Arise the Duopoly? by Clive Black

September 18, 2018 11:06 am
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The proposed merger between Sainsbury and Asda (Wal-Mart) is genuinely mega-stuff in the corporate retail world. The proposed deal represents a material potential threshold in British retail history, bringing forth an effective duopoly because alongside Tesco UK, broadly in their present form, the two businesses would have c.60% of the domestic grocery market.

The proposed merger is an involved exercise. I cannot really believe I am stating this but, bizarrely, it could get clearance. However, the story may not end there. Going back to the start, this merger is the product of the unconditional clearance by the UK Competition and Markets Authority (CMA) of the combination of Tesco and Booker. I expected this deal to be broadly cleared but not unconditionally, that is without any balancing remedies.

Such clearance paved the way for investment bankers to entice Mike Coupe at Sainsbury and Roger Burnley at Asda, ex-colleagues, to have a go. In fact this is not a merger; it is a takeover of Asda by Sainsbury. More broadly, it is a capitulation by Asda’s parent, Wal-Mart, from the UK market as it receives an unremarkable exit valuation, takes up pension responsibilities and 29% voting rights despite acquiring 42% of the equity.

“The reality is that this is a merger of weakness.”

The deal is caught up in all sorts of delicacies and nuances. The CMA has said the supply chain will be considered as part of the broader investigation, new territory, whilst Mr Coupe has spoke of c£350m of net buying synergies, emanating from international proprietary brand suppliers; so presumably domestic brand and private label manufacturers have little to fear…!!! Hmmm. Ms. Tacon at GSCOP may actually have something to do in due course methinks…!

The process of investigation is manna from heaven for the legal profession. On what basis the CMA determines to consider the merger will be critical, Asda and Sainsbury are understandably trying to have the widest possible definition of the market. However, will they ‘get away with it’? Recent comments by Mr. Coupe that the deal needs to work financially for shareholders (FT article) suggests some doubts at first base may be emerging.

Who knows that remedies, if any, the CMA will come up with. Closing stores is not a remedy whilst disposals have to go to those that can operate a superstore. With Tesco’s dominant share that leaves few eligible acquirers; what if they do not want any stores? Hence, there is much water to flow under the bridge, and maybe quite a bit of time, before remedies can be revealed, agreed and so this deal completed.

Indiana Jones comes to mind at this point but after all that, should the marriage be consummated then the task of merging two companies that do similar things very differently, comes to the fore. Indeed, this final task could just be the most difficult of all, just when we suspect Mr. Coupe will be planning to ‘hang up his boots’, hopefully, for him, ‘in the money’.

“The two businesses would have c.60% of the domestic grocery market.”

The reality is that this is a merger of weakness. Sainsbury is suffering in grocery from the return of Tesco and is seemingly trying to cut itself to growth, which never works in grocery retailing. With Argos bedded in and masking underlying profit contraction in food, the business ‘needs a deal’, rarely a good reason to do one. As for Asda, well it is relatively weak as a pure value play against the limited assortment discounters (LADs) and inferior as a grocer to Morrison, Sainsbury and Tesco. Hence, in running out of ideas Wal-Mart is exiting through Sainsbury to focus on the Americas, China and India.

Rarely have I witnessed a deal where the supply chain, manufacturers, are so anti, so worried and so dismayed that such a position can be reached. That the CMA is considering the supply chain in its investigation, therefore, is a good thing, albeit how the CMA will look at it, well who knows?

There is much to go on, therefore, before we understand the ongoing organisational structure of a very important component of the British food system. Quite simply, duopolies do not tend to work for shoppers, they are almost inherently designed not to without concomitant regulation. Accordingly, the CMA has a tough job on the one hand, one it has brought upon itself, but maybe an easy one on the other; perhaps it’s time to look after the shopper; few seriously believe that 10% price cuts on an unspecified number of lines from an unspecified date, as suggested by Coupe & Co., is a meaningful commitment to consumers.

Meanwhile, the supply chain must weave its way through the uncertainty, not just of second-guessing the CMA, not even Mystic Meg can do that, but wider issues of sterling volatility, commodity price changes, adjusting shopping patterns and tastes and then the

crazy almost chronic situation that is Brexit (no matter how one voted the current situation is beyond laughable). In such contexts Coriolis has a skill-set that is grounded in reality, focusing upon productivity and efficiency through supporting operational excellence, which is important at all times but no more so than today.

