However if the economy really does start to grow then wage increases are likely to be one of the consequences.  If this was to happen the BoE would have to increase base rates to dampen demand so as to head off inflation.  Even base rates of 2 - 3 pc, previously regarded as low could, on the face of it, have significant implications for many already stretched consumer and business borrowers.

So are we damned if we don’t grow and damned if we do?  Well as with many aspects of this recession and its aftermath little is straightforward.  Mortgage lending fell for an unprecedented fourth consecutive month in April with householders paying off £241m more than they borrowed.  There appears to be a change in mindset amongst consumers resulting in little appetite for borrowing.  Similarly with businesses, whilst investment intentions amongst SMEs appear to be on the up this is mainly for replacing older plant rather than for expansion.  A combination of lack of confidence about growth prospects plus a lack of trust in their banks appears to have blunted business’ appetite for borrowing as well.

So an increase in interest rates may not have the effect we might expect.  Furthermore the actual interest rates being paid by many consumer and business borrowers are much higher than the low base rate would imply and was supposed to bring about.  A combination of restricted supply of credit, lenders being more risk averse and attempting to increase their margins has pushed rates up.  Of course if base rate rises then lenders will attempt to pass on the increase to borrowers but this may not be so easy to do.  RBS alone currently has £20bn of deposits for lending to businesses but can’t find any takers.

What it all adds up to is that some change is coming but what changes and what the effects will be are far from certain and very difficult to forecast.  We did not know what the effect of a record low base rate would be or of printing money on the scale we have been.  Now we do, but we don’t know what will happen when (and it is when and not if) these measures start to be reversed.  We don’t know because we have not been here before.

Now is the time to test your business model against a range of possible change scenarios.  Ask what might go up, what might go down, what would the effects be on your business model and could you respond fast enough?  The option of just sitting there and waiting to see what happens is now a high risk strategy.

Getting “radical” at M&S

Talking of sitting and then talking and then talking some more but not doing anything, I noted some comments last week from M&S Chairman Robert Swannell in connection with the underwhelming annual results. He declared that the changes being made in the business were “one of the most radical transformations in British retail or indeed in European retail, any European business of scale”.  He didn’t quite go on to add “or in the world or even the universe”, but what he did say was “the board has spent the last two and a half years talking about this plan”.

Two and half years “talking” about this plan!  I know that oil tankers can take a while to turn round but if you spend two and a half years talking about the plan to turn it round you will likely discover that when you come to turn the wheel you are already stuck on the rocks.  When competitors like Zara can get new lines into their stores in two and half weeks, how on earth can the M&S board think it has the luxury of two and half years to talk about its plan for change!  If that’s”radical"”, then I am a left handed teacup!  Change is coming, get ready now.

Yahoo promises not to screw up

Talking of “radical” in an unprecedented statement on the acquisition of blogging website Tumblr for $1.1bn, Yahoo’s (latest) CE Marissa Mayer promised “not to screw it up”.  By this she meant Tumblr would be operated independently, founder David Karp would remain as CEO and generally they would be left to get on with what has made Tumblr successful to date.  That success however does not include making anything much in the way of profit.

Yahoo’s problem is that they don’t any longer have an audience.  Their strategy now is to buy other peoples’ audiences, which in addition to Tumblr has included Astrid, described as a “get it done” app (or diary to you and me) for an “undisclosed sum” and of course Summly, the mobile news app for $30m.  However Ms Mayer’s promise not to “screw it up” refers to Yahoo’s previous acquisitions which include Flickr, Delicious, Broadcast.com and Geocities.  Remember them, probably not.

The real challenge for a corporate such as Yahoo is that it is not so much will it screw up the business but will it screw up the people?  Tumblr especially is all about David Karp and his team.  Ms Mayer has already upset many Yahoo employees by banning working from home.  With $250m in his bank account how long before Mr. Karp gets fed up with being required to be “in the office” whenever Ms Mayer wants him there?  Saying one thing and then doing something which is completely at odds with what you say will screw up the people faster than anything else you can think of.

