Where next for High Street retail?

Christmas High Street sceneAs the figures for pre-Christmas trading are appearing a clear divide is emerging in performance between non-food and food sales performance.

This is supported by Next reporting that sales fell by 0.4% compared to 2015.

However, as predicted, Marks & Spencer and John Lewis also reported increased sales in non-food items.

Discount retail posted the biggest gains.  B & M, which offers a range of household, DIY, furniture, clothing and other items, has reported a 7.2% rise in like for like sales during the three months up to December 24.

Perhaps predictably, however, online buying continued its inexorable upward trend by +19% according to BDO.

High Street shopping remained relatively quiet until the last week before Christmas, with analysts suggesting a variety of explanations ranging from Christmas falling at a weekend, giving a full week for “last minute” shopping, to consumers being more careful about their spending, to the Black Friday hangover and inevitably to the rise of online shopping.

Overall, retail analysts at BDO are predicting a slight fall overall in High Street retail trade in Dec 2016 after a significant fall of 5.3% in Dec 2015.

Less discretionary spending and more on “essentials”?

Interestingly, the food retailers have generally experienced increased sales in the pre- and post-Christmas period. Again, it was the discount end that did best with Aldi reporting sales up by +15%, and Lidl by +10%.

But of the “big four” supermarkets that have so far reported, sales were also up, at Sainsbury by .1%, largely fuelled by its Argos operation, at Tesco by 1.8%, at Morrison by .2%. Marks & Spencer, too, reported increased food sales, up by.6%.

Can retailers relax a little in 2017?

Despite the slightly more positive Christmas picture compared with 2015, this year retailers will still face several pressures as higher import prices thanks to a devaluing £Sterling feed through and hit both their costs and consumers’ income.

Food prices are expected to rise but so also are clothing, a great deal of which is manufactured outside the UK. What happens to oil prices will also play its part in increased transport costs and the price of petrol at the pumps reducing discretionary spending.

Two significant costs that may also affect High Street retail are the effect of Quarter day rents due at the end of December and the impact of business rate revaluations due to come into effect in April. While the latter may benefit smaller independents if may hit the larger stores hard. Given also the ongoing Brexit uncertainty inhibiting investment, will we see another BHS-style High Street name collapsing?

Corporate Governance review needs your responses

word cloud corporate governanceIt has received very little publicity but in November 2016 the Government published a green paper outlining proposals for a review of corporate governance.

The green paper provides information on the current situation. It includes proposals for changes and is being used by the Government to stimulate debate, consult with the wider community and gather contributions and suggestions.

The deadline for responses is Friday, February 17, and the paper includes a useful list of questions, as well as information on three ways to respond, either by email, through a website or as hard copy.

The paper covers three main themes, executive pay and its regulation, strengthening the voices of employees, customers and suppliers at board level and the current anomaly whereby large privately-held businesses are subject to lower standards than public companies.

A fourth section has been included asking for suggestions for other ideas or themes that could be explored to strengthen UK corporate governance.

In her introduction to the green paper the Prime Minister emphasises the pledge she has repeatedly made to strengthen the economy and UK business “for everyone, not just the privileged few”.

She argues that for people to retain faith in the economic system “big business must earn and keep the trust and confidence of their customers, employees and the wider public.”

Ethical behaviour is a must for all businesses

Ultimately no business, whether it is a SME or a large corporation, can hope to prosper and grow long term without earning the trust of its employees, customers and suppliers and even the wider community.

While the focus of this green paper is on larger concerns, it contains food for thought for all types of business.

The treatment of employees, fair levels of pay for both workers and senior executives, how the business relates to and contributes to the community in which it is located and how it treats its customers all contribute to its reputation.

While the larger business may seem to have the power to get away with sometimes questionable behaviour this is not a risk SMEs can afford to take if they want to survive and prosper.

