That could just be a legacy year for food systems. By Dr. Clive Black

December 17, 2020 9:23 am
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What a year eh?

 

Twenty-twenty will be characterised by bio-security, a virus few, if any, apart from Dominic Cummings of course, had heard about as 2019 came to an end. What change it has brought, particularly for food systems, what legacies will emerge?

Of course, as 2020 comes to an end, another running sore, Brexit, has raised its uglier head again. Perhaps one of the silver-linings of the pandemic was that our deteriorating relations with the EU was removed from the limelight. Combined, Brexit and Coronavirus are a destructive cocktail.

Indeed, combined both have placed the spotlight of structural deficiencies of Britain, albeit ones that could be positively adjusted if we had a fit for purpose establishment.  Brexit and Coronavirus have tested the skills of state policy  makers, not that their tasks were easy or enviable, it should be said.

However, in the flawed assessment of the dangers of the virus in its early days, the comprehension not to lockdown care homes at first base, over-promising on testing, track and trace, ludicrous decision-making around education, chaos personified, not helped by can’t do, won’t do, don’t do, teaching unions.., and then Brexit; it has been a low score in the appraisal of the UK Government. The latter is a failure of statesmanship on both sides of the Channel too. Put together this is abject failure by Government ministers.

And then there is the Civil Service, which has been badly found out. It simply is an old boys and girls club that is not biased, it is just self-perpetuating. Cummings did some stupid things but he was right about the Civil Service going into the pandemic, and he is right about coming out. One of the reasons that the UK is so ill-prepared for the future, its Westminster politicians aside, is that we do not have enough appropriately educated, experienced and talented senior public servants around digital, green, mathematics and science in the highest echelons of policy making and the Civil Service.

Which brings one onto the subject of advisors and the media. It is hard not to rant when one considers these groupings. In fact they are linked as many eminent scientists seem drugged on being on the BBC and Sky News. It seems discretion is a dirty word for many SAGE members – (do these people not have to sign the Official Secrets Act?) – as they seek their fifteen minutes of fame, whilst the media has been destructive, unreasonably harranging Ministers and thinking the decent public do not disapprove. And then we have Sky’s Political Editor, who has pompously and aggressively been at the fore of this media approach, including to Cummings’, found culpable of breaking Coronavirus rules on a sixtieth party bash with her colleagues whilst we should not forget Niall Ferguson’s contribution to compliance. It is just rubbish.

Meanwhile, thousands of Briton’s who obeyed the rules missed the last moments of their passing  loved ones, did not see their parents, grandparents did not see new arrivals; the establishment has let us down practically and morally in so many ways.

“For the food system, the future will embrace considerable change, technological advances in every aspect of the industry will ensure that, but also in a world of enhanced bio-security, the next phases of sustainability, the never-ending advances in well-being plus perhaps notable scope for import substitution and a new agri-policy as the CAP fades away from these shores, the future will be one of great challenge but opportunity.”

So what of the legacies of 2020?

We will clearly know a good deal more next year as the impact of the vaccine takes hold and we observe the UK’s relationship with the EU. In the meantime, the British hospitality industry has been through hell. As many as 10% of the countries public houses have closed down, not to re-open anytime soon, and maybe up to 20% of the casual dining segment. That capacity reduction has implications for owners, employees, the supply chain and future prices.

For grocers, business rates aside (‘thank you Tesco’ I can hear every other supermarket boss saying), 2020 has been a year of elevated demand, the rise of online, lower promotions and new ways of operating around viral control. The big factor behind these changes, the virus aside, is working from home; and this is a major ongoing change for the industry. As I outlined before now, it means suburban food systems are structurally boosted but city centre and travel hub locations are decimated. The future though looks brighter for most supermarket groups.

All of which brings us to Brexit and the food system. Prior to the New Year, the port chaos at Dover and Felixstowe, does not augur well. Clearly there could be higher operating costs and, through decisions to prioritise key lines, less choice. How any tariff arrangements pan out remains to be seen, but clearly there could also be higher prices for certain goods with product sourcing adjustments as well. French wine, Irish beef and Danish ham markets could all adjust in their market presence in the UK in 2021, as could demand for home produced goods.

Coming back to the bug and Brexit, four final thoughts. First, there is a worrying sense of entitlement in a large part of the UK, where many folks and groups seem to think that a money tree genuinely exists. Second, the future of the UK is now a much more live political and policy issue. The Scots are angling for independence and the rest of the UK may just think; go, but not on your terms. Nicola Surgeon may be wise to move on quickly as and when Scotland becomes independent.

