Week ending 26th April 2013

A year ago it looked as though the end game was in sight for the euro, then things quietened down.  The general view was that somehow the Eurozone would muddle its way through to a solution over time.  However the Eurozone reappeared last week in the business, economic and political sections of the media and it seems nothing much has changed or is likely to and the slide continues.

Mrs. Merkel mentions the war

Spain’s unemployment has continued to rise and hit a new record of 27% with 57% of under 25s out of work.  Italy has finally cobbled together a government which includes Silvio Berlusconi’s party so not much change there.

Stern Auntie Angela is once again pushing for stricter Europe-wide control over national budgets, still pursuing the idea that if only everyone could be more like the Germans then all would be well.  This is diametrically opposed to the French position that wants banking union or in other words if only everyone could be more like the French then …. Well you get the picture.

The ability of the Eurozone politicians to come up with policies and proposals that effectively cancel each other out is not altogether surprising if you look at European history.  Differences like this arose regularly sometimes leading to war which would sort it out one way or the other.  Now that option is not available (thankfully) but the Eurozone doesn’t seem to have found an alternative that works so the differences and the problems they cause rumble on.

Of course this is what the euro was supposed to be all about.  A common currency leading to “ever closer union” would be the mechanism by which all differences would be resolved.  Indeed Auntie Angela has warned sternly of the risk of a return to conflict between European countries if the euro fails.  However it is clear from a number of developments from last week that the pressure on the euro is building.

Austerity light

With GDP throughout the Eurozone falling and even the German economy feeling the pinch it seems everyone (apart from stern Auntie Angela) is questioning whether austerity has gone too far.  Almost any country that cares to ask is being granted an extension to deficit reduction targets.  The IMF came out with a strange argument that George Osborne was “playing with fire” by pursuing the current rate of deficit reduction in the UK and that there is the “fiscal space” in the UK to indulge in a bit of “fiscal loosening”.   The mood appears to be swinging towards the idea that some sort of “light touch” austerity is the answer because austerity itself has become the problem.

All this is a classic and big scale example of tackling symptoms rather than the core problem which is the euro itself.  In fact it’s worse than that.  When you tackle symptoms and this produces consequences you don’t much like this causes you to tackle these symptoms as well, so you get further and further away from the core problem.

No FTT no €30bn

An example of the Eurozone focusing on symptoms and not the problem is the attempt by Germany and 10 other countries to introduce a Financial Transactions Tax (FTT).  As the tax will apply to trades across the world if they originate in one of these 11 countries it is not surprising that many other countries including the US and UK are against it.  A Swedish minister has warned that it will be a disaster and will not work.  He should know as he actually introduced it in Sweden and found it was a disaster and didn’t work.

Last week Jens Weidman President of the Bundesbank no less announced that “From a monetary policy point of view, the FTT in its current form is to be viewed critically”.  He also warned that it could raise the costs of government borrowing and outweigh the revenues raised by the tax.  I think we can take that as a “nein”.

The only argument I have found in favour of the FTT is that it could raise up to €30bn which would be used to …lower government deficits!  Well perhaps, but if it raises borrowing costs then once again the EU will have cancelled itself out and long since lost sight of the real problem.

George Osborne has taken to matter to the European courts.  It would be rather good if he could get the European Court of Human Rights to rule against FTT.  Would be almost worth putting up with Abu Qatada to win that one.

Whatever it takes or whatever it costs?

One of the moves that kept the lid on the whole mess for a while was the European Central Bank (ECB) becoming in effect the lender of last resort in the Eurozone.  Last summer it launched its emergency rescue strategy, Outright Monetary Transactions (OMT), buying up the bonds of countries like Spain and Italy and bringing about a spectacular fall in their borrowing costs.  This followed Mario Draghi’s statement that he would do “whatever it takes” to deal with the Eurozone’s sovereign debt problems.

However he omitted to mention that his plan required the German taxpayer to “pay whatever it takes”.  Last week the Bundesbank having poo pooed the FTT did the same to OMT, taking it apart point by point.  Germany’s constitutional court is due to rule on the legality of OMT in June.  If it rules against OMT it pretty much means the end of the euro.  With stakes that high the markets seem confident the court will find some formula to avert that kind of crisis.  However it does show just how close run this is all getting.

