June sector focus on the restaurant trade and changing eating habits

The restaurant trade is notoriously volatile at the best of times but the last two years have seen it undergoing a particularly torrid time.

Even by the standards of the recent decline in High Street retail the restaurant trade stands out.

By December 2018, according to a BBC report, “Gourmet Burger Kitchen [has] earmarked 17 sites for closure while Carluccios is shutting 34 outlets. Prezzo said it would close 94 – about a third of the chain – including all 33 outlets of its Tex-Mex brand Chimichanga.” Add to these burger brand Byron, and the French cuisine chain Cafe Rouge.

In all, according to the trade publication The Caterer, 1,123 restaurant businesses filed for insolvency in the first three-quarters of 2018 and the most recent Market Growth Monitor from CGA and Alix Partners reveals that the number of restaurants in the UK decreased by 2.8% in the year to March 2019.

The problem is highlighted by the experience of Jamie Oliver who in August 2018 closed 12 of his 37 Jamie’s Italian restaurants and made about 600 staff redundant in an attempt to save the rest of his business. It didn’t work as in May this year he announced the immediate closure of his restaurant group, including Barbecoa and Fifteen, with the loss of 1,000 jobs, leaving him with just three surviving restaurants.

The bulk of the insolvencies and closures has been among restaurant chains, of which arguably, there has been an oversupply.

Having said that, some chains are still surviving and expanding, notably Indian food chains Dishoom and Mowgli.

What is driving the contraction of the restaurant trade?

Of course, and inevitably, the backdrop to some of this is at least in part the still-unresolved issue of Brexit and when, if ever, the UK will finally leave the EU. This is arguably the undercurrent driving a significant drop in consumer spending and confidence in future job security despite current record employment levels.

Then there is the impact of high business rates, the minimum wage and rising ingredient costs and increasingly a shortage of staff, many of them from overseas and notoriously badly-paid, as more and more EU citizens return home either because conditions in their home countries have improved or out of a perception of the hostility towards them in the UK.

However, there is also arguably a shift in eating habits taking place.

It is partly a case of a desire for quality over quantity or a unique dining experience that has contributed to the survival of small, independent local artisanal restaurants, although if you speak to their owners, rent and business rates are a major issue.

It is also about an increased desire for more healthy, often locally-sourced food, the rise of vegan diets, and above all, it is about time and convenience. Increasingly, people are opting to eat in, either with their families or with friends and to order food online. With Deliveroo, Just Eat and Uber catering to this demand the traditional “dine out” restaurant trade faces an uphill struggle unless it can offer something unique as the small independent offering well-cooked, authentic, regional specialities can.

Evidence mounting that SMEs are more attractive to millennials

There has been a growing body of evidence and research over the last couple of years that millennials prefer working for and shopping with SMEs.

Too often we hear about the difficulties and obstacles SMEs face, such as excessive red tape and disproportionate taxation, but it should be remembered that they account for more than 99% of all businesses in the UK, and recently, Secretary of State for International Trade Liam Fox called UK SMEs “the future of the UK economy”.

As such, it would be foolish for millennials starting out on their careers to ignore the potential opportunities SMEs could offer, and indeed, according to research carried out by Sodexo, it seems that 47% of this young cohort see them as the ideal business size to work for compared to 19% who put their faith in larger companies.

Among the benefits they saw in working for SMEs millennials in the survey they cited flexible working hours, the ability to work remotely, career progression and a friendlier company culture.

Research for the software firm WebOnBoarding suggests that new staff settle in more quickly at smaller businesses and newcomers found people friendlier than in larger companies.

Other benefits to millennials from working in SMEs

In a small business there is more opportunity for both hands-on experience as well as a wider variety of tasks.

As a SME grows, the opportunities for advancement are likely to be greater than they would be in a larger business with a more formal structure and the small business also needs to be agile to survive and flourish, which arguably allows from for more innovative thinking and contributions from all members of the workforce.

This gives younger employees the opportunity to develop their skill set much more quickly than they could in a larger organisation and also tends to give them more responsibility.