Third, the island of Ireland also starts to look potentially different. Elements of the Belfast Agreement could be tested in ways that its authors probably could not have anticipated. How ironic it is that Tony Blair’s open borders policy that adjusted the British labour market could be a key factor behind future challenges and change in Northern Ireland.

In the meantime, Northern Ireland is the focal point of the dysfunction of British and EU politicians. Its food system is subject to EU law, there is a border down the Irish Sea for imports from Great Britain and, bless them, the good people of the region’s food industry are understandably seething with the shallow rhetoric and, frankly, bull-shit of Michael Gove and others. I make this point as the Chairman to two fine food businesses in the region, Mash Direct and Morelli’s ice cream.

And lastly, after what will be a rise in constitutional questions for the Union, will be The Chancellor’s Budget in March, which must assuage the markets that the British are not reckless. Hence, a balanced Budget needs to be in the agenda which means, if we are all in this together, higher taxes; the triple lock, NIC for the self-employed, pension tax relief for higher rate earners, taxing Amazon et al and so it goes. If we do not then the pound could slide, with worrying implications for inflation and interest rates.

Similarly, whilst a balanced budget is important, I implore him and his gang to genuinely think strategically about what will make the UK more competitive for business in the next decade from a supply side perspective. There is a huge opportunity but also a necessity here and it embraces seizing what Brexit may deliver around policies that set the UK on a more entrepreneurial, greener, innovative and prosperous future; one where we can perhaps afford our public services.

One lives in hope but the car crash of a year for the British establishment leaves one in abject fear. For the food system, the future will embrace considerable change, technological advances in every aspect of the industry will ensure that, but also in a world of enhanced bio-security, the next phases of sustainability, the never-ending advances in well-being plus perhaps notable scope for import substitution and a new agri-policy as the CAP fades away from these shores, the future will be one of great challenge but opportunity. Whatever one thinks of 2020, it is momentous year with a long hang-over.

I wish you all a very Merry Christmas!

 

Dr Clive Black

Senior Advisor

Coriolis Consulting

December 2020

Covid Christmas – What Beckons? by Dr Clive Black

November 2, 2020 3:01 pm
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How will Christmas 2020 pan out for Britain’s food system?

A simple question that is not so easy to answer with the big day less than two months away.

What we do know is that it will probably be very different compared to recent times. First and foremost, the British food and beverage (F&B)  channel – cafes, hotels public houses and restaurants – faces an existential challenge. December is, traditionally, a very big month comprising lots of gatherings involving much eating and drinking.

If the ten o’clock closing time, the rule of six and limited bubble interaction remain in place then it could be a grim December and Shore Capital’s prediction of a 20-30% reduction in F&B capacity in the UK could prove to be too timid. As an aside, one has to have immense sympathy and empathy with the trade, its owners and employees, that policies where evidence has not been credibly presented has taken its legs away. Indeed, the steps taken by many operators have been truly magnificent and the public policy focus feels very questionable.

Such policy failure was at the heart of the good side of Andy Burnham’s work – albeit in trying to be Prime Minister without the mandate he overstretched himself – leading to huge suspicion, disrespect, distrust and one senses disobedience of the Government’s controls by the public, a public fed up with an incompetent State and civil service, a destructive and detached media and a scientific community that has become drugged on the limelight and frankly lost the dressing room.

“the public…(is)… fed up with an incompetent State and civil service, a destructive and detached media and a scientific community that has become drugged on the limelight and frankly lost the dressing room.”

Back to the food system, where F&B loses out, Retail is likely to gain. Not all Retail, however will be in the winner’s enclosure. The food systems around central business districts and travel hubs are likely to remain chronically short of footfall, including supermarkets and convenience stores in these locations. Hence, it is most likely that suburban supermarkets, neighbourhood stores and the online channel will see very strong seasonal demand year-on-year.

Indeed, with the online grocery channel nearly operating at full capacity, it may be wise to place Christmas orders as soon as possible, otherwise the only other remote option maybe click & collect, an activity that we see mushrooming and benefiting the profitability of the supermarkets.

If the rule of six is largely disrespected, and I for one think Victoria Derbyshire should not have apologised for saying she is having seven around at Christmas…, most of the country will be doing so.., then there could be some specific demand differences year-on-year; large turkeys and geese may not be as popular as roast joints around the festive table this year. With several million more people in the UK this year too due to travel restrictions, plus many students at home and low levels of eating out, it maybe wise not to wait until the last minute to procure the Christmas fayre.