Italian job

Now that we have a new Italian government perhaps we will see some action to stop the Italian economy choking to death.  However be careful what you wish for.  Strangely Italy is not fundamentally a basket case, its problem being lack of competitiveness brought about by letting its labour costs race 30pc ahead of Germany’s.  In particular it has a primary surplus of 2.5pc of GDP (something George Osborne can only dream about currently).  This means Italy could leave the EMU and regain competitiveness without facing a funding crisis.

So why doesn’t Italy do just that?  Mainly because its political leaders have not so far been prepared to play rough.  The latest PM Enrico Letta does not look like the man to change that and the government he now heads is unlikely to last long enough to achieve anything meaningful.  But even with a PM who was very nearly named after a cup of weak coffee, you never know.

Why does all this matter

You may be wondering why I am boring you all to death with this stuff.  Last week the UK GDP figures were published and apparently we managed a whole 0.3pc growth in the last quarter, avoiding the triple dip, which sounds more like the latest offer from KFC than a meaningful economic concept.  Also it was reported that many businesses are sitting on mountains of cash and are reluctant to invest and even more reluctant to borrow to invest.  Behind the flat economy and reluctance to invest is uncertainty and that uncertainty is all about what’s going to happen in the Eurozone.  Even when nothing does happen what might happen is scary enough to keep most CEs and FDs awake at night and holding on to their cash cushions.

So the crisis and the uncertainty are set to continue. The UK’s and indeed the world economy cannot recover properly until the EU faces up to the fact that the euro in its current form just cannot work.

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 19th April 2013

Whenever you look back on the previous week, whether it’s your own week or the world’s in general it has usually been a series of ups and downs and this is the theme for TWb4TW this week.

What goes up must also come down.

This has certainly applied to two particular investments recently, gold and shares in Apple.  Last week gold hit a two year low and is down over 20pc from its previous record high of $1,921, dropping almost 13pc in just two days.  Apple shares, having hit $700 in September, making it the world’s most valuable company went below $400 last week.

This demonstrates once again that human emotion can be a much more significant factor than the realities of supply and demand, economic conditions, or even world events.  For example investing in gold is supposed to be a means of “storing wealth”, to protect its value against inflation, currency devaluation and other economic and financial shocks that can reduce the value of cash and other investments.  So fear causes investors to buy gold to protect their wealth.  This causes the gold price to rise.  Then the greed factor kicks in and it becomes not about protecting wealth but about increasing wealth so more and more investors pile in.  Then someone notices that some of the underpinning assumptions no longer apply or different factors have emerged such as Cyprus’ proposals to sell its gold reserves to finance its bailout.  Fear takes over again and the price goes down, often quite rapidly.

In the case of Apple it was the greed factor that drove the share price up on the assumption that it could produce blockbuster new products and profits on a more or less continuous basis.  Then it dawned on people that Apple is run by human beings not some super race and the likelihood of new I phones, pods or pads generating ever increasing profits for ever and ever was, in a word, unlikely.  The adjustment to this reality was bound to happen when the fear factor kicked in.

If you can stand apart and observe the greed and fear at work you have a chance of making rational decisions.  However this is more difficult to do than you might think as illustrated by legendary Wall Street investor John Paulson.  He made billions from betting against the US sub-prime bubble.  However his bullish stand on the gold price is estimated to have cost him hundreds of millions of dollars over the past two weeks.  So if even people like John Paulson can go up and down so can almost everything else.

Facebook – down and staying down?

Last week Sheryl Sandberg, Facebook’s COO, made a rare visit to their HQ in Britain.  Ms Sandberg has recently published a book and judging by the content of her press conferences and interviews promoting her book was the main reason for her visit.

One thing she did not appear to comment on was Facebook’s share price.  Just about a year ago it carried out an IPO at $38 a share.  Since then the shares have mostly gone south and ended last week at $26.59.  Greed having driven the rush to buy the shares soon turned to fear when it became apparent Facebook did not know how to make money out of mobile phone content.  This was actually apparent before the IPO but was ignored in the rush to get in on the “next big thing”.

