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 17th May 2013

I know best

The National Audit Office’s (NAO) job is to monitor government spending on behalf of MPs.  It does this rather well, producing robust, well researched reports which in many instances highlight government mismanagement and waste.  The NAO maintains its independence from government and tells it like it is.  So the NAO is a really good thing or least you would think so.  Well it would be if governments took any notice, but they don’t.  They just receive the reports and completely ignore them.

Last week the NAO produced a report on HS2 which casts serious doubt on whether any of the benefits claimed for this £37bn project would ever be achieved and on whether the project can be delivered within the time frames that have been set.

It also criticised the DfT for basing the business case for HS2 on data more than ten years old.  Previously my concern was that by the time it was built, the basis on which the investment decision was made could be ten years out of date.  It now appears it already is 10 years out of date.

The response from Patrick McLoughlin, the Transport Secretary was to accuse the NAO of depending “too much on out of date analysis”, so you can see how much notice he is going to take.  The message to the voters and tax payers is that HS2 is good for you so that is what you are going to get (and pay for).

Not listening by politicians and business leaders is starting to stir up forces that could have unexpected consequences, for example.

Who likes the EU?

The EU has once again moved to centre stage in British politics.  However a survey published last week indicated that UK voters are not alone in having doubts about the benefits of EU membership.  This revealed that the proportion of Europeans with a favourable view of the EU has fallen from 60pc to 41pc.  The French are now more Eurosceptic than us Brits with backing for the EU falling to 41pc compared to 43pc in Britain.

This indicates that we are all members of a club that the majority of us now don’t much like.  However with a few exceptions the political and civil service classes (hard to tell the difference these days) throughout the EU still seem as keen as ever on the “European Project”.  Even in the UK whilst the Tory party is clearly split, Labour and the Lib Dems are adamant that our future is within the EU.

Politicians often accuse each other of “being out of touch”.  However is it more that the political classes as a whole are now out of touch with the rest of us?   The tensions between voters and politicians are growing and could produce very different kinds of election results as voters seek to punish politicians who they feel no longer represent their interests and don’t listen to their concerns.  This could produce a very different political landscape to that we have been used to with the current coalition government being just the first taste.

Google play on words

A sign that someone is having difficulty maintaining an argument that they had thought previously was cast iron is when they start to fall back on semantics to justify their position.

Last week Matt Brittin, VP of Google’s northern Europe operations was back in front of the Public Accounts Committee having his soft bits squeezed yet again on how much tax Google does not pay.   Since his last visit a number of whistleblowers have come forward claiming that Google does carry out sales activities in the UK.  This is contrary to the company’s claims that all its European advertising sales are routed through its European HQ in Ireland.  Mr. Brittin acknowledged that “clients may well feel that we are selling [in the UK].  But what is very clear is that no one in the UK can execute a transaction”.   He refused to admit that an earlier statement that “nobody is selling” had been misleading.  He said “The UK team are selling, but they are not closing”.

Oh dear Mr. Brittin, you really are getting desperate.  If it wasn’t for the politicians on the PAC not understanding what the terms “selling” and “closing” mean and HMRC being completely out of its depth when dealing with big multinational corporations you would be dead meat by now.  It is not just the politicians that are out of touch and not listening, it is business leaders like Mr. Brittin as well.  Watch out Google because the rest of us will eventually find a way of punishing you, even if we can’t think how to do that right now.

And if anyone was wondering what happened to the £20m voluntary contribution to the Exchequer from Starbucks, well it hasn’t been paid yet but according to a Starbucks spokesman they are “on track” to make the payments.

Rising Sun

A few weeks ago I mentioned the huge monetary easing ($75bn a month!) launched in Japan as the strategy for finally defeating more than 20 years of economic stagnation.  At that time no one could predict what would happen as nothing on this scale has been attempted before.

Now we know a bit more as the first thing that has happened is the Japanese have repatriated funds to enjoy a boom at home rather than investing in foreign bonds, but this may be about to change or it may not.  It is early days and anything could happen.  What else has happened is that Japan’s economy grew by 3.5pc in the first quarter, the Nikkei Index is up by 70pc since October and the yen has devalued by over 30pc against the dollar, yuan and euro.  This is causing concern for other Asian exporting economies, especially for China and if the Germans aren’t worried yet then they should be.  So not only do we not know what is going to happen, when it does we have no idea what the consequences will be.

And finally

Burning issues

The French have come up with a new economic indicator, burning vehicles.  Whenever the French express dissatisfaction with the EU or anything else it often involves setting fire to vehicles.  I saw a report last week that they manage to burn between 42,000 and 60,000 vehicles annually.  I don’t know how we do by comparison but I am pretty sure we don’t match (no pun intended) “l’incendie francais”.

Apparently, as the French economy deteriorates the rate of vehicle burning is increasing, with nearly 1,200 vehicles reported burned over News Year’s Eve and New Year’s Day alone.  It is feared that growing social unrest could hamper the French government’s ability to push through the economic reforms that are required. However as President Hollande’s entire political philosophy is based on not doing what is required in this respect this is hardly relevant.  On the other hand if they burn enough vehicles then this could spark (again no pun intended) a revival in French car manufacturing leading to economic recovery.  Aux barricades citoyens!

A facetious conclusion perhaps and not to be taken seriously?  Well I hope I have illustrated above that there are economic and political forces stirring that we have not experienced for many years, if at all.  Stranger things than burning your way back to economic growth could happen with unexpected consequences that we will have to respond to.  Changeability for businesses and business people has never been more significant for determining who will be the winners and who the losers.