Dr Clive Black

Advisor to Coriolis

September 2018.

Can better living standards be turned into improved supplier profitability?

April 11, 2018 4:29 pm
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The language has been, as is often the case these days, a bit over the top. However, whilst there has not been a crash in real British living standards over the last few years there has been a bit of a squeeze. In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

Similarly, whilst not a crash, we are measured about any suggestion of a forthcoming surge in living standards for UK households as we see wages and salaries more or less matching CPIH as the second quarter of CY2018 commences with the prospect of a more positive gap to come. So, as the annualisation of sterling’s devaluation against the global currencies works through the system, post the UK-EU Referendum, plus as sterling actually appreciates, it has gone from USD1.20 to 1.40+ versus £1…, then we foresee an easing of UK inflation.

Correspondingly, we also believe that the labour market will remain quite tight, especially for skilled workers. Also, it feels like the freeze on public sector pay will thaw, easing any prevailing people flow to the private sector and supporting market values, leading to an expectation that wages & salaries in the UK in CY2018 will rise above prices. So, we foresee rising living standards, but moderately so, to be clear.

In CY2017 we saw wages and salaries rise by between 2.5-3.0% whilst inflation, as measured by the ONS CPIH was hovering for much of the time over 3.0%.

What does this mean for consumer expenditure in these Isles? Well, those squeezed households have been spending more of their hard earned cash on essentials rather than discretionary items in recent times – so food, utilities and fuel. Accordingly, with a little bit more slack in the system that trend is likely to ease back a little with more treating taking place.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Will the anticipated upturn mean better times for manufacturers and business services providers? Well, there may be a trickle of rising living standards, which are a whole lot better to face than the falling ones. At the same though there is the prospect of two increases (circa 50 basis points) of interest rate accretion to come in CY2018, whilst there are plenty of cost pressures facing business.

We have touched upon labour prices already, which are expected to grow. Additionally, there is the burden of a National Living Wage creeping higher, the Apprentice Levy and the now expanded Auto-enrolment charge. Energy prices are up year-on-year as Brent Crude ICE now normalises at USD65-70/barrel rather than USD45-50, whilst rents and particularly business rates rarely tend to fall; especially for companies in the South and East of England.

As such we see structural cost pressures that are likely to lead businesses to think evermore closely about unit costs, productivity if you will, and the drivers of that including more automation, more customer insight to drive better decision-making and more agility.

What folks spend their money on though is shifting, with less seemingly going on things (goods) over experiences (services). We think this will continue, which will help leisure and entertainment over retail; shopkeepers are also contenting with online shift.

Whilst this characterisation of the UK consumer economy is high level, and cautiously optimistic, so implying opportunity, we also at a high level see cost challenge that needs to be countered, particularly if we throw import substitution and export opportunities into the mix too.

Coriolis is a business that is centred on operational efficiency at the sharp end, not the high level, from well-grounded folks that understand the importance of productivity in the evolving UK economy. In this respect, benchmarking, understanding scope to automate versus manual processes and attentively focusing upon managing costs down, is what Coriolis does; its raison is highly relevant to a dynamic UK economy.

I hope the prospect of a rising tide of consumer disposable income, even if gradual, works to your favour over the coming year.., let’s hope that there are no more snap elections and the like to b*gger things up again…

Dr Clive Black
Advisor to Coriolis

In this Amazon era, what are the major strategic takeaways for business?

October 30, 2017 3:41 pm
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Retail and ecommerce are changing globally. Around the world, new technologies, trends and business models are rapidly transforming the way people discover, shop and buy all of their physical goods, from grocery to fashion and everything in between.

“If one thing is clear at this gathering of the retail industry’s top brass, it is that pretty much everyone in the sector is figuring out how to beat, collaborate with or be the next Amazon.com.”

Shoptalk Europe covers innovation in retail and ecommerce. It focuses on the evolution of how consumers discover, shop and buy in an age of digital disruption. This year, a trip to Kobenhavn brought together the trainers, T-shirt and jackets of the retail and digital economy. Like many industry bashes just watching and listening were the key learnings as opposed to being one of the hundreds of folks trying to pass a business card to the head of Tesco Online or the founder of the Dollar Shave Club in the hope of that big time call.
A vast array of subjects were discussed at this very Americana set piece event, a paradise for the absorbers of jargon; from engaging consumers through interactive technologies to emerging technologies that drive retail innovation. That said the degrees of specialism, insight and entrepreneurship were impressive.