Apart from announcing that “To say that mobile is important to Facebook is the biggest under-exaggeration of all time” Ms Sandberg was giving nothing away.  I suspect that this is because there is nothing to give away and that we are left with just fear and greed to determine where Facebook’s share price goes next.

Tesco- down but maybe going up?

Staying with the emotional theme Tesco is not one of those businesses that people like, but many still shop there.  Many of the people who vehemently oppose a new Tesco superstore still go and shop there when it opens based on an unemotional judgement about convenience and low prices.  Consumers don’t “love” Tesco like they “love” John Lewis so many have been quietly pleased to see them struggling recently.

Last week we learnt that Tesco had taken the unemotional and rational business decision to pull the plug on its US venture and to write down the value of its land bank in the UK as they called a halt to further large scale store expansion here.  Given both the financial and emotional investment involved this is a text book example of business brain over ruling heart.  Big as the losses are Tesco can afford to do it right now, so right now is the time to do it.

CE Charles Clarke stated that “I have been working for Tesco for nearly 40 years and I can tell you this – it already looks, feels and acts like a different and a better business”.   However if Tesco is really to become a “different and better business” then Mr. Clarke will have to find a way of getting to rest of the business to share his enthusiasm and excitement for his vision of the future.  Tesco has done the hard nosed, rational and unemotional business stuff very well for years.  What people are looking for now is something that makes them feel good about spending their money with Tesco that is not about fear and greed.

What this tells us is that rational business logic on its own is never enough.  You need the emotional factors as well and the trick is to get the balance right and that is the challenge for Tesco to get back to growth.

Dell – going down to get back up

Earlier this year Dell Computer founder Michael Dell put forward an offer to take Dell private at $13.65 a share.  The logic is that as a private business removed from the pressure of quarterly results, Michael Dell will be more able to take the decisions and actions needed to switch the company’s focus from PCs to faster growing software sales and services.   This is because in the strange world of public companies shareholders will often not tolerate the adverse short term consequences of decisions that need to be taken in the longer term interest of the business.

Michael Dell’s offer took account of the fact that in order to go back up you may first have to go down.  So inevitably some shareholders complained he was buying the business on the cheap.  It also prompted private equity firm Blackstone to put in a rival bid at $14.25.  However after the slump in PC sales worldwide in the first quarter Blackstone withdrew their offer.  This pretty much vindicates Michael Dell’s proposition and even though he still has to persuade some shareholders to accept his chances are looking better.

Michael Dell clearly has considerable emotional investment in the company he founded so he has both personal and financial motivation to secure its future.  However in order to make the hard and rational business decisions needed to turn the company round he must first remove it from an arena where the emotions of fear and greed rule.

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 12th April 2013

Last week the death of Margaret Thatcher pushed every other story about almost anything else off the front pages.  Even Fat Boy Kim who is threatening to blow up the world was relegated to the middle pages, which won’t have improved his temper I fear.

So I will not attempt to add more to what has already been written and broadcast about Margaret Thatcher.  However if there is one thing from her life and career that I think holds a lesson for us all it is that she knew what she was there for. Everything she did she did with a clear purpose to achieve a clear outcome and this is the theme for this week’s TWb4TW.

Two speed M&S.

Sales at M&S for the 13 weeks to March 30^th squeezed out a 0.6pc overall increase, down 3.8pc in clothing but up by 4pc in food.  The drop in clothing was not as bad as feared and M&S shares rose by 4.3pc in response.

Food is now 55pc of total sales and is growing faster than the grocery sector as a whole, in spite of not selling online.  Commentators were unanimous in being perplexed by how M&S can get their food offering so right but their clothing so wrong.  In food they continue to innovate whilst their competition can only emulate.  By contrast in clothing they flounder and watch the competition speed past them.  You can see clearly what M&S food is there for but as for their clothing, you wonder why they still bother.