Hence, for the supermarkets, elevated demand and good mix is anticipated in forthcoming weeks. Good mix because whilst many families will sadly struggle this Christmas, notably people who have lost income in the private sector – those on benefits, state pensions and working in the public sector are better off year-on-year – one senses that after a pretty miserable year fed up folks will have a blast this year.

Supermarket bosses and their supply chains will have a lot operationally to contend with in forthcoming weeks to effectively execute Christmas. And then there is the matter of Brexit’s next chapter a week later. What could possibly go wrong..? That, however, is a wholly different political shambles.

Dr Clive Black

Senior Advisor to Coriolis Consulting

November 2020

Now that’s Asda Price! By Dr. Clive Black

October 7, 2020 9:06 am
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In these days of spin, leaking and social media guff, it was quite refreshing to be surprised by a business transaction. So, well done to the Issa Brothers, TDR and their advisors in emerging from the back of the runners and riders to capture Asda (subject to regulatory clearance); a month or so ago this would have been a genuine surprise.

The price for the No.2 apparel retailer by volume in the UK, many folks overlook George’s market positioning, and the country’s No.3 grocer was £6.8bn, debt-free and cash-free; just £100m more than those industry legends, Archie Norman and Allan Leighton, sold the business to Wal-Mart for in 1999. Whilst for another time, Asda has been a far from stellar investment for Uncle Sam’s biggest offline retailer, particularly when we take accumulated capital expenditure into account.

So, the Issas’ and TDR appear to have gained Asda for a bargain, c0.3 times (x) sales and an historic EBIT multiple of 8x, lesser still on an EBITDA basis, say 5-6x. Indeed, such has been the challenge by Wal-Mart to exit the UK that it failed to merge with Sainsbury’s and balked several times on an IPO and so it could have been required to retain a stake in the NewCo., which I guess is somewhere between 10-20%.

The deal poses many questions, more so than answers at this stage, as to Asda’s future. The shy Issa brothers are now front and stage of the limelight, reflected in a swathe of press stories chronicling their truly meteoric rise from genuinely humble beginnings through the now global EG (Euro-Garages) Group, which is also 50% owned by TDR, their Asda investment partner. Indeed, current press scrutiny has also revealed no payment of tax to HMRC over the last couple of years by EG.

“The leverage in this deal has permitted the change of ownership but when there is so little equity and so much debt, the lenders have immense final say on matters. As such, rightly or wrongly, it is not unreasonable to sense that the rest of the UK grocery retail trade is also intrigued but not yet losing sleep over the change of ownership in Leeds.”

The new owners state that the future of Asda will be about convenience, online and complementary brands. Scope to progress on these fronts can indeed be envisaged – implanting Asda into the EG estate perhaps, repurposing superstore space with consumer branded partners and centralised urban online fulfilment centres for example – but all this raises the questions of the new team’s capabilities, particularly online, and whether or not all this moves the dial to permit the aspired long-term growth?

Indeed, beyond these plans, there is no doubt more detailed preparatory work within, such as what will the new owners do with George say, two other key questions arise. Firstly, the leverage, debt, could be huge in this NewCo. (£4.0-4.5bn), and how do the new owners plan to address this mountain? In this respect there is an understandable reflection that the business could explore the sale and leaseback of its considerable (75% freehold assets.) Whilst this is so, Asda is a low margin business and to re-engineer in this manner could inject operational leverage into a financially leveraged Group.

In an intense industry, such steps would not enhance Asda’s competitiveness, indeed, it would make it most vulnerable to effectively compete should price activity levels heighten. Hence, a leveraged Asda, even with new agile and innovative entrepreneurs at the helm, would be a benign force for the rest of the trade. In these respects too, where does the Group’s International Produce Limited fall into place, a disposal perhaps?

Secondly, all of which then brings one to the big question as to what ultimately happens to Asda? Do the Issa/TDR buy-out the wantaway American in due course, assuming that the free cash flow is generated and the leverage remains available, noting that this deal is a manifestation of super-low base rates, central banks pumping dosh into the financial system and the need by private equity to deploy enormous volumes of cash.

Additionally, will TDR and the Issas also seek an exit or new structures with which to evolve Asda? So, for example, doing some crazy navel-gazing:

  • Will Asda be merged with EG and what will the UK Competition &  Markets Authority make of such a move?
  • Does acquisition and merger form part of the new Asda owners plans; so say Iceland or B&M European?
  • Is an IPO and/or a reverse listing through acquisition on the cards in future?

