The shifting sands of retail

 

There are signs of a re-balancing between online retail and physical stores as Asos posts its second profit warning in three months.

The rise of e-commerce was regarded by many as a nail in the coffin of the High Street because it was spared the costs of expensive rents and business rates, in-store staff and high energy costs.

However, in their enthusiasm, it seems that the champions of e-commerce may not have paid enough attention to some of the additional costs involved.

While prices may be cheaper online, there are some additional costs which are turning out to be significant.

Online retailers certainly reap some benefits from centralised warehousing as opposed to a High Street presence. However they have significant packaging and shipping costs, which are proving a burden when dealing with the issue of returns and who pays for them. The additional staff handling costs can also prove significant, especially when administering returns.

This is becoming a big concern for a volatile sector like fashion and clothing, where, for example Asos  in the UK returns amount to 39% and in Germany 58%.

A major issue is the size labels used on women’s clothes. Another relates to the difference between the item on a screen and the one that is received. I know several women who order many items at a time expecting to return most of them. They choose retailers with pre-paid return policies and often return as many as 90%.

There are two examples of retail outlets that have had consistently good performance even over the last few uncertain years: Next and John Lewis.

Both combine e-commerce and a High Street presence, but crucially, both have introduced a hybrid system, click and collect, where customers can order online but pick up their order in a store.

It will be interesting to see how the online retailers overcome the issue of returns.

Plainly High Street retail is not dead yet.

Private Equity, investment and retail

 

Earlier this year we asked whether Private Equity should be involved in High Street retail after several well-known chains had indicated their intention to float on the Stock Market.

They included Fat Face (77% owned by PE firm Bridgepoint), Card Factory (owned by PE firm Charterhouse) and Poundland (76% owned by Warburg Pincus).

Several of these IPOs have now taken place, and one has been cancelled.  Fat Face has withdrawn its proposed IPO after deciding that it would be unlikely to raise money at the level it had hoped.

This was after shares in Card Factory fell 10% a week after its launch and Pets at Home losing 3% since its float in March 2014, and despite Fat Face having increased sales to February 2014 by 8.2% following the previous year’s pre-tax losses.

Plainly PE investors are adopting a more cautious approach to the old financially driven model for realising value. The old model often involved a public to private acquisition, repaying private equity owners by loading the company with debt, and then flipping it back into public ownership.

While the prospect of a quick exit has focused the attention of Private Equity owners on public markets, all too often the valuations don’t leave much for new shareholders. The recent decline in shares shortly after being floated is a reminder of the old model that made Private Equity owners so wealthy, often at the expense of public owners who sold cheap and bought back expensive.

The new parable of the talents

 

“For to everyone who has will more be given and he will have an abundance. But from the one who has not, even what he has will be taken away.”

This conclusion of the biblical Parable of the Talents (Matthew 25: 14-30) neatly summarises the results of unrestrained and unregulated neoliberal free market capitalism, as propounded by Milton Friedman (Chicago School of Economics), the model by which business and economies have  been run since the 1980s.

But even before the global financial crisis of 2008 (and more so since) economists and academics like Paul Krugman (End this Depression Now), Jo Stiglitz (The Price of Inequality) and Will Hutton (Them and Us) were questioning the model and the latest to wade in has been Thomas Piketty with his dubiously-praised book Capital in the 21st Century.

Piketty’s book claims to provide evidence over two centuries of the ebb and flow of extreme inequality of wealth, leading to his thesis that wealth grows faster than economic output. His conclusion is to heavily tax the wealth creators which proposals have been embraced by those politicians looking to justify tax increases.

Capitalism itself has come under fire since 2008 largely because it has proved such a ruthless and unforgiving system for so many people.  But, it is also argued, like democracy that it is the least worst system for providing the economic growth needed to afford acceptable living standards for the most people.

But is the problem the system itself or its unregulated consequences? And how does any of this matter to the myriad small businesses that are the backbone of the UK economy and its hope for the future?

We would argue that the essential ingredients of a healthy capitalist economy are demand, ideas, investment, resources and leadership – all essentials for running a successful business.

What is a problem, is the outcome that has so badly affected so many people and businesses. In particular the notion of ‘too big to fail’ where the capitalist model of accepting failure was undermined by the political consequences.

This was addressed at a recent conference in London called Inclusive Capitalism, where among others Mark Carney, Governor of the Bank of England, argued for a return to high ethical standards in banking and for recreating fair and effective markets.

Sir Charlie Mayfield, chairman of the John Lewis Partnership, too, defended capitalism as a force for good and for social mobility, but proposed that it required rethinking business conduct and education, encouraging wider ownership  among employees and investing in employee training and development, all of which imply a shift from short term profit-taking or rent seeking to longer term thinking and investment.

All of which, too, is something any small business owner could have told them.