CE Marc Bolland says he needs more time to turn round the clothing division and has bought in a new team including Belinda Earl as the company’s first style director.  A number of commentators and retail analysts are urging Mr Bolland to replicate the success of the food business in clothing – summed up as directional, not trying to do everything for everyone and value for money but skewed towards the high end of the market.  Whilst this may well be part of the answer I am not sure it is the entire problem.

When you have a problem the temptation is first too look for the new, different idea that will solve the problem.  However M&S dropped the ball in clothing about 20 years ago, just about the same time it picked up the ball in food and started to run with it.  Whilst it was some time before this showed in the numbers they gradually lost sight of what their clothing division was there for, whilst becoming steadily clearer about what they were there to do in food.

I would suggest that Mr. Bolland needs first to understand how M&S lost its way on clothing whilst at the same time finding its way on food. How did the present situation arise?  What was it that used to work and now does not and why?   This process would also help him discover what purpose would be served profitably and who for by the clothing division today and then the problem and the solution will become clear.  Perhaps M&S only has one ball!

PCHP

Talking of sales figures global sales of personal computers fell by 14pc in the first three months of the year, the biggest fall since 1994.  HP which is still the world’s biggest PC seller saw one of the biggest falls, shipping 24pc less in the first quarter.

Clearly a big change is going on and if you are the biggest loser in a product area that has “loser” written all over it you had better sort yourself out pretty soon or you’re dead.  Here are some of Meg Whitman’s (CEO of HP) responses last week.

“We are aggressively pursuing a multi-form strategy” – “In the end I would very much like to be in smart phones” – “I worry about Lenovo and all of HP’s competitors”.

And on her claim of accounting improprieties at Autonomy when HP bought them.

“When the news about Autonomy broke the remaining employees were unsettled – that’s the best word” – “HP is still incredibly committed to Autonomy”  - “This is terrific technology. It’s almost magical technology.  What it allows customers to do is to understand all the unstructured data, the application of legal and compliance – it is terrific technology”.

So that’s all clear then. Can you spot what Meg Whitman is there for and what the purpose of HP is to be?

Swann song

I have written about Kate Swann previously but it is worth looking again at her remarkable record at WH Smith as she hands over the reins to her successor as CE, Steve Clarke.  She has turned WH Smith from a loss making, uncompetitive near basket case with no clear reason to exist into a highly profitable business that knows what it’s doing and why.

Swann was very clear about her purpose at WH Smith which was to make profits.  She was not afraid to take difficult, contrary decisions to achieve this.  Taking out low margin entertainment products actually reduced sales, almost a blasphemy in the retail world, but she showed how concentrating on higher margin products made much more money.

She is ready for another challenge and she won’t be short of offers.  However whoever gets her needs to understand she will do the job her way, she’ll be clear about that.  Does that remind you of someone?

French disconnection

If there is anything worse to be in than the PC market at the moment it is the French economy.  The economy contracts, competitiveness evaporates, taxes go ever higher and their sovereign debt accelerates to over 90pc of GDP.  Francois Hollande has managed to become the most unpopular President ever, even though voters still think they should continue to receive all the benefits the French state can no longer afford.  This also reminds me of something.  Oh yes I remember, the state of the British economy before Margaret Thatcher.

And finally

I read last week in an article by Sun Baohong in the Telegraph that when Coca-Cola first entered the Chinese market its name was represented by the Chinese characters that meant “Bite the wax tadpole”.

I can’t help feeling that somewhere there is a product for which the brand “Bite the wax tadpole” would be perfect.  Any ideas, I would be pleased to hear them.

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 5th April 2013

Just imagine …

You are the finance director of a large conglomerate.  You joined the business over 2 years ago as part of a new senior team to turn the business round.  It has proved a mammoth task and although the business is stable it is showing little sign of getting back on to a growth track.  This has been reflected in the share price with two recent downgrades.

This was an old fashioned conglomerate with everything controlled from the centre by a large, bureaucratic and very expensive head office.  Managers running the trading businesses felt all they were there for was to feed this monster and just did what they thought they were being told to do.  You have made some progress in reducing the size and scope of the head office. Along with your CEO and Chairman you have been telling the managers that you want them to be freed up to run their business units with as little interference from head office as possible.