While the SME may not be able to afford to pay the large bonuses paid by some larger companies, they can be creative in the ways they reward employees, such as by offering a day off for a sporting activity, a luxury spa treatment or an early end to the working day on Fridays during the summer.

What is the future for company audits?

conducting company audits

In principle, company audits must be carried out on any public body, FCA regulated business and most companies unless they are exempt. The exemption threshold means a company must have at least 2 of the following: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million, 50 or fewer employees on average.

The audit industry has been under review for some time and this scrutiny has intensified since the collapse of Carillion the construction and outsourcing firm in early 2018.

The industry is dominated by the “Big Four”, Deloitte, EY, PwC and KPMG, who audit almost all of the FTSE 100 largest companies. Despite their dominance other accountants have also come under the spotlight such as Grant Thornton who were auditors of Patisserie Valerie that went bust recently, apparently due to a £40 million fraud.

Mr Dunckley, CEO of Grant Thornton told MPs on the business, energy and industrial strategy committee “we are not looking for fraud and we are not looking at the future and we are not giving a statement that the accounts are correct. We are saying they are reasonable, we are looking at the past, and we are not set up to look for fraud.” MPs were not impressed. Should they have picked up the fraud as part of their audit? What is their level of accountability for failing to spot the fraud?

One of the contentious issues raised has been a suspected conflict of interest between auditors’ auditing and consulting arms.

In 2018 PwC, was fined £6.5 billion for its “inadequate review” of now-defunct department store BHS’s books.

In April 2019 the FRC (Financial Reporting Council) fined KPMG £6m and “severely reprimanded” them, telling them to undertake an internal review over the way it audited an insurance company, Syndicate 218, in 2008-09.

And in May 2019 the FRC fined KPMG another £5m and again “severely reprimanded” them after they admitted misconduct over their 2009 audit of Co-operative Bank.

KPMG must be feeling the heat as it was also the auditor for Carillion, which collapsed with debts estimated £1.5bn.

Since the Carillion collapse the CMA (Competition and Markets Authority) has been investigating and announced its recommendations in April.

It concluded that there should be:

* A split between audit and advisory businesses, with separate management and accounts

* A mandatory “joint audit” system, with a Big Four and a non-Big Four firm working together on an audit

* Regulation of those appointing auditors

The CBI criticised the proposals saying they could add cost and complexity for business with no guarantee of better outcomes and could restrict access to the skills required to carry out complex audits.

For smaller businesses, including those below the exemption threshold, company audits can be an effective test of a company’s accounts and are a useful tool for directors in assessing their business’ health.

The worry is that the seemingly endless question marks, fines and “reprimands” issued to large firms and their presumed conflict of interest between earnings from consultancy and from audit work could undermine confidence in the audit function and in the many smaller accountancy practices that diligently carry out audits.

Key Indicator – investment decisions in a mature business cycle

21st century city setting for mature business cycle

A mature business cycle is one where the prevailing conditions are such that any economic slack is largely used up and assets are richly priced after a period of expansion.

Arguably this is the position in which the economies of the developed countries, such as the USA, UK, EU and Japan now find themselves, where there is a stable population and slowing economic growth. In this context a growth rate of 2% is seen as acceptable.

Arguably, too, mature economies are at a pivotal moment, in that a market economy is never static and there have been signs for some time that the situation is somewhat volatile, as a selection of headlines in any period illustrates.

For example, on April 28 a new report on global trends published by KPMG Enterprise suggested that increased activity from venture capital investors had been pushing up deal prices in the North of England, and the billionaire investor Warren Buffett told the Financial Times that he is “ready to buy something in the UK tomorrow” regardless of Brexit.

A month later, a member of the Bank of England’s MPC (Monetary Policy Committee) was reported in The Times as saying that “levels of business investment in Britain could be stronger than they appear, because official measures underestimate spending on intangible assets”.

Within days of the collapse of British Steel in Scunthorpe into administration there were reportedly 80 potential buyers for the business.

All this seems positive but at the same time there are equal numbers of less positive headlines suggesting a global economic slowdown, rising prices and inflation in some countries and worries about an imminent recession being due at this point in the economic cycle.