He saw it coming, but wasn't watching

Talking of screw ups last week saw the departure of Nick Buckles, CE of G4S.  In spite of the botched attempt to acquire ISS and the Olympics fiasco, Mr. Buckles had retained the backing of shareholders.  However a recent profits warning that took 15pc off the share price was one “misfortune” too many and he realised he had to go.  He went so fast (his successor has only been in the business seven weeks!) that I think he had been expecting that his time at G4S did not have long to go in any case.

The curious thing about Mr. Buckles track record at G4S is that overall it is not bad.  The share price has outperformed the FTSE by 174pc during his tenure.  So what went wrong?

My take on this is that he did not know when to get involved in the detail to make sure a robust process was in place and working to get the intended result.  I know he was the boss of a very big company but there are times when you have to get more closely involved in the ball game in order to win.  On the Olympics I find it staggering that on such a high profile project with huge risk both financially and to reputation if it went wrong that Mr. Buckles was not monitoring it closely day by day.  It is clear that the failings were as big a surprise to him as to anyone.

This is not about doing other people’s job for them but it is about making sure they are doing the job you expect them to do.

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.

Week ending 15th March 2013

TWb4TW is back.  Sorry for the gap, have had a very busy two months (good)  plus some health problems with immediate family (not so good) that took up a lot of time.  So here we go with some of last week's news.

Is there a nasty side to John Lewis?

Last week John Lewis Partnership (JLP) was accused by the Forum of Private Business (FPB) of bullying its suppliers when it was revealed it was demanding a “growth rebate” of up to 5.25% from its suppliers.  JLP’s argument is that its exceptional sales performance is due to its investments in new stores, refurbishments and its growing e-commerce operations.  Therefore it is only reasonable that suppliers who benefited from increased profits through efficiencies provided from the increase in volumes should make a contribution towards the investment that brought this about.

On the face of it this does look as though JLP, who are often praised by government as a model British business, love their customers and love their staff, but are just as capable of putting the boot into their suppliers as any of those nasty supermarket people.  I am not going to try to resolve the argument between JLP and FPB in this article as this is a case of “they would say that wouldn’t they” on both sides.  What it has made me think about though is the relationship between suppliers and retailers.

Manufacturers and suppliers of consumer goods have one fundamental challenge. Their expertise and assets are in developing and producing the products.  However even if you have invented and can produce the best mousetrap in the world if you do not have the means to put in front of customers in a way that enables them to buy it, then you don’t have a business.  Retailers provide the space to stock and display product, the footfall of customers who might buy the product and the means of making the transaction.  If a consumer goods supplier cannot find an alternative way of doing all this themselves then they have to work with a retailer, otherwise no sales!

These suppliers need to think hard about what this means for the balance of power in the relationship.  Apart from a few “must have” products and brands (a costly position to achieve and often temporary) this generally means the balance of power is always going to be with the retailer, so don’t be surprised if the retailers use it.

James Dyson had to face up to this some years ago.  Even though he had invented the best vacuum cleaner on the market, the expectations of customers for household electrical goods were that prices did not increase and over time they reduced.  Dyson’s retailers had to respond to this if they were to compete and so did Dyson.  This is why he closed his UK manufacturing facilities (much criticised at the time) and moved to Malaysia to lower his costs.  Because Dyson faced up to the reality of the market in which they operated and adjusted their business model to compete effectively they are now a global brand and business and employ more people in the UK than they did when they manufactured here.

So if you are a JLP supplier and feel they are now showing their nasty side, which you didn’t see coming, then ask yourself this question.  Would you rather have them as a customer who, with their “competitive strength” can invest and change to meet the new challenges in the market or would you rather have been a supplier to HMV and Jessops whose lack of “competitive strength” meant they couldn’t and didn’t?

Zara – another way

Talking of retailers the world’s largest clothing retailer is the Spanish company Inditex, best known in the UK for its Zara fashion shops.  In spite of the global financial crisis and economic chaos in Spain the company’s value has grown from €37bn in 2007 to €65bn now.  Profits increased by 22pc in 2012 alone.