Regularly reviewing and refreshing your business website

website refreshA business’ website is arguably one of its most important marketing tools for several reasons: most importantly, to reassure potential clients and customers that your goods and services will satisfy their needs and ideally to attract new customers who are searching for a solution.

Many SME owners, particularly those selling services rather than products, assume that because their offering does not often change then their website does not need much attention.

However, the online world changes more rapidly than any other sector, not only in terms of consumer behaviour but also in terms of the technical aspects and in particular the ranking of your website by search engines will be influenced by how active it is.

Website user experience and security

There cannot be many website owners who are unaware of the growing importance of the medium through which potential clients view their website.

The UK has one of the highest rates of browsing via a mobile phone and this means that a website cannot hope to keep site visitors unless it is responsive – i.e. easy to view and to navigate on a smartphone as well as a PC or laptop.

This applies equally whether a business is selling products or services and is an aspect of websites that is assessed by search engines such as Google.

If pictures take too long to load, if it is difficult to move between pages, if there is too much text to be easily readable on the screen the likelihood is that the visitor will go elsewhere.

This means that visual and other elements of design need to be as clear and simple as possible and, especially, that the information shown on a mobile phone needs to be pared down and easily digestible on a small screen.

An annual website appraisal will ensure that it is still performing to the maximum standard, wherever it is being viewed.

An audit should also look at the behind the scenes technical aspects such as Search Engine Optimisation (SEO), whether the key words being used are still relevant, and whether the design is still the best it can be. Don’t forget that every web page should be optimised, which also allows for more focused targeting of messages to help search engines direct potential clients to the relevant page.

You might consider making your website more integral to the running of your business where some firms do everything through their website from database management, to integrated marketing campaigns that trial messages and optimise results, to booking orders, managing work flow and processing payments.

Last but by no means least, given the frequency of news reports about website hacking, a crucial element to have checked is the site’s security.  This is especially important, not only for taking secure online payment, but also for any business that is encouraging visitors to sign up for offers, appointments, free information or any material that requires them to register their personal details.

A regular website audit should also check that it is protected with the most up-to-date security protection against invasion.

In short, if a business wants to protect and enhance its reputation a regular website review and update should be a key element in its operations

Can forecasting help SMEs prepare for the future in uncertain economic times?

looking ahead using binocularsOur regular followers will know that we generally advise business owners to revisit and revise their plans and forecasts over the quiet Christmas period and to give some thought to setting goals for the coming year.

In the aftermath of the events of 2016 many will have found it harder than usual to see the way ahead given the uncertainties surrounding the economy both at home and in the wider world.

Predicting the future means understanding where you are and knowing what resources you have

Reviewing a business’ performance over the previous year is undoubtedly a worthwhile exercise for establishing its current position, including identifying any weaknesses in your financial position as well as those systems that should be improved.

A business that has existed for some years will have experience of a variety of trading conditions and how they were overcome to use as the basis for analysis.

It is also likely to have an established network of suppliers and clients/ customers for gathering information about options including sources of finance. Depending on the goods or services it supplies it will at least understand the competition it faces and be aware of the demand and future trends.

The relatively new SME will not have quite the same level of experience and information, although hopefully it will at least have carried out research into demand, likely customers and how to market to them, as well as having identified the level of investment needed.

Whether new or more established, both can use the techniques of a SWOT Analysis to identify their Strengths, Weaknesses, Opportunities and potential Threats to clarify their current position in an organised way and identify the So WHAT actions that arise from a SWOT Analysis.

Please refer to the K2 Knowledge Bank for more on SWOT Analysis and how to get the most out of them: knowledgebank.k2-partners.com.

This preparation work will help with setting the following year’s goals.

The unanswerable questions and being prepared

The major problem facing all businesses at the start of 2017 is, of course, the economic uncertainty surrounding the possible actions of a new US President and the lengthy process of negotiating the UK’s exist from the EU.

crystal ballForecasting for a business against this background is certainly going to be tougher.

Goals will need to be set that make allowances for best and worst cases, regardless of whether a business is local or an exporter.