According to a recent article in the Economist on the mature business cycle, markets are choppier, perhaps due to the latest developments in the on-going trade war between the US and China, and it would be wise, it says, for investors to watch what happens in the foreign-exchange market where, it argues, the dollar is “a thermostat for global risk appetite: it rises with a weak dollar and falls with a strong one”.

Clearly, for investors, especially those that are rent seekers or seeking quick returns on their money, the current volatile economic situation is hardly welcome. Questions arise about where it is safer to put money and it is hardly a surprise that commodities such as oil (see last month’s Key Indicator) are seeing significant price rises.

VOIP a phone solution for growing SMEs

VOIP replaces the old-fashioned switchboard

As a SME develops and grows costs can quickly escalate, no more so than its phone and communication systems and yet there is a cost-effective solution called VOIP that some may not be aware of.

VOIP stands for Voice over Internet Protocol and is essentially a broadband-based phone service that can include a free switch board.

A business can make calls using laptops or PCs but equally using VOIP telephones, which cost very little and are the only additional piece of hardware needed if bought upfront since the exchange is either embedded in the phone or provided by the VOIP supplier who is normally also the broadband service provider.

A VOIP system allows the business to dispense with call handling and an in-house switching system, all of which can be set up and automated by someone familiar with IT systems. You can have unique phone numbers and set it up so that calls can be switched from one number to another.

With a phone-based service, you use VOIP the same way you use a regular landline: by picking up the phone to answer it or dialling a number to place a call.

Calls are not confined to only others who are using a VOIP system and usually there is no additional or at most a minimal cost for calling overseas. The system can also be used to make conference calls and it allows you to take your number with you when you travel.

It has been estimated that savings using VOIP can be as high as 95% per month but if you are considering this option, there are some things to remember.

Getting your VOIP system right

Basic requirements are a high-speed internet connection and VOIP phones which are inexpensive. You should also remember that in the event of a power cut your phone set-up will not work and it is therefore wise to have a secondary power source, such as a generator, as a standby.

For businesses with multiple users, a separate PBX (Private Branch Exchange) is not required as the phones can be set up to manage calls within a network and can also be set up to transfer calls between phones like in a normal office exchange as well as routing incoming and outgoing calls. Most Internet Providers offer hosted/virtual PBXs, so that your SME does not have to go to the expense of buying and installing expensive equipment.

There is one caveat if considering using VOIP for your business, and this is that you will likely come across many phone company providers, such as BT, as well as specialist providers, who will offer to install and manage your set-up and hire you the phones.

You should remember that the uplift charged by VOIP phone companies is their gross profit plus phone hire if they supply the hardware and for the small, but growing SME this means a significant, and unnecessary, expense.

This website is a very useful introduction to all things VOIP.

Why advice to aspiring women leaders may have been all wrong

The numbers of women leaders are not rising despite the growing calls to eliminate gender discrimination in the workplace.

women leaders advised not to emulate men

There are just six female CEOs of the FTSE 100 companies and at the start of the year The Equality Trust revealed that they earn 54% of their male counterparts.

Some years ago, Sheryl Sandberg published her book Lean In, in which she argued that women should show more drive and determination, put themselves forward for daunting tasks, and showcase the same level of confidence conveyed by male leaders.

But either aspiring women leaders have been ignoring Sandberg’s advice or, if they have followed it, it has not resulted in promotion.

The “lean in” advice may even be wrong according to personality scientist Tomas Chamorro-Premuzic, an international authority on psychological profiling, talent management and leadership development who argues that it could actually be counter-productive.

It is more likely, he says, that if women mimic the accepted male behaviours of self-promotion, showing ambition and so on, it could actually lead them to mimic the dysfunctional behaviours that are shown by many toxic leaders.

Regular readers may know I have tackled the subject of the “dark triad” of corporate leadership behaviours in previous blogs, identifying the traits of narcissism, Machiavellianism and psychopathy shown by many such leaders.