So, in conclusion, this is a very bold move by the Issas in particular. Their ambition and courage has rarely been questioned, it will now be fascinating to see what they bring to Asda. The leverage in this deal has permitted the change of ownership but when there is so little equity and so much debt, the lenders have immense final say on matters. As such, rightly or wrongly, it is not unreasonable to sense that the rest of the UK grocery retail trade is also intrigued but not yet losing sleep over the change of ownership in Leeds.

Asda has been sold for remarkably low exit multiples for a reason. That’s Asda Price.

Dr Clive Black

Senior Advisor to Coriolis Consulting

October 2020.

The Employment Conundrum. By Dr. Clive Black

August 27, 2020 10:21 am
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Economic historians will have much to ponder when they reflect on 2020. No one could have imagined, as we fretted about the scope for Iran and the USA to engage unpleasantly with each other in January what much greater turmoil there would be ahead.

The economic consequences of the Coronavirus pandemic remain to be seen. Much is pontificated but the only ‘thing’ that seems certain is uncertainty. The disease has caused economic havoc leading to unimagined policy interventions, most notably furloughing, which at its height was supporting nine million workers in the UK plus initiatives for the self-employed.

Such policies have led to a worldwide expansion of the balance sheets of central governments through printing money and a leap upwards in government debt. Quite how such debt will be managed, paid for and paid back is a cause of uncertainty around the globe, the only blessing for the UK is that we are not alone and hence, there has been no run on sterling.

The policy measures to support employment and public services have been met with broad approval, even though everyone knows that there is a lot of ‘mickey-taking’ out there. As summer ends, however, and the schools, hopefully, necessarily, return and the Chancellor’s ‘Eat out to help out’ scheme, again widely applauded, ends, attention turns to the autumn economy. What may this mean for the UK grocers?

After the deep lockdown, which took Q2 UK GDP down by an amazingly bad 20%, the unlocking process has seen recovery of sorts. Signs for July and August are encouraging, actually, many domestic businesses helped by the lack of foreign holidaymaking by the British, but it will be the autumn months that tell the truer tale, when any pent up demand from lockdown has worked through the system and furloughing tapers down.

Predictions of potential unemployment in the UK vary but all make for tough reading with a genuine concern as to what the ending of furlough may mean, especially for those industries directly impacted by what appears notable, potentially structural behaviour change. So, with Teams and Zoom in tow, international business travel and accommodation looks to have gone through a downward shift, as does domestic commuting due to the step up in working from home (in this respect if central government really wants civil servants back in Whitehall then why not order them back)?

The travel and hospitality sectors, therefore, appear vulnerable, which has a notable bearing upon the UK food system, with calories shifting from urban centres and the food & beverage channel to the suburbs and retailing. Additionally, reflecting worries of the potential for a  notable rise in unemployment, the supermarkets are bringing value to the fore of their near-term operational agendas.

“…the online grocery channel… has doubled in size in twenty-three weeks; having taken 23 years to reach c7% participation… is now c15%. Such growth presents a major challenge to the onlineless Germans, who now attack 85% of the market today, rather than the 93% of March 2020.”

Indeed, learning lessons from the past, when collective blindness by the superstore operators let the ‘Germans’ in, base value, case price value, is much more important in this economic cycle as opposed to an over-dependence upon supplier funded promotions. So, whilst rational, we see Tesco UK moving demonstrably in its pricing and rhetoric against Aldi GB, with the other superstore groups working out what pricing they need on lines that matter to shoppers, so narrowing the differentials that existed in the past – ‘lines that matter’ being the key point here, not Swiss chocolate.

More to the point, the pandemic has brought a remarkable shift in the prospects for the online grocery channel, which has doubled in size in twenty-three weeks; having taken 23-years to reach c7% participation, it is now c15%. Such growth presents a major challenge to the onlineless Germans, who now attack 85% of the market today, rather than the 93% of March 2020. That online expansion has also awoke the global behemoth that is Amazon, which has taken more than a tiptoe in its approach to UK online grocery through its tie-up with Morrisons, including putting the full Morrison offer on its main website with no extra delivery charge for Prime customers.

So, as the economy hopefully normalises, the employment data will be very important. Bringing folks off furlough is essential and one senses that by late October, many will be but UK unemployment could still notably rise, albeit whether the rate it hits 7,8,9% as some suggest, remains to be seen. What is clear though is that fear of higher unemployment and all that goes with that, remains a central concern for the UK Government and the Chancellor in particular, and the supermarket bosses too. As such, core value and the core values of what a supermarket stands for, maybe especially important going into Christmas 2020.