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 10th May 2013

Feeling flat

Looking back on last week, apart from Leicester Tigers beating Harlequins to go through to the Aviva Premiership final I found little to get excited about.  We had the Queen’s speech at the state opening of parliament but this was so uninspiring that now I can’t remember what was in it.  We discovered that we did not after all have a double dip recession and were therefore never in danger of having a triple dip.  However I can’t feel inspired or even relieved about something that didn’t happen, even if this means something else isn’t going to happen.  The FTSE 100 climbed back over 6600 for the first time since October 2007, but so what, after all we have been here before.  We might or we might not have a referendum on our membership of the EU and we had yet another report, this time from the Transport Select Committee on what to do or not do about a third runway at Heathrow.  Wouldn’t it make a change if just for once someone produced a report on what to do and we just got on and did it!

So, from what for me was a week that I have already almost forgotten, here are a few items that I believe do merit some attention.

It’s the productivity stupid!

Politicians and the media do seem to get excited over 0.1pc differences in GDP, one way or the other.  However what really matters is the actual growth potential in the UK economy.  Currently that growth potential is only about 2pc per year.  Anything over this, whilst it can feel good in the short term, risks overheating, which manifests itself in inflation and/or some form of bubble, such as in property or the financial sector.  This is because we just don’t have the economic “competitive strength” to sustain growth much above this level, because our national productivity is not increasing sufficiently to underpin higher growth levels.

So 0.1pc is a whole twentieth of our current growth potential, which is or should be a bit alarming if you think about it.  Even if we could achieve and sustain growth of just 2pc per year this would still mean a steady long term decline in living standards, so the productivity issue really matters.  For government improving productivity would mean that instead of just producing reports on a third runway we would actually build one.  For the individual business it means continuously improving everything you do – people, processes, customer satisfaction to deliver long term sustainable growth in financial returns.  Now that would be a bit more exciting!

Delicate China

Still on the growth theme reports last week indicated that China’s economic growth is beginning to falter again.  Everything is relative so even though the economy grew by 7.7pc in the first quarter which may look a lot to us this was lower than expected.  Lead indicators point to further slowing of growth which could take GDP down towards just 6pc.  This is the point at which the Chinese economy would struggle to deliver the rate of growth in living standards that the Chinese Communist Party (CCP) sees as being essential to its own long term survival.

Not so long ago most economic experts believed the question was not if but when the Chinese economy overtakes the US to become the biggest in the world.  That view is now changing to maybe never.  Loss making and inefficient state owned enterprises continue to dominate key sectors and have grown fourfold since 2003.  The ageing population means that the workforce actually contracted by 3.5m last year.  The growth from “catch up growth” based on cheap exports and imported technology is fast running out of steam.

Huge cultural and structural changes in the economy and politics will be needed to counter these headwinds.  Whether these will be achieved will depend on the outcome of a power struggle between reformists and anti- reform hardliners in the CCP.  We may well need to revisit the China factor.  It is not just the economics, the politics really matter, much more so than in our own economy.

Be careful what you wish for

More than 20 years ago when I was working as a management consultant I had a meeting with a senior director of Co-operative Insurance (CIS).  He believed the organisation needed to change but was not hopeful that it ever would.  The huge inflow of premiums on millions of small policies from millions of policy holders had created a highly complacent culture.  “What we need” he told me “is one really bad year”.

Well it has taken over 20 years but last week we learnt that they finally achieved this.  It may have taken a long time but they really have tried hard.  First they merged CIS with the Co-op bank for no apparent good reason and then in 2009 acquired Britannia Building Society, again for no apparent good reason.  Finally they went for the 632 Lloyds branches under Project Verde.

Two weeks ago Co-op pulled out of Project Verde citing the worsening growth prospects in the UK.  Last week it had to admit to problems of its own mainly with the Britannia commercial property portfolio, resulting in impairment provisions of £469m.  There was also the little matter of £250m spent on a new IT system.   So finally they achieved their “really bad year”.

Unfortunately this was such a bad year that the Co-op has gone from “challenger bank” to a bank with a big hole in its capital base and “definitely not needing a government bailout” in just 2 weeks.  It may be that the only solution for the Co-op will be to sell off the bank, but with rather a lot of banking businesses (around 10) likely to come into play over the next year, the prospects for a sale are not encouraging.

The Co-op’s “ethical banking” positioning appealed to a lot of customers and there is no doubt it achieved a high standards of customer service which are valued by its customers.  In spite of this the bank did not achieve the level of “Changeability” it needed to make a success of the projects it embarked upon. Lloyd’s staff and regulators working on Project Verde found that the integration of Britannia had barely begun and there was no concept of what had to be done to fix the business.  Thus proving once again that whilst it is right to be “doing the right thing” in banking as in any other business you have to do it really well if it is to pay off.

BT’s sporting bet.

Last week BT announced that it would be offering its 3 new sports channels “free” to BT broadband customers.  In spite of losing a little ground on fears of a price war with Sky, BT’s shares are at a 5 and half year high.

The bet they are placing is that in return for making little or no profit from its TV business it will attract large number of customers to its broadband service.  Whilst not perfect, the BT broadband service is better than most and certainly as good as any so the platform is there.

Also like Sky they understand that if you attach football to a media offer for some reason it seems to work.  BT will show 38 Premier League matches a season, the first time these games will have been available free since the foundation of the Premier League.  So this is a game changer and it remains to be seen how Sky will respond.

What is a first in my view is that BT has actually finally come up with a commercial proposition that could make real sense to a lot of customers.  This really is about winning and keeping customers not just about managing a decline in its customer base.  So has the giant finally awoken?  Well there are still those call centres to sort out!

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 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.

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.