Absolute knowledge and control of cash flow, sales, invoicing and comparing monthly management accounts with the forecast as a regular review is likely to become imperative.

If possible, ensure there are at least some financial reserves to deal with the unexpected.

While it is plainly foolish, even if it were possible, to forecast the future in any detail, especially now, there will undoubtedly be unexpected opportunities as well as shocks.

Businesses will need to cultivate agile and flexible cultures, systems and processes to be prepared for both the opportunities and potential hazards of surviving and flourishing in the current economic climate. Courage and nerves of steel would probably help also.

Economic pressure is building for a storm in the coming years

stormy skyIt is a brave, or foolhardy, man or woman who would try to predict what will happen to the economy in 2017 especially in light of the various shocks that we experienced in the US and UK in 2016. But the trends as evidence of a building financial pressure are irrefutable.

An incoming, and potentially “protectionist” US president, who seems to favour diplomacy and policy announcement via Twitter, and the wholly avoidable but now irrevocable decision by the UK to leave the EU with the prospect of lengthy negotiations before the process is complete make for a cloudy and uncertain picture which adds more pressure and most likely brings forward the inevitable storm.

The trends and pressures that give clues have been covered for some time by Alasdair Macleod, Head of Research for Goldmoney, and are summarised in his nuanced and thoughtful Outlook for 2017 that actually looks further than the year ahead for the USA. And as the cliché goes “when the US sneezes, UK catches a cold” or worse “when US catches a cold, UK gets pneumonia”.

Investor over-confidence in expectation of a business-friendly pro-tax reducing regime, a shift from monetary to fiscal policy leading to a rise in budget deficits and rising inflation are among the signs he identifies.

At the same time, although all this is reminiscent of the 1970s when interest rates soared to as much as 13%, this time it is in a climate of massive debt leading to constraints on the Federal Reserve’s ability to increase interest rates for fear of precipitating a collapse in the economy.

“Next time, when a financial crisis occurs, the problems will be more widespread, encompassing bond markets, property, equities and governments themselves. It will be ebola compared with a flesh wound. There will be no option other than to rapidly expand the quantity of money on a global basis, with central banks buying up government debt, ultimately fuelling price inflation even further,” Macleod predicts, suggesting that tangible assets will be the only protection against devaluation of fiat currencies, although perhaps not as soon as 2017.

What is the position of the UK economy by comparison?

Given that for at least the last 20 years the management of the UK economy has been based on similar “neoliberal” principles to those in the US, in our view, the UK faces a similar cocktail of risks and there have already been some signs to reinforce this, though not yet at the level to indicate an established trend. Inflation and interest rates will eventually bite on the printing of ever more paper currency or more Quantitive Easing which both amount to the same devaluation of £Sterling incidentally to 1.55% of its value in 1969.

The Chancellor’s Autumn Statement included investment in digital and physical infrastructure – a shift to fiscal measures – and the Bank of England has continued to keep interest rates at their current low level.

On Wednesday, the British Bankers’ Association (BBA) revealed that in the 11 months from January to November 2016 the rate of saving had increased by 4.8%, climbing from £19.8 billion in 2015 to £32.4 billion in 2016 so far, suggesting that people are already anticipating predicted inflation and stagnating wages.

This week the FTSE 100 reached a new record high at 7,111.69, suggesting a level of investor confidence in equities, or is it more a lack of good quality stock available for safety?

We had already learned that inflation is expected to rise in 2017 and have also had a prediction from Nationwide that house prices are expected to stabilise rather than continue to climb ever upwards.

So, the likelihood is that the UK too is facing a “perfect storm” similar to Macleod’s analysis of the USA, with the same constraints on Government’s ability to act and a consequent devaluation of its fiat currency, bonds, equities and for home owners a decline in the value of their property by 20%.

The storm may not erupt in 2017 but the pressure is mounting so we advise businesses to be prepared and despite all this, we wish you a happy and prosperous New Year.