 

One interesting and unescapable feature of this considerable event was the elephant in the online and offline world of retail; Amazon. Amazon was revered, spoken of in the main with great deference, admiration and no small amount of fear and loathing. Amazon is distinctive in this respect as it is both a competitor for some but also a key customer or distributor as well.

So, in this Amazon era, what are the major strategic takeaways for business?

Well, in the first instance trying to replicate or replace what Amazon does head on and win appears a bit of a forlorn hope. One perhaps needs to accept that Amazon is here to stay for a good while and is a formidable opponent. A similar perspective could be applied to Alibaba in China it should be said. Amazon has considerable scale on its balance sheet to see through its plans, which seemingly revolve around sub-optimal profitability to possibly reach a position where monopoly conditions will permit super-normal profitability.

As such, is Amazon using a form of capitalism that is sub-optimal profitability to potentially reach a market dominant position where super-normal profitability achieved? Or is that a naive expectation as Amazon is just a pseudo-commercial operation that is very ‘nice’ to its customers, earns enough to get by and will remain in sub-optimal profit mode even if it has a monopoly position? Hmmm. History does not look encouraging on that front. Head on though it feels like ‘getting by’ could be a credible outcome versus Amazon.

In this respect, who and what can stop Amazon apart from itself from becoming a ubiquitous behemoth controlling the distribution of goods & services decimating the margin structure of sector by sector? Well, competitors appear few and far between on this front albeit we note Booker-Tesco speak of their collective scale being a factor in coping with Amazon in the future.

Rather, we sense that it will be non-commercial folk and more capable competition in time, that will ultimately face into and potentially tame the Amazonia commercial beast. By non-commercial folks we think of competition regulators and tax officials, noting that Amazon was fined EUR250m very recently by the European authorities.

Capability is perhaps more interesting as a mechanism for small & medium sized companies to cope with Amazon, as opposed to large groups already with their heads above the parapet. Whilst Amazon has the reputation it has with shoppers on merit and never-ending innovation translated into the enviable functional service, there are many things Amazon is not, even as artificial intelligence, personalisation and other systematic processes emerge that mirror simple humanity come through.

As such one of the clear pendulums swinging the other way from prior narratives is the importance of stores to the future of retail. Some may have scoffed at such a suggestion in years gone by but the reality is far from so. The experiences that stores can deliver, the human social interaction, the easy choice and theatre are very, very difficult to replicate online. Indeed, many pure-play online retailers are opening stores; e.g. Ace & Tate, Birchbox and MyMuseli.

As such the first thing that dawned upon us as Amazon acquired Whole Food Markets was that in the grocery space, Amazon could not ‘win’ through centralised picking and excellent logistics to home alone. It needed the connection between a very fragmented customer base and a close fulfilment centre, that is in fact a “shop”.

Adrian Letts in Copenhagen, the Head of Tesco Online, alluded to this process too when he spoke of the store becoming more important to their grocery and non-food businesses than dark stores, for example, in the future. Indeed, the flexibility that stores offer to shoppers for direct shopping to online shopping is now only starting to become much more clearly worked out; e.g. shops as places where logistics providers can deliver products not bought in-store or sold by that vendor e.g. Amazon lockers.

Amazon should be a catalyst for management to be competitive, innovative and entrepreneurial. Efficient markets make business’ better and being better is a never-ending process. In Denmark Spencer Fung spoke of his Li-Fung business as being slow, a tortoise, that was not just competing with faster & slower tortoise but living in a world where hares were becoming even quicker. Spencer is trying to speed up his business through simplification and digitalisation, what was I saying about jargon earlier? Such a candid assessment from a large and advanced Asian group gives grounds for collective encouragement to my mind;

“the key is working out where I need to be simpler, quicker, more competitive, more innovative and so more entrepreneurial.”

The human touch, the experience, the accessibility, the theatre are all things that Amazon will have to learn about and invest in if it is to compete. As such the questions are, as spelt out by Jerry Storch, CEO of Hudson Bay Company;

Do I have great products?

Do I have great stores?

Do I have great staff?

In whatever field, a business is playing in and this use of great does not just mean higher category, super-premium and expensive, it permeates all product categories and channels. As such thinking about Amazon as a competitor and a potential distributor for goods, directly or through market place, is a healthy and logical outcome of the market economy working. Amazon is a superb construct and something to be respected and admired. Whilst so, the Amazonia tail should not wag outside the legal bounds that other firms have to abide by; something for firms, trade associations, non-governmental and official bodies to focus upon.

