Maybe let Tesco run the country’s finances
The roll card is long, it is grim reading and, frankly, it is depressing. Much print space goes into criticising Britain’s politicians, much of it deserved, especially the present torrid Conservative regime. Whilst so, being a politician has its drawbacks, and tragically at times mortal dangers, leading one has to ask who in their right mind would be one, which is not good for democracy, nor the capabilities of the country.
Whilst this is so, much of the running of the country is handed by politicians to agents of the state, many very highly paid augmented with gold plated pensions to boot. Here the roll call is increasingly grim. Let us take a brief current look into this assertion.
In April 2024, Ben Bernanke, the retired ex-leader of the Federal Reserve in the USA, delivered a withering report on the basic incompetence of the Bank of England, notably its inability to forecast, which is pretty problematic for the country’s rate-setter, a body which just about everyone knows does not understand the mechanics of the economy. Indeed, Bernanke, as a mate of the Bank it should be said, could have been even more critical but that could mean fireworks in the press, someone may even have been found out, nay even lose their job, and 50% pension contributions.
Then there is the Office for National Statistics (ONS), which costs more than £500m per annum, mis-counted the UK’s GDP, that is understated it, at a time when Psycho-Leavers and Remoaners were arguing about how the UK had come bottom on the G7 Post-Brexit.., only to be mid-table. The same ONS that has admitted that its own labour market data is not especially reliable, a key variable behind the Monetary Policy Committee’s (MPC’s) base rate deliberations, which feeds into the aformentioned less than world-class Bank of England. More to the point, staff at the ONS are voting on industrial action because they have been asked to go to the office to work two days a week!!! . One struggles to believe how this stuff happens; indeed, there is an acronym for it that begins in ‘W’ and ends in ‘F”.
Out with the financial sector we have OFWAT in the UK, which permitted the owners of domestic water companies to leverage to hilt; how come and who thought it would be a good idea? Water, British utilities in general, have been a circus for some time with clever private capital outwitting civil servants and Ministers. Yes, elevated investment has occurred compared to the bad old days of Old Labour, but not enough, meanwhile rivers are polluted, water is in short supply after a few weeks of dryness despite perennial rainfall and so the private capital has received its money back several times on its equity.
Not expecting rising base rates, partly an outcome of zero-interest rates set by the somewhat lacking Bank of England, Thames Water shareholders are in a Mexican stand off with the UK Government over the need for additional capital to service debt; a situation that should allow market forces to prevail if they default on their loans, i.e., it goes bust. Whatever way one plots it though, again this is, total mismanagement by OFWAT, the common theme here; a very expensive marzipan layer of the British bureaucracy delivering generally poor services with no comeback whatsoever.., then there is the Post Office, OFGEM in the energy market, the CMA, the planning circus across the nation and, as Kurt Vonnegut states, ‘so it goes.’
Now business is far from perfect and there will always be crooks around, which by way of balance is why good governance is important in the commercial world and, in the main, companies listed on the London Stock Exchange have a good overall record because of the responsibilities of Board members and transparency. All of which made me look at Tesco’s FY24 results, which were issued in early April in contrast to the mass of mis-management in public bodies outlined above with the corresponding reward for failure.
Now, Tesco is a firm that a decade ago fell over also due to management failure, it should be said, but unlike public bodies, management was sacked and shareholders suffered a markdown in their equity for a while. New management, under Sir Dave Lewis, came in and necessary change was affected, change that took several years to expedite it should be said; the public agencies have virtually no moral hazard due to the complex labyrinth of procedures, committees, consultations and appeals that means no one is sacked and only entitlement rules.
Tesco in April 2024 under CEO, Ken Murphy, who replaced Sir Dave in 2020, announced c7% sales growth to near £70bn for FY24. The firm gained share in a demonstrably competitive UK grocery market by focusing upon its customers whilst taking difficult decisions around cost-benefits with respect to suppliers and employees, e.g., it has rationalised its SKU count to push more volume in fewer lines to improve unit economics, hitting some suppliers it should be said, and removed counters to some customers’ chagrin, with corresponding job losses, because the reward outweighed the overall cost. These are difficult decisions but in the rounds, the benefit outweighed the costs of all stakeholders though.
Accordingly, Tesco’s FY24 earnings rose by 11%, which allowed dividends to grow by the same amount, paid from free cash generation, after necessary maintenance capital in its stores and key enablers like IT, taxes (which unlike many over-leveraged firms, it pays), whilst reducing underlying net debt by £700m too. Tesco now has a net debt to EBITDA ratio of less than 0.5 times, which is low, permitting a recurring share buy-back, which delivers an earnings yield of c4.5%, £750m-1bn, and so 15% total shareholder return.
All analogies break down, of course, and running public services is not the same as supermarkets or any other business it must be stressed. Whilst so, Tesco employs over 300,000 people with a single human resource department, it is customer focused, unlike an absence of purpose overlaid by a sense of entitlement in too many public bodies, and it respects its shareholders, in public bodies this is the taxpayer.
To be clear here, it is generally not front line workers that are the problem in the public sector, it is their management, who, for example require firemen, policemen and nurses to go to a place of work, but if one is a processor, a technocrat, a facilitator, never mind a manager, there is an entitlement to work from home and fit the service to the public around dog walking, manicures, exercises, and domestic administration.
Britain’s senior and middle management of public services are patently not fit for purpose. National Government expenditure is maxed out, evident by record budgets and national debt whilst service levels deteriorate. In the main this is a failure of the allocation and curation of resoruces, that is management. Whilst it is not novel to suggest a necessary change of culture, a focus on a) the recipient of such services and b) the taxpayer over hugely expensive ‘self’ would strategically serve the nation better. Tesco shows that in difficult contexts, the right management, the correct culture, achievable goals and a focus on execution can over time deliver for all stakeholders.
If Kier Starmer is to be the next UK Prime Minister he would do well to take a serious look at Britain’s failing technocracy, which includes mandarins, agency chiefs, the legal and planning systems and so forth, and fundamentally reset otherwise his mantra of economic growth will fail as what used to be called ‘the blob’ becomes bigger and less capable. The future of Britain’s public services needs much better management, culture, processes and operations.
For business, this is what Mark Dudley and his team at Coriolis focus upon, it is their day job to assist management to be the best they can be, to enhance cultures, processes and operations so that they can also better serve their stakeholders. Give them a shout if such outcomes interest you.
Dr Clive Black
Senior Advisor
Coriolis Consulting
April 2024