 

Choosing to do business in $dollars, instead of £Sterling

currency exchange boardWhile there is uncertainty and volatility in currency exchange rates, as has been the case since June 2016 and the EU Referendum outcome, many UK businesses might find it more attractive to trade in another currency, especially if they are purchasing goods in another currency.

Since June the value of £Sterling has plummeted by some 15% against the $Dollar and around 12% against the €Euro, making imports, such as raw materials, goods and supplies to the UK more expensive, although it has been positive for those UK companies that trade overseas.

This month the US Federal Reserve increased interest rates by 0.25%, suggesting that there is more confidence in the US economy and in the strength of the $Dollar.

The business advantages of using another currency

It is plainly of no benefit to a UK business operating only in the UK to switch all its transactions to another currency, but the situation is different for exporters and those who pay for purchases in another currency.

For these businesses the decision to switch, most likely to $Dollars, is about taking a longer term view of risk and currency values.

Many businesses work in other currencies and the $Dollar is for many industries the standard currency, as well as the one used when doing business in the Far East.

Opting for trading in $Dollars is changing the way you think about your business, in particular about paying bills, where it might be advantageous to have a $Dollar currency account.

One question to ask is what currency is more suitable given that UK interest rates are driven by the desire to protect employment.  Are US interest rates more stable that the UK?  If the UK is keeping interest rates low to promote employment, on one level that is a measure of instability.

Interest rates have been held down for far longer than they should have been since the 2008 Financial crisis and we would go for trading in $Dollars rather than any other currency.  It is all about managing risk.

But there is a note of caution. The cost of commercial insurance policies for those using $Dollars tends to be much more expensive due to the assumption that a business is more likely to be exposed to US law and the prospect of litigation.

If you got this far, I thank you for reading my blogs and wish you a very happy New Year.

What is the purpose of a company?

company purpose and directionSomething to reflect on over the festive period is a debate we have been hearing more and more about recently, challenging the purpose of a company as a corporate entity.

It may seem obvious at first sight but there are actually several questions to be considered.

The assumption that companies exist to make money may appear to be self-evident, but for whom and for what purpose?

Is it simply for the benefit of its shareholders? But what about its other stakeholders?

What about employees, many of whom may have worked for the company for far longer than shareholders have held shares? Indeed, many employees may also expect the company to be able to pay their pension in the future.

Where also do lenders and creditors stand especially in the UK where their interests are paramount in insolvency proceedings?

The local community and environment are also becoming important stakeholders with ever more focus on corporate social responsibility, health and sustainability related legislation.

In the EU there has been some effort to harmonise company behaviour across different countries, such as in the Directive, Solvency II, which aims to unify a single EU insurance market and protect the public from bail-outs.

Do cultural differences affect the purpose of a company?

Despite attempts to harmonise legislation, there are cultural differences that are likely to prevail. For example, in Southern Europe much legislation is primarily for the benefit of employees.

Most regulators seem to focus predominantly on trying to prevent risk-taking, particularly by banks, which are essentially companies that primarily make their money out of risking capital.

In the UK, there has been a growing culture of shareholders taking money out and leaving companies leveraged to the hilt risking jobs, pensions and creditors.

Another reason behind the large number of new companies being formed is as an employment vehicle for their shareholder/directors. This might be sensible given the personal liabilities of being a sole trader versus the protection of the corporate veil. But was this intended?

It is understandable that ever more regulation imposes ever more responsibility and increasing personal liability on directors to discharge their duty to the various stakeholders of a company.

So what exactly is, or should, a company be for? and for whose benefit?

Resetting the marketing budget for 2017

Ready for Tomorrow?Given the challenges many SMEs are likely to face in the coming year, the quiet period between Christmas and New Year is an opportune time to reflect on the state of a business and consider where next.

Once there is a clear view of the way ahead it is also important to revisit the business’ marketing, consider what has worked and what has not and reset the marketing budget at a realistic level of spending.