Your Chief Accountant who you inherited from the previous FD’s team has put forward a proposal for a major new “enterprise wide” IT system.  He has proved to be competent which is why you kept him on and his proposal appears to have a solid business case behind it.  He is confident the system will produce major savings at head office at the same time as providing up to date and accurate information on all the trading divisions.

The business logic seems to add up but it will require big changes in all the trading divisions which will take a lot of management time to implement.  Right now you want those managers to concentrate on increasing sales and profits in the businesses they lead.  They are showing signs of responding positively to the new freedoms they have been given.  However you are concerned that they may not have yet developed enough “changeability” to take on this new IT system as well and you feel it may send the wrong message, more control from the centre rather than less.  After careful thought you take the brave decision not to go ahead with the IT project but to focus on supporting the trading units in growing their businesses.

Meanwhile back in the real world …

Last week HMRC implemented the biggest change to PAYE for decades when the new “Real Time Information” (RTI) regime was launched.  Instead of reporting on wages and salaries and tax and NI deducted annually businesses are now required to report every time they run a payroll. This will be a minimum of 12 times a year but for many businesses it will be more often than this.  Failure to comply will result in fines.  HMRC claim they will make big savings in their costs and from increasing the tax they collect.

Now this may be true and I don’t argue that our tax system and regime need bringing up to date.  However given the extremely challenging business and economic climate and the exhortations from government to grow, export and all that good stuff is this really the right time to be introducing something like RTI?  Especially as this government has been banging on about how it is backing business and cutting red tape.  How does that rhetoric match with the requirement to do at least 12 times as much work complying with a PAYE regulation as there used to be?

Did I say something about back in the real world?

Going against the accepted wisdom

Recent readers of these articles will be familiar with my view that what really matters is getting the “business model” right.  I came across a good example of this last week in an unexpected business sector.

Currently about 18 pubs are closing each week, the victims of successive recessions, cheap alcohol from supermarkets and high beer duties.  The majority are those that only served drinks.  The accepted wisdom is that you cannot make money in pubs on drink sales alone and certainly you need a food offering if you are to grow.  Food is the “engine” for driving sales.

However a pub group called Amber Taverns set up in 2005 and which now has a portfolio of more than 80 pubs only sells drinks.  They don’t allow children in their establishments either which goes against that part of the accepted wisdom that says you have to attract families to make money.

There have been plenty of pubs coming on the market which is part of the business model logic so Amber can be picky.  They look for pubs within easy walking distance for a good number of people, with plenty of footfall and passing trade.  They refit the pub with good modern fittings and an array of TV sets tuned to the sports channels.  They offer their beer at competitive prices, nearly half price or less than a “gastro pub” and their managers know their regulars by name.  So you have what Amber owners describe as the modern social club for the 21^st century.

A time of change always offers opportunities and the growth of Amber taverns is an example.  However it is not just based on being able to acquire pubs at a good price.  It is based on a solid business model that delivers what a certain kind of customer wants and makes it easy for them to get it.  The right business model is a key component of “competitive strength”.

I wonder if there is an opportunity for a pub chain that does not allow children AND doesn’t have TV sets either!

Eastern promise

It’s worth paying some attention to what is going on in Japan.  This is a country whose economy, despite being one of the largest in the world, has been going nowhere for years in terms of growth.  Well if the bank of Japan (BoJ) has anything to do with it that’s about to change as it plans a massive hike in the country’s monetary base from 29% to 56% of GDP by 2014.  To show what an upside down world it is one the BoJ’s targets is to get inflation “up to” 2% in 2 years.

Monetary easing on this scale is so huge and unprecedented that none of the experts can really say what the consequences might be so I am not even going to try.  However one effect already has been that the yen has depreciated 32% against the euro since last July.  Is anyone going to buy a Peugeot ever again?

And finally

Nearly another 3 weeks gone and Italy still doesn’t have a government!

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 29th March 2013

This week’s TWb4TW is more politics than business for a change, though as always there are lessons we can learn. 

Aspiration Nation

This week sees the start of some of the biggest changes in decades for the NHS.  These changes are made even more significant given that the Tories said in their election manifesto that this is one thing they would not do.  We are used to politicians not doing what they promised but this may be a first where they do what they promised not to do.