In fact, the problem, says Chamorro-Premuzic, is that while gender discrimination plays a part in potential women leaders being overlooked, the primary reason why so many incompetent leaders are appointed is because there is a general difficulty in identifying and selecting competent leaders.

He identifies several reasons for this.

Firstly, he argues “there is not much overlap between people’s self-perceived and actual talents for leadership”. Often, he says, the most incompetent leaders suffer from “extreme deficit of self-awareness”. This could also be applied to many politicians.

Secondly, he says, narcissists and psychopaths often lean in. This leads to excessive risk-taking, which may be counter-productive for a business’ stability and growth. Therefore, if leaders are selected on ability to showcase aggressive behaviours we are likely to select a disproportionate number of candidates with antisocial tendencies.

However, the biggest problem with the lean in argument, he says, is that we have double standards when evaluating women and men, leading to women typically being rejected and disliked for being intimidating bulldozers or simply for not being “feminine” enough.

Instead, his advice is that in order to pick the best potential leaders, of either gender, we should be looking for such qualities such as integrity, emotional intelligence and communication skills.

Moderate ambition therefore may be a better indicator of leadership potential and aspiring women leaders’ greatest advantage because it means “having the drive and ability to lead without wanting to become the centre of the universe … perhaps because that place is usually reserved for narcissistic men.” Boris beware!

What should be on the SME wish list from the new Bank of England governor?

The search has begun for a replacement for Mark Carney, Bank of England (BoE) governor, who is due to leave his post in January 2020.

So far, the speculated names in the frame have included Andrew Bailey, the chief executive of the Financial Conduct Authority, seen as a “safe pair of hands”, Ben Broadbent, the Bank’s deputy governor for monetary policy and Andy Haldane, the Bank’s chief economist.

But also included have been Shriti Vadera, chair of Santander, Janet Yellen, former head of the US Federal Reserve, and Raghuram Rajan, economist, and former head of the Indian Central Bank.

Chancellor Philip Hammond has reportedly said that Mark Carney’s “steady hand has helped steer the UK economy through a challenging period”.

In the light of the ongoing turmoil that is a still-not-finalised Brexit, political populist turmoil and US-inspired trade wars with China and potentially the EU, clearly another “steady pair of hands” at the BoE is needed, as well as someone who may have to deal with a government that wishes to take back much of the power that was handed over by Gordon Brown when he was Chancellor.

Beyond a steady hand what qualities might SMEs like to see in a Bank of England governor?

The BoE headhunting will be carried out by Sapphire Partners, a head-hunting firm that specialises in diversity and placing women in top roles. The company is run by an all-female management team.

While they will obviously be seeking the best candidate for the job this could be an encouraging sign for many, given the various ongoing headlines about the difficulties women entrepreneurs have in being taken seriously and accessing finance as I have reported in past blogs.

At the time of Carney’s appointment in 2013 it was revealed that loans to SME fell by £4.4bn in the three spring months. Since then the signs have been that the main banks have continued their reluctance to lend to SMEs, so perhaps a signal of SME support from the new Bank of England Governor would be welcome.

To be fair, Carney and the Monetary Policy Committee have resisted the temptation to raise interest rates, which has been a huge benefit to many SMEs, particularly in the current turbulent economic climate. This has been welcomed by FSB (Federation of Small Businesses National Chairman) Mike Cherry.

In an interview published on the Government’s website in February this year, Mark Carney referred to the BoE’s upgrade of its RTGS [real-time gross settlement] system to take advantage of new technology to “not only lower the cost and increase the speed of payments, but has the potential to be transformative beyond the financial sector” and he said would benefit SMEs.

He also said “These benefits would multiply if delivered alongside services trade liberalisation, which has the potential to increase productivity growth, reduce excess imbalances, and make free trade work for all, including SMEs.”

So clearly he has been mindful of the considerations for SMEs, but what else would you like to see from the new Bank of England governor?

Leave your suggestions in the comments section below.

Are Internet unicorns another bubble destined to burst?

Reminiscent of the hubris leading up to the 2000 dot com crash, the start of this year there has seen a queue of internet unicorns lining up to launch on the stock market via Initial Public Offerings (IPOs).