One thing to remember is that marketing is not an optional extra. If potential clients or customers do not know who you are and what services or goods you offer they are clearly not going to be converted to buying from you.

This is particularly important to remember when trading during difficult economic conditions, when it is generally not advisable to cut the marketing budget.

How much money is available to spend on marketing?

This involves having a clear idea of how secure the business’ income is and this will depend on whether it has long-term contracts with clients and customers or not.

It is also important to know how much money needs to be retained to cover overheads and other expenses.  For example, the business that has a 12-month contract with a supplier will need to ensure it has the money to fund the obligations, especially when it is prepaid.

Armed with this information and a careful analysis of the potential for increased demand for its services or goods a business will be in a better position to establish what cash may be available to spend on marketing, and what proportion of that it can afford to use for speculative marketing.

Limited duration versus enduring messages

While businesses might consider the cost and impact of promotion material and the medium for distribution, it is also worth considering how long a message lasts for.

Businesses should also monitor the cost and results of initiatives such as time and money spent on social media. Paid for advertising such as Google Adwords, Google’s Universal App Campaigns or Facebook advertising should be measured in terms of a return on the investment.

Much of this activity disappears from view very quickly in that the message put out today may be lost tomorrow – or even in a few seconds in the case of Twitter. However, that is not to say that there is no value to such marketing activity. With sustained effort it can be used to raise awareness of a business’ brand while not directly bringing results in terms of immediate sales. Such marketing therefore needs to support other initiatives.

On the other hand, spending on a printed membership journal or client leaflet, where information remains available for a long period could be seen as more durable marketing. However how many of these are used by clients to find your products or services? It could be argued that years ago online search engines replaced Yellow Pages and similar directories.

There is never an absolute guarantee of immediate results with any form of marketing since ultimately the choice to buy remains with the customer.  Equally, there is a value in both limited duration and enduring messages.

The important point is to know exactly what cash options a business has and to decide how best to apportion marketing budget to get the optimal return on the investment.

 

A look at the UK construction industry at the end of 2016

bricklaying in construction industryIn December 2015 KPMG was forecasting a “positive outlook” for the construction Industry for 2016, when Richard Threlfall, KPMG Head of Infrastructure, predicted steady growth and gradually improving margins.

He said: “2015 has been a particularly ghastly year for many Tier 1 firms, who have been knocked off-course by losses on legacy contracts signed too cheaply in order to maintain volume in the depth of recession……….

“Weak profitability in the industry won’t improve overnight, but we can expect to see steady growth in order books and gradually improving margins. For the supply chain, the outlook is really good.”

A year on, the statistics suggest that the industry, both Tier 1 and smaller construction SMEs, have experienced mixed fortunes.

Some key construction industry statistics and pressures

According to the Office for National Statistics (ONS) most recent findings published for October 2016 construction output had decreased by an estimated 0.6% compared with September 2016. All new work decreased by 0.9%, with the largest downward contribution coming from infrastructure. This was despite an upward revision in the figures for the third quarter (Q3, July to September).  Even repair and maintenance, traditionally the preserve of construction SMEs, had experienced no growth.

Nevertheless, it said, new orders remained at their highest level since 2009, immediately after the 2008 economic crash.

Similarly, according to a Guardian report in November, construction work for office space in central London had reached its highest level for eight years, up by more than 4% compared with the period before June’s EU Referendum.

Chris Lewis, head of occupier advisory at Deloitte Real Estate, said the figures showed the capital was resilient.

That may be true for commercial property in London, despite the post-Brexit uncertainty, but what about housing construction, especially outside the capital?

Despite the evidence of considerable demand, particularly for affordable and social housing, here too, ONS figures showed that output had dropped by an estimated 1.4% in Q3, despite a slight upward revision in the figures.

Housebuilder Redrow noted, however, that housing was still up 8.7% when compared with the same period in 2015 as private new housing increased by 10.8% but public new housing – a much smaller part of the sector – fell 3.1%.