Coriolis is in the business of assisting business in the UK, Australia and in-between to become more competitive from within. In the fast-moving world we live in, where more is fundamentally the same than some folks think, but more is moving at the pace of Mr. Fung’s proverbial hare, help with change, help with pace and help with competitiveness is a helping hand indeed, which Coriolis is very well set up to do. Make Amazon not be a source of fear but a source of inspiration where it can be admired, copied, defied and defeated, certainly not loathed.

Dr Clive Black
Advisor to Coriolis

Another fine mess…..

September 7, 2017 3:49 pm
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A year ago, I was writing about the fall-out of the UK-EU Referendum and how we felt the business community and wider economy may fare. As it was, the whole country was fatigued by the never ending political shenanigans. Accordingly, once again, business folks went away in the summer shattered from the carnage of the political car crash that the May-Corbyn combine delivered. .

“I can’t stand this, there is just too much politics going on”

This year the viral reaction of “Brenda from Bristol”, bless her, perfectly characterised the national mood when Theresa May called the June General Election.

What an unmitigated disaster that was, little short of a national embarrassment.

Whereas we felt that the UK business folks would dust themselves down and ‘get on with things’ in late summer 2016, we feel a little less sanguine about matters a year later.

Firstly, there is undoubtedly fatigue and frustration with the political elite and the way that it is holding back rather than enabling business.

Secondly, brinkmanship of the EU and UK around Brexit is waring; these bureaucrats do not run businesses and seem not to give a flying fig about the reality that uncertainty creates.

Thirdly, the UK economy is decelerating a little albeit those doom-mongering economists continue to be proved more wrong than right.

The UK economy is interesting;

• We have very low unemployment, lots of vacancies and a skills shortage.

• Whilst inflation is back in the system, it is not as high as the Remoaners would like and so living standards are stable rather than imploding. Albeit for low income households’ inflation is regressive I should add.

• More to the point the UK has annualised against the devaluation of sterling and the inflationary pressures upon business look like easing.

• Interest rates also remain unhealthily low, they should be slowly and steadily increased as the degree of stimulation now does not seem healthy, but low rates makes money relatively affordable.

Such a deck of economic cards is not the worst that we have seen over the last twenty or thirty years for sure. That said, the political circus and Brexit uncertainty are making it that little bit more challenging for businesses to invest. And that investment is vital to the long-term prospects for the UK. Hence, whilst we expect most British entrepreneurs to remain stoical and so continue to ‘get on with things’, we could understand if they held back a little.

In this respect, having removed the two idiots that were her political advisors, it is welcome that Theresa May is now being forced to talk to business. However, that is a long way from being a proficient and effective Prime Minister for the UK. Accordingly, I believe it is time for business to be in the face of their local MPs and the government. More than this though I look to government to be more visionary and more committed about our supply-side needs. Whilst Jeremy Corbyn gives me as much confidence in terms of economic competence as do Coventry City’s defence at keeping clean sheets, he is right to goad government of the need for material infrastructure investment. To me this is the time to do something real and brave for the UK embracing our skills shortages, digital communication, green energy, advanced engineering, life sciences, creative industries and transport to just mention a few.

There is a need for material structural supply side investment to make Britain a place international capital wishes to commit too. There is a need for a vision to broaden our economic base to make it less dependent upon the City of London and stronger across our regions. We need to set out, and get on with long-term plans to improve air and rail communications forthwith. East-to-West rail links in the UK are archaic; It is insulting to the businesses of the north of England, for example, that the government can offer support for Crossrail 2 and cancel the electrification of the Liverpool to Newcastle-upon-Tyne rail line.
Outside the UK we also need a structural upgrade in our commercial capabilities around embassies and consulates. The UK is going to have to trade better in future decades and government needs to offer serious supply-side support, as we see the Dutch, Germans and Irish do for years. A somewhat seemingly permanently intoxicated ex-GP trade minister is a laughing stock and he revealed his true colours on business when he characterised our businesses people as more interested in golf than trade.
So, I do hope that you all come back once again refreshed. I also hope that bright eyed and bushy tailed you wish to have a go again despite the piteous state of our political class. That class though now needs to start listening to your needs and I implore you not to be passive. As a country, we need to be more competitive, more productive and more entrepreneurial. To be so, we could do with a bit more government help than hindrance and I also suggest you express what you need in terms of supply side policy to make your company more effective.