 

Dr Clive Black is an Advisor to Coriolis Consulting

 

August 2020

Working from home & the UK food system. By Dr. Clive Black

July 8, 2020 1:25 pm
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We are not totally through this terrible Coronavirus pandemic, indeed whilst the number of cases fall and fatalities, thankfully, ease, few if any think ‘we’ are out of the woods yet. As lockdown eases, to try and protect the economy, and households, it should be said, the risk of higher transmission could rise whilst some look to autumn with concern, when, seemingly, the wider air conditions – cooler and damper – maybe better for the virus to re-emerge.

And with the day in, day out now of the Coronavirus era, behaviours are evermore adjusting.  Whilst the power of the leftfield does not go away; who would have thought that breaking a local lockdown would be the mechanism to expose seemingly gross labour practices in the Leicester apparel industry? This leading to a key customer of sweat shops, Manchester based Boohoo, to have to issue defensive statements of its behaviours, and see its brand equity threatened and share price marked down?

Gradually changing daily routines…

Those collective behaviours are very simple in many ways but maybe having profound implications for the nature and extent of the British food system. Before now Coriolis have written of our concerns for the Food & Beverage (F&B) channel in the UK as a result of the Coronavirus crisis. Indeed, we have spoken of 20%+ contraction in industry capacity, evidenced by recent closures of stores in the Casual Dining segment in particular, e.g. Frankie & Benny’s at Arena Park in Coventry will no longer be the pit stop before a game by the Sky Blues should this dysfunctional club ever play in its home town again.

That reduced capacity can be expected to displace calorie volume to surviving F&B competitors plus the Retail channel too. Indeed, the shift in daily behaviour is a key factor behind the contraction of F&B. So, it is not just the recreational element of F&B that is under-pressure but also that which depends upon the commuter, the office worker, the business lunch and dinner. The key factor behind such pressure is working from home and the new addition to the daily acronyms, WFH; not to be confused with WTF…!

 

WFH is a powerful dynamic for the system

WFH has mushroomed through the lockdown. Business behaviour has been transformed through Microsoft Teams and Zoom, although whether totally secure or not remains to be seen, to the point that executives are thinking about how they do what they do, where they need to be to undertake their work effectively, and, most critically, the amount of time they have to spend commuting to no especial productive effect; in fact quite the contrary.

Coronavirus has been a period of greater decisiveness for business; things that could not change have gone. Ways that were traditional are no longer relevant and for many hundreds of thousands, maybe millions, his means lesser or even no commuting in future. Marks & Spencer has labelled this present time, ‘never the same again’ in its own transformation programme.

“…online shopping has doubled in a little over three months….superstores and neighbourhood food providers, including butchers, have seen a major step up in trade; (and) with their confined stores and ranges, the march of the German discounters has also been impeded.”

The rise of the suburbs

What this all means though is a demonstrable shift in time away from the office, the urban centre with all their coffee shops, cafes and restaurants situated in close juxtaposition to railway stations and office blocks, to the suburbs. It is for this reason in lockdown that online shopping has doubled in a little over three months, that superstores and neighbourhood food providers, including butchers, have seen a major step up in trade; with their confined stores and ranges, the march of the German discounters has also been impeded. Indeed, looking at motor traffic, it is noticeable how much emptier urban centres are, how much busier suburbs have become.

Quite how matters pan out remains to be seen, but the shift to WFH appears to be the start of a semi-structural shift to which the food system will adjust. On the downside, WFH means greater pressure on the F&B segment plus the food-to-go and food-for-now components of the Retail channel in urban centres. For the neighbourhood cafes, restaurants and convenience stores, plus the supermarkets, it is an unexpected boon that is expected to stick in some form on an ongoing basis, even with economic recovery, lower than feared unemployment and challenges to domestic household expenditure; the latter of which still remain a key worry it should be said.

Arise domesitca

The term Coronavirus did not feature as part of our vocabulary at the turn of the year,( except for Dominic Cummings, of course), it had a profound impact upon our lives through the total lockdown. It is likely to have a more enduring influence thereafter, particularly through dramatic change to the British labour process, technology enabled, which is perhaps fundamentally conditioning the food system as billions of calories that were consumed in urban centres, travel hubs and business parks shift to your kitchen, living and dining rooms.

 

Dr Clive Black

Senior Advisor to Coriolis Consulting

 

July 2020