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.