As a precursor to these changes there has been a rewrite of the NHS “constitution” as the framework for the new look NHS.  Robert Francis in his report on the Mid-Staffs hospitals scandal recommended that patients’ rights be formally enshrined in this new constitution.  He wanted to make it explicit that “patients are put first” and that “everything done by the NHS should be informed by this ethos”.  A good idea would be the response from most of us I suspect.  However all that Jeremy Hunt the Health Secretary has come up with is that the health service will “aspire to put patients first”.

Yes I kid you not, these are the actual words that have been written in to the new NHS constitution and published last week.  Coming hard on the heels of George Osborne’s “aspiration nation” budget speech it seems that “aspire” is the new theme for this government as the alternative to actually delivering a result.  After all it has a loftier almost spiritual feel to it when compared to “doing your best” or “trying hard”.  In fact as long as you are “aspiring” you don’t even have to bother with either of those.

The other thought that occurred to me was if the patient has not been at the core of the NHS constitution previously than what was?  Could it have been?

“The NHS exists to enable doctors’ receptionists to satisfy their need to exercise complete power and control over the rest of the human race”.

Or

“The NHS exists to increase the income and egos of medical consultants in equal proportion for ever and ever”.

Or

“The NHS exists for politicians to mess about with, even when they say they won’t and so they can feel they have done something worthwhile”.

OK I am using 3 stereotypes to make a point (and get a cheap laugh) but to actually put the words “aspire to put patients first” into the NHS constitution is just as big a nonsense.  The question is how could this happen?  I have a horrible feeling it is because:

Clever people do clever things

A lot of clever people would have worked on the new NHS constitution, politicians, lawyers, civil servants, representatives of medical professional organisations and so on.  We know these people are clever because they all have firsts from top universities and say things the rest of us can barely understand.  They will have worked far in to the night to produce a set of words about patients that would ensure that it would be difficult or even impossible to be held to account for anything that actually happens to them.  The person who came up with the word “aspire” may well feature in the next honours list!

However what has got lost amongst all this cleverness is a clear sense of purpose.  Without a clear sense of purpose which everyone involved can understand and relate their own role to then the project is doomed to fail.  This has been proven in research and practice time and time again in both private and public sectors but still clever people almost invariably get this wrong. The problem is that for clever people having a clear sense of purpose is just too simple and keeping it simple is not what clever people do.

 

I don’t like your attitude

The Francis report on the Mid-Staffs scandal is an example.  Whilst the recommendation for patients’ rights to be enshrined in the NHS constitution is spot on, Robert Francis and his inquiry team could not resist going further and coming up with no less than 290 recommendations on how to do this.  Now if you want to make something actually happen 29 would have been too many and 290 introduces such an enormous drag factor on change that any meaningful change is unlikely to be achieved.

The number of recommendations is a product of getting into too much of the detail of what should be done, rather than focusing on what needs to change and then holding people to account for making that change happen.  The Mid-Staffs scandal is being used to demonstrate that the standard of patient care throughout the NHS is sub-standard and that this in turn is down to the “attitude” of nursing staff in particular.  One recommendation for fixing this is that nurses should spend a year on the wards caring for patients including feeding and washing before they qualify.  I suspect like me many people were surprised to find this did not form part of current nursing training.  However the inference here is that this will sort out the “carers” from the rest and fix the “attitude” problem, at least Jeremy Hunt seems to think so.

The very worst place to start trying to change people’s attitude is to tell them it needs to change.  What is more the attitude of rank and file staff in any organisation is a direct result of the attitude of the leadership.  Consequently attempting to change attitudes amongst staff without first changing the thinking and behaviour at the leadership level is bound to fail, as all the research and practice again demonstrates.  For the NHS this leadership “attitude” problem goes right up to the top political level.  Perhaps if any politician “aspiring to reform” the NHS was required first to work for a year on the wards, caring for and washing patients, we might get better outcomes for the NHS and all of us who use it.