Inditex is not only the world’s largest clothing retailer but also one of the largest clothing designers and manufacturers.  The company produces more than half of its products itself and every item of clothing passes through its Spanish manufacturing and logistics facilities.  All this started when Inditex’s founder and owner Amancio Ortega opened a shop in La Coruna to sell products from his nearby factory.

So it’s another business model but in Inditex‘s case it’s a fast fashion model, capable of taking a design from catwalk to shopfloor in two weeks.  What’s more if a design does not sell it can be withdrawn, the lessons learned and then replaced in the same time frame.

Contrast this with the situation at M&S where the only change they have made to their clothing business model was to move their British based supply chain offshore.  M&S are desperate to get their clothing business right but the next opportunity they will have is not till they launch their Autumn Winter ranges later this year.

This is not to say that the answer for M&S is to move into manufacturing.  What this and the Dyson example illustrates is the crucial importance of getting your business model right, taking full account of all the challenges involved, including the possibility of your customers demanding retrospective discounts.  I so often hear about business ideas and business plans, but not so often about how a business is supposed to work.  Successful businesses have robust business models and you can see why they work.

Morrisons – why are we waiting!

Another retail struggler is Morrisons who last week reported sales down by 2.1pc and profits by 7.2pc.  CE Dalton Phillips blamed this on lack of an online business, limited presence in the fast growing convenience store market and failure to promote the points of difference.  All very well and “bleedin' obvious” Mr. Phillips but when are you actually going to do something about it?

He has had a bit of luck with the convenience stores as other retail failures have enabled Morrisons to acquire 62 sites to expand the “M Local” stores.  On the points of difference they have hired that irritating Geordie pair Ant and Dec (not all Geordies are irritating, just Ant and Dec) to front an advertising campaign to promote the fact that Morrisons are the second biggest manufacturer of fresh food.  This has been reported on repeatedly in the business and trade media but no actual sign of the campaign itself yet.  Morrisons also failed to capitalise on the horse meat scandal, with only a few press adverts and the odd interview with Mr. Phillips being the sum total of their efforts.

On the internet he has stated “ we have a specific plan on the proposition and how we will be different” but no more details as these are apparently “commercially sensitive”.  This appears to be still stuck somewhere between the idea and the planning stage.

All this points to a lack of “changeability” in Morrisons’ culture and business processes.  This was evident in spades when they bought Safeway and the integration of the two businesses took forever.  They don’t seem to have shaken this off and until they do I don’t see them overcoming the challenges they are creating for themselves.  If Morrisons start demanding rebates from their suppliers before they have delivered sales growth then this won’t be a sign of smart business, just one of desperation.

Merve swerves but Heseltine on the money

In an interview last week Mervyn King, the soon to retire governor of the Bank for England actually said that economic recovery is now “in sight”.  Coming from the biggest misery guts in the whole economy I take this as the strongest signal yet that we can actually look forward to better times and that they are not too far off.

However far more significant for me was a radio interview with Michael Heseltine earlier in the week, as part of the usual “what do think will/ought to be in the budget” run up to the actual budget.  Heseltine replied that “what government, the public and private sector, in fact everyone in this country has got to realise is that we have got to do everything much better than we have ever done in the past”.  The big theme for the budget is “growth” but whether we get anything that is really about growth is another matter.  However I am pleased to find that Lord Heseltine agrees with me (note agrees with me) that growth is about “getting better” not about “getting bigger”.  Take note Morrissons, M&S and any of you JLP suppliers feeling hard done by.

Quote of the week

In a party political broadcast last week David Cameron stated that he had not gone into politics to be “the popular guy”.  My first thought was “that explains a lot” but my second was could this signal a new direction in political campaigning?  After years of politicians trying and failing to make themselves popular has Cameron spotted a truly left of field strategy for electoral success?  If so he will have sidestepped Ed Milliband who is desperate to make himself popular (or even for people to know who he is) and Nick Clegg who thinks he must be popular because what’s not to like about a fair minded Lib Dem like him.  Perhaps the killer ticket to capture the "unpopular vote" at the next election could be David Cameron and Ed Balls?

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.