In this respect, the Coriolis team is an enabler of productivity and competitiveness and as such an excellent commercially focused supply side support from the private sector. As such Coriolis is on the same entrepreneurial page as you are and to me well worth engaging in to boost your capabilities.

I wish you well for post summer trade.

Dr Clive Black

Business feeds Amber Rudd’s ‘money tree’

July 19, 2017 2:01 pm
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Just over a year ago the business community of the United Kingdom (UK) was coming to terms with the quite seismic decision of the British to leave the European Union (EU). The majority of the business community wanted to remain in the Union, the “devil you know” seemingly better than the one you don’t.

It is also true that big business had a stronger penchant for staying in than many smaller firms, companies that feel the sharp end of Bruxelles bureaucracy without the administrative central resources of a large corporation to monitor and manage the regulatory burden; that said, much regulation comes from Whitehall that does not seem to garner the same interest from the Daily Mail; employment, planning and the thorny issue of relative enforcement.

The result of the EU Referendum, in the main, was accepted by business – the City, where the UK is too dependent, car manufacturers and big Pharma continued to protest – and the mantra after the big vote was, ‘well we just have to get on with it’. And so we did, H2 CY2016 was much, much stronger from an economic perspective than any City or Treasury economist forecast; the Governor of the Bank of England appearing especially out of touch with his emergency rate cut whilst the Evening Standard’s current editor was simply foolish with his scaremongering for an emergency budget.

What was also clear last year is that a lot of business folks went away and dwelt upon what the Referendum result actually meant for them. In doing so, tired of the political hum drum they went away on mass, most to the EU continent as it happens, and after some sleep, a few sangria and a couple of good books, started to plan the September push. Such rest was necessary and Briton’s business folks did the country proud in the following months.

 

Sadly, the summer of 2017 has the same feel. This is not an emotion that those same business folks – who take risks, invest, employ and generate wealth – wanted to repeat one year on from the UK-EU Referendum. However, Theresa May’s calamitous election campaign has left the UK a bit of a laughing stock around the world, from a political perspective at least, emboldened and united the EU with whom we have to negotiate an exit and so created another round of uncertainty, which just about all businesses, apart from flight of foot capital rich and/or speculators, abhor.

The damaged goods Prime Minister, her dysfunctional party when it comes to Europe, the minority government and the fully costed near lunatics that are the Labour Party represent a disaster of a political economy for British business. For anyone who is in any doubt about the misuse of the term “fully costed” read the Institute of Fiscal Studies paper on John McDonnell’s plans, noting that the bloke who was probably most relieved that Labour did not win the General Election was probably John McDonnell as he would have had a sterling collapse and capital controls to impose if he was Chancellor.

So, sadly, once again hard working entrepreneurs and industrialists will need time to reflect on what this all means and how to react this time around. I have to say that this time around there is more need to worry than was the case with the EU Referendum where for one reason and another we did think that the UK would dust itself down. Now we watch carefully as to how the Brexit negotiations actually go – don’t be too swayed by the propaganda on each side, make sure one looks at the detail where it effects your firm – and also business confidence and expectations.

We shall be mightily relieved if managers come back from holiday stoical again, believing that the pint is more than half full rather than empty. There is a lot still to go for, for British firms. The devaluation of sterling does indeed pose import substitution opportunities. That devaluation should also stimulate structural exporting, as opposed to just trading at the margins. What is also clear too is that we will have to trade beyond the EU at a strategic level, for which business organisations – the bodies firms pay subs too – need to be on their mettle.

I have also argued elsewhere that in an economy where labour may be re-priced and in short supply – UK unemployment in June 2017 was as low as it was in 1975 – people productivity, overall cost control – nay leadership – and tight cash management need particular attention strategically going forward. Now, I am not going to insult the management priorities of business folks but the wider context does underscore these themes to my mind.

In this respect, Coriolis is an organisation that I feel is particularly well placed to add value at the coal face, where it matters for British firms. More broadly though we must, whatever our industry, be noisy to fight for entrepreneurs’ interests in the face of an intellectually challenged Government. In a previous piece I asked for a manifesto for business. Whatever your view, make sure business’ interests are heard, because it is business that keeps the lights on, it is business that pays the bills and it is business that feeds Amber Rudd’s ‘money tree’.

Dr Clive Black
Advisor to Coriolis