Arising from the ashes

Back to business now and one good story last week was the news that Jessops photographic shops will be returning to the high street.  TV dragon Peter Jones acquired the brand, stock and other assets from the administrator in a joint venture with restructuring specialists Hilco.

The return to the high street was a surprise as Jones was expected to relaunch Jessops as an online retailer only.  He is smart enough to know that in spite of the best efforts of previous managements and owners Jessops is still the leading brand in the specialist photographic equipment market.  What’s more because, as Jones himself says Jessops sells a “technical product” the click and collect model that a combined high street and online presence enables is best suited to the core Jessops customer’s needs.  So absolutely the right business model and Jones expects to have around 40 stores open by the end of April enabling him to cover the UK with click and collect and to offer the technical advice that the Jessops customer values.  Half the 500 staff will be previous Jessops employees.

The only slight doubt I have is that Jones is to be both Chairman and Chief Exec.  Given his many commitments it will be a challenge for him to give the attention to detail that will be needed to make this all work.  He will need to find leaders amongst his management and staff to help him with this.

And finally

Congratulations to Nick D’Aloisio the 17 year old who sold his app Summly to Yahoo! for £20m.  Apparently this app detects the key points in news stories and automatically rewrites it to fit on to an Iphone screen.  Even though this is still bigger than the average Sun reader’s attention span Yahoo! is very excited about it and maybe they are right to be.  However as they are also the company who took over the management of the Sky e-mail service last week and promptly emptied over 10,000 old e-mails from my business partner going back years into my two mail boxes, I am not so sure.

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 Easter break and hope you have a great week this week.

Week ending 22nd March 2013

The budget dominated the business, economic and political news last week.  You will be pretty fed up with reading about it by the time this week’s TWb4TW is published.  So apart from a small mention at the end this is a budget free zone.

Cunning Foxtons

One positive sign that maybe an economic recovery could be stirring is a revival of interest from investors in Initial Public Offerings (IPO) or “floating a company on the stock market” to you and me.  Investors are encouraged that both Esures and estate agents Countrywide’s IPOs got away smoothly last week and have even begun trading above their float price, which is a first for some time.

This has prompted reports that another high profile firm of estate agents, Foxtons, are considering a potential £780m IPO.  You may remember Foxtons prospered during the London property boom and became famous for the brightly painted Minis it provided to its staff which promoted its brand as they hurtled round the streets of London.  Foxtons expanded rapidly on the back of the London property boom.  However, whilst it was high profile it was not very highly thought of by people who had bought or sold property with them.  Over optimistic valuations and putting sold signs on properties that were not yet sold to boost their apparent sales success were just two examples of practices their clients complained of.

In 2007 BC Partners (BCP) paid £375m for the business of which £300m went to Jon Hunt the founder.  Then the London residential property collapsed and so did Foxton’s profits.  The deal had loaded the company with debt and initially the banks involved took control with a debt for equity swap and BCP writing off a significant proportion of their investment.  However, surprisingly BCP then decided to buy back both the debt and the equity.

Perhaps not so surprisingly.  The buy backs were achieved at an advantageous price as the banks were happy to get rid of the problem.  The timing was good as the London residential property market recovered and Foxton’s high market share enabled them to deliver record sales and profits.  So it would not be surprising if the next stage of BCP’s cunning plan for Foxtons is an IPO.  If they were to achieve £780m this would be a pretty good return despite the earlier problems.  But what would investors be getting?

Now even my dog knew that the first property market to recover would be London.  So, on the face of it you would be investing in the dominant player in a resurgent London property market which sounds pretty good.  However Buzzel and Gale in their book “The PIMS Principles” demonstrated that whilst high market share is indeed highly beneficial to profitability, it depended on “how” that market share had been achieved as to whether that profitability could be sustained.  Market share achieved through delivering “superior relative quality” of product and service to the customer would sustain high profitability.  Market share achieved through other means, such as opening lots of estate agent offices, contains inherent weaknesses which eventually become detrimental to profits.