A unicorn business is defined as a private, venture capital-backed firm worth over $1bn. Among those that have either launched IPOs or considering them are Lyft (launched in March), Uber (launched in early May), Pinterest, AirBnB and possibly We Work and Slack.

So far, the results have been distinctly underwhelming with Lyft’s shares valued at $72 each on debut, giving the seven year-old company and rival to Uber a market value of slightly more than $24bn.

Uber set its launch value at $90 billion (£70 billion) and listed share prices at $45 each. However, within hours on its first day of trading Uber’s share value had dropped by 7.6% down to $41.51.

Neither of the two ride-hailing businesses has so far ever made a profit.

Last year, despite boasting revenues of $11bn Uber made operating losses of $3bn and while its revenues grew from $343m to $2.1bn between 2016 and 2018, its losses also soared, from $682m to $911m.

The hubris might best be justified by the fact that We Work was valued at ~$20bn at last fundraising, despite last year losing ~$4bn. Contrast this with UK listed Regus that made ~€800m last year and is currently valued at ~$4bn.

There is no doubt that trading conditions in the last two years have been challenging, with a global economic downturn, trade wars and political populist movements all making markets more volatile.

This may be behind the incentive for unicorns to rush into IPOs before economies find themselves in recession. Again, readers might like to recall the market bubble ahead of the dot com crash in 2000 when Lastminute.com was the last of old “retail” internet firms to list before the crash with many of those who missed the boat subsequently falling by the wayside.

Are there more deep-seated problems with internet unicorns?

Ilya Strebulaev, professor of finance at Stanford University, has extensively researched private venture capital backed companies and come to the conclusion that unicorns are overvalued by about 50%.

Prof Strebulaev argues that typically venture capital-backed businesses make losses “because they basically sacrifice profits to achieve very high growth or scale” but the question is whether their business models will be sufficiently flexible to allow them to convert losses to profits over time.

The current crop of internet unicorns are significantly larger than the internet companies that were involved in the mid-1990s dot com bubble and 2000 crash but a lot depends on their plans for the future.

Lyft has plans for using the money generated from its IPO to invest in acquisitions and technology, including autonomous driving, for example.

Uber has already suffered from protests by its drivers over their treatment with stories rife of drivers earning so little that they have to sleep in their vehicles and with protests ongoing there are concerns that it would face significantly increased costs if forced by regulators to classify drivers as employees rather than contractors.

An item in its IPO prospectus is particularly telling “as we aim to reduce driver incentives to improve our financial performance, we expect driver dissatisfaction will generally increase.”

If these companies are pinning their hopes of future profitability on driverless cars and dispensing with drivers altogether they, and their investors may have a long wait.

Business opportunities for SMEs in the growing demand for sustainability and cutting waste

cutting waste is essential to preserve a beautiful environmentThe neoliberal economic model based on perpetual growth has come under increasing attack from environmental campaigners particularly since the week-long Extinction Rebellion activity in April this year.

With almost-daily horror stories about climate change, global warming and the amount of plastic waste littering the planet, not to mention a significant decrease in biodiversity, it is clear that action needs to happen a lot more urgently than has previously been admitted.

Changing the developed world’s economic model from perpetual to sustainable growth is no doubt going to be a major challenge, particularly in the face of a rise in populist political parties putting national self-interest first and also of some leaders, such as US President Donald Trump who despite the evidence still questions the truth of climate change.

Nobel prize-winning economist Joseph Stiglitz makes a distinction between good capitalism, which he calls “wealth creation”, and bad capitalism, which he called “wealth grabbing” (extracting rent).

Some of this thinking may be behind the recent announcement by the UK’s largest money manager, Legal & General Investment Management that warned about “climate catastrophe” and has promised to get tougher on boards where it identifies a high level of executive pay, lack of diversity in senior corporate roles, as well as “insufficient stewardship” of the way the business is acting.

The company voted against the re-election of nearly 4,000 directors in 2018 – an increase of 37%. – and it has published a blacklist of eight companies whose shares they decided to dump.