Undoubtedly there are pressures on the construction industry not least the post-Brexit uncertainty and ongoing skills shortages.  The massive devaluation of £Sterling is also an issue, given that much building material has to be imported, particularly bricks, which are no longer produced in the UK and will therefore be more expensive.

The stagnation in the repairs and maintenance side can hardly be good news for smaller, local SMEs. It remains to be seen whether the announcements in the Chancellor’s Autumn Statement of increased spending of £1.1bn extra investment in English local transport networks, £220m to reduce traffic pinch points and of the promised £1.4bn for 40,000 extra affordable homes will be enough to ease the pressure on SME builders.

2016 review – an uneasy year for businesses

2016 reviewIt seems like a very long time since the then Chancellor, George Osborne, warned in January 2016 of a dangerous “cocktail of risks” facing the UK economy.

The British Chambers of Commerce (BCC) echoed this, citing volatile stock markets, plummeting commodity prices, a potential slowdown in China, a poor 2015 Christmas for retailers and uncertainty about the outcome of the referendum on the UK remaining in Europe.

March brought news of Tata Steel’s decision to sell off or close its UK steel operations, prompting fears for hundreds of jobs particularly in Port Talbot, Wales.  While by November Tata had announced it had agreed a deal with the various trades unions over Port Talbot, possibly safeguarding an estimated 8,000 jobs, the outcome is not yet 100% certain.

In April came news of yet another large retail collapse, this time BHS.

In the run-up to the June EU referendum there were signs of a marked slowdown in investment decisions, coupled with worries about skills shortages if restrictions should be imposed on overseas recruitment.

In June, of course, the outcome of the referendum was a majority in favour of leaving the EU and the first monthly Markit Purchase Managers’ Index (PMI) immediately thereafter showed that the UK economy had been shrinking at its fastest rate since 2009 with confidence in both manufacturing and services falling below the benchmark of 50.

The decision also precipitated a massive devaluation of £Sterling by 15% against the $Dollar and by 10% against the €Euro, which benefited exporters but was predicted to eventually feed through into higher prices for imports and increased inflation. In response, the Bank of England further reduced interest rates.

Another indication of slowing global economic growth came in September with the collapse of the South Korean company Hanjin Shipping, the world’s seventh largest container company.

However, on the whole business activity post-Referendum showed no marked signs of contraction and by November the monthly Markit PMI index was showing upward trends in activity in Construction and Services. But just this week the BCC was warning that the “business as usual” approach that had so far prevailed since was unlikely to last and that business optimism was “continuing to fall”.

At the same time, quarterly reports on business insolvencies have remained steady, showing only statistically insignificant increases.

Also in November Donald Trump won the US presidential campaign, prompting yet more concern and uncertainty, particularly about the impact on other economies, including the UK’s given his notably “protectionist” views as stated during the campaign.

What was 2016 like for SMEs?

The measures introduced in the 2015 Small Business, Enterprise and Employment Act started to come into force with April deadlines for UK companies to compile PSC (Persons with Significant Control) registers.  There were also changes to the taxation of income received from share dividends with the introduction of a new tax-free dividend personal allowance.

Pension Auto-enrolment continued and there was another potential worry for SMEs with the government’s proposals for businesses to file quarterly tax returns.

There was one bit of potentially good news in the April budget, when the threshold for business rate tax relief was increased to £15,000, which may be good news for small High Street retailers, once the outcome of September’s rates revaluations become clearer.

A change of regime in Government produced some recognition of the difficulties for SMEs with the new Chancellor, Philip Hammond’s Autumn Statement, promising extra investment in local transport and digital infrastructure as well as Rural Rate Relief being increased to 100%. But business costs are also mounting with increases in the national living wage, insurance premium tax and changes to NI rates.

The 2016 picture will not be complete, however, until the Christmas retail trading figures and the next set of quarterly insolvencies are revealed sometime in January 2017.