This was backed up by Zook and Allen in their examination of the long term performance of over 2,000 companies in 2001 and then repeated in 2011.  They concluded that:

“A common misconception is that rapid, sustainable growth can only occur in “hot” markets—markets that are growing rapidly—and that being in a hot market is the best way to generate high profit levels. Our data refutes that. A variance analysis of our database demonstrated that relative competitive position within an industry is more than four times more significant than the choice of industry in determining the economic returns of companies. In other words, it’s how you play the game that matters, not which game you play”.

All the commentary around the possibility of a Foxtons IPO centres on the “hot” London residential property market as the key to success.  If Foxtons have also upped their game on the quality of service they provide their clients, the acid test being would most of their clients definitely recommend them to others, then you would have the best of both worlds, a quality company dominating a currently hot market.  However if not much has changed at Foxtons then an IPO would be no more than an opportunity to have a punt on the London residential property market.  Each is a valid proposition provided it is clear which one you are being offered.  Is it real "competitive strength" or just high and possibly temporary market share advantage?  So beware the cunning Foxtons and look carefully at the other IPOs being lined up for launch this year.

ARM – keeping cool in a hot market

In case anyone has not heard of ARM they are a Cambridge based company that designs microchips and generates its revenues from licensing these designs to those that wish to incorporate them in their products.  Its chip designs are used in nearly all the world’s mobile phones and you won’t find a hotter market than that.

ARM was created from a spin off from Acorn computers, a company that prospered for a while but just could not keep up with the big boys in PCs.  However what they did know was that could design better micro chips than Intel and others.  Because they did not have experience or facilities for manufacturing they came up with the licensing model.  This has proved to be spot on and so resilient that ARM safely worked its way through the dotcom boom and volatility in semi-conductor markets.  In 2012 they achieved £577m of sales and £221m of profit.

ARM is an outstanding example of how "competitive strength" creates the "changeability" that delivers even more "competitive strength".  They demonstrated this again last week when their CEO Warren East announced he would be leaving after 12 years in charge, handing over to Simon Segars who has been with ARM even longer than East.  Given that the opportunities for ARM to go for another major phase of growth have never been better it is perhaps surprising that East has decided to go now.  His reasoning is that as it will take 6 years for ARM’s next design blueprints to be in products and with the company being in a strong financial and market position now is the right time to make this change.

This is a superb example of clear thinking and the understanding that it is not the “hot” market that really matters but the company’s ability to successfully exploit the opportunities.  East has ensured ARM can do this in every respect, right down to deciding that a change of leadership was required.  We don’t have enough people like him in top positions in UK businesses.

Italian Job

The financial crisis in Cyprus was a big economic and political story last week.  The Cypriot government is trying to raise the €6bn it needs to secure an EU bailout and proposed to do this by taking a slice out of citizens and exp-pats’ bank accounts.  Tactically actually having a government is where the Cypriots may have put themselves at a disadvantage in their negotiations with the EU.  Let me explain.

By contrast it is now more than a month since the Italian elections and they still haven’t actually got a government.  In fact as 25% of the vote went to a party that said it would not be part of any government Italian voters in effect voted not to have government and that’s what they got, or didn’t get.  This confirms the observation of a previous UK ambassador to Italy that “it is not difficult to govern the Italians, it is simply unnecessary”.

So Italy is probably a country that can get by perfectly well without a government. When it comes to negotiating with the EU (or Germany to be more accurate) this puts them at an advantage as the Italians have contrived a situation where there is no one for the EU to talk to.  This leaves the EU with little choice but to carry on as before which suits the Italians, both voters and politicians perfectly.  Cyprus and maybe Spain take note!

Rhyming slang

Briefly on the budget I was struck by George Osborne’s little catch phrase, “aspiration nation”.  This sounded like a trial run for the Tory election slogan in 2015.  Ed Milliband countered with “a degraded budget from a degraded chancellor”.  However without the little rhyme it isn’t memorable enough to be an election slogan.

However the overall reception from UK business to the budget was that we are an “anticipation nation”.  In other words we are still waiting for George Osborne to redress the balance between just making announcements and actually doing something.  Even some of the things that sounded like they might be about to doing something are not planned to happen for 12 months or more.  A bit less of the politics and a bit more focus on the day job of getting the UK economy moving is what business is still looking for.

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.