In October last year, ten companies announced that they were cutting waste by ditching plastic. They included McDonalds, Starbucks, Aldi, Lidl, Pizza Express and Costa. Supermarkets have also been at the forefront of a drive to eliminating throwaway plastic shopping bags, with Morrisons offering both re-usable and paper alternatives and encouraging shoppers to bring their own containers when buying vegetables.

There is already some evidence that becoming a “greener and leaner” company can actually benefit a business’ bottom line.

SMEs have been encouraged to cut their CO2 emissions and offered financial incentives for changing to more environmentally-friendly processes, such as better building insulation and reducing paper use and have seen their overheads reduce as a result. Use of automation and AI has also benefited some.

Are there positive business opportunities for SMEs as a result of cutting waste?

There has been an increase in the number of small businesses, mostly located in High Street shops, specialising in the repair of household products that would once have been discarded and in teaching people how to do the repairs themselves.

Other small businesses have developed classes teaching people how to make or re-purpose their own clothes and are reportedly thriving.

Here are examples of two other SMEs that have developed, and are thriving based on their social, sustainable and environmental awareness.

In Ipswich, a clothes company originally set up in partnership with Indian producers out of a concern for Fair Trade, has recently formed another partnership with African producers to source sustainably-grown cotton which local garment workers then use to make attractive clothes that are imported to UK to be sold online. One of the selling points of the garments produced is that each item comes with a verifiable history of its production.

Another business operating nationwide and based in Essex has created a service for building contractors with contracts to re-purpose or refit existing buildings. It offers site preparation that includes initial site layout, demolition, removal of internal and external fixtures and fittings, and the removal of all waste sorted into recyclable materials that are verified by an independent adjudicator and certified so that both this company and the contractor have evidence of their efforts to be as sustainable and environmentally friendly as possible. It also clears sites at the end of the contract.

With some innovative thinking, there are huge opportunities for SMEs to create completely new, social, sustainable and environmentally friendly products and services.

If you have any examples do please let us know in the comments.

Price and environmental pressures in the cargo shipping sector – stormy waters ahead?

cargo shipping on stormy seaIn early April a national newspaper published a report on the captain and crew of a cargo ship who had been stranded in the Persian Gulf off the UAE for 18 months without pay or food.

The cargo ship, said the report: “became a floating prison from which he and his 10-man crew could not escape without losing their claim to thousands of dollars in unpaid wages.” The ship’s owners had got into financial difficulties but would not sell the ship because they “would not get a good price”.

This is becoming an all too frequent story and in 2018 alone according to the IMO (International Maritime Organisation) an estimated 791 sailors on 44 ships had been abandoned in this way as a slump in orders led to overcapacity in cargo shipping and took its toll on owners.

Over the last couple of years, a global economic downturn has been gathering pace exacerbated by Trade Wars between the USA and China leading to lower demand on trade routes between Asia, the USA and Europe.

Demand has also been affected by rising costs including for fuel, port handling, insurance and security. These have increased significantly over the past few years, not least due to piracy off Somalia and the recent threat by Iran to block the Straits of Hormuz.

Will 2019 bring any relief for cargo shipping?

Growth in the first 11 months of 2018, was the slowest recorded in the past decade for intra-Asia at 3.8% and the predictions are that European containerised imports may be stuck at a demand growth of no more than 2% for the foreseeable future.

Rates have been relatively steady for a couple of years but, it has been argued, they are barely recovered from a loss-making, low-rate 2016. For some charter cargo shipping companies rates are expected to remain loss making, leading to numbers of idle ships.

While there is some potential for demand from South America and Africa to grow, the outlook is very uncertain.

An added complication is that the IMO has introduced a mandatory cap on the amount of sulphur in ship fuel starting form 2020. Lower sulphur fuels are expected to be more costly than the current Heavy Sulphur Fuel Oil (HSFO).

The increased emphasis on climate change and environmental protection will play an increasingly important role in the cargo shipping sector as it will in other sectors and it will not escape from the geopolitical pressures of trade wars, rising populism and uncertainty over regulation due to these, Brexit and other issues.

It will be some time before there is any relief for the cargo shipping sector.