As for Piketty’s claims, at least they are now being challenged by the Financial Times. Increasing taxes on the wealth creators have not increased revenue collection, nor have such policies promoted wealth creation. 

Was St Matthew the first capitalist?

Update on Interest Rate Swaps missold to SMEs

 

The May deadline for banks to compensate thousands of small businesses for the misselling of Interest Rate Swaps (IRS) has now past and banks would seem to want everyone believe that they have resolved matters within the deadline.

But campaigners Bully Banks say that many SMEs will miss out on compensation arguing that banks have rejected most claims for consequential loss.

The compensation scheme imposed by the Financial Conduct Authority (FCA) on the banks allowed for basic redress – a refund for excessive interest paid plus 8% interest. However, affected businesses could also claim for such things as lost profit and legal expenses (consequential loss).

Bully Banks Chairman Jeremy Roe was quoted recently as saying: “I don’t know of any business that has successfully claimed for consequential loss and received reasonable compensation from their bank”.

Meanwhile the British Bankers’ Association claims that banks have met their obligations by informing businesses of the IRS compensation they may be owed by May’s end. The claims for consequential loss are being dealt with case by case but would seem to be being dragged out.

It is three years since Bully Banks first began their campaign into IRS misspelling.  That is a long time for a small business to wait for recompense. 

But for many it seems that the waiting is still not over and the outcome remains uncertain.  In the meantime many such businesses would be well advised to prepare for the worst by revising their business plans with the help of a turnaround adviser rather than wait in hope for a big payout.

Wednesday will be an interesting day for small businesses

 

Results of a survey into lending to small businesses are due to be published tomorrow (Wednesday) and are expected to prove an eye-opener.

The six-month survey, carried out by the British Chambers of Commerce (BCC) and Federation of Small Businesses (FSB) at the behest of Chancellor George Osborne, is widely thought to show that small businesses continue to feel excluded by the banks from lending, despite all the exhortations of the Chancellor and Treasury.

Bank of England figures have, in any case, already indicated that business lending continued to fall in the three months to February 2014 down by £500 million, following a reduction of £3.3 billion in the preceding three months.

Publication of the survey will coincide with the launch of a joint BCC/FSB website called Business Banking Insight (BBI), which is expected to allow small businesses to rate their banks’ performance on services and on understanding their businesses.

It is expected to give small businesses the information they need to compare offerings by banks and by alternative finance providers.

While it may be, as reported in the weekend’s Business Telegraph, that the Treasury will urge banks to increase competition in lending to small businesses, is it likely that bank lending will rise, given the lack of security for new loans and regulators’ requirements for higher capital reserves?

The matter for real concern should be existing loans and the impact on borrowers when interest rates rise.

Be prepared!

 

The news is awash with worries about a new housing bubble and the need to contain it by raising interest rates.

Although the focus of 17% increases in housing prices is mainly on London and the South East, an interest rate rise will not only affect housing costs across the UK, but all debt repayments including loans to small businesses for growth.

While the economy may be recovering there is still a risk that an interest rate rise could trigger the insolvency of many businesses that are still burdened with historical debt.

Low interest rates are keeping quite a lot of businesses afloat where some may need to consider their restructuring options before events overtake them.

Before rates rise, as they inevitably will, it makes sense for a business to take a close look at its cash flow, its business plan and its plans for growth so that it is not knocked off course.

Amid the day-to-day attention on keeping the business running smoothly and efficiently to satisfy customers, do small business owners have the capacity and the time to stand back and assess its fitness for the future?

Would it help to bring in the supportive, outside expertise of a business adviser, a fresh pair of eyes with the time to focus on what adjustments might be needed?

Quality v quantity in social media marketing for SMEs

 

Part of the job of transforming a company in difficulty is finding a market. While the immediate crisis is often a lack of cash, the more fundamental ones relate to funding, sales and margins that are necessary to drive growth and we regularly see a failure to effectively market the goods or services.

A case in point is the use of social media, where it is easy for a small company to find itself running ever faster to stand still and to no effect whatsoever by trying to keep up with all the latest advice on frequency of posting on every available outlet .

How often, for example, do you ‘follow’ someone on Twitter or read their blogs because their insights impress you, only to eventually ‘unfollow’ them because the quality of their posts has deteriorated as the frequency has risen?

For the time-poor small business owner attempting to produce a high volume of good quality material for the ever growing list of platforms including LinkedIn, blogs, Facebook, Twitter, Pinterest, Google+, YouTube and more, it is an exercise in fantasy if they don’t have the time, knowledge and writing skills to do it well.

The DIY approach can damage your company’s brand, especially if it isn’t thought through or properly implemented.  

Far better to have a clear understanding of the company’s target customers, which media they use and what sort of information they value. This can then be used to develop a marketing strategy based on clear goals, whether to generate awareness or generate inquiries and a marketing plan for implementing the strategy. Your strategy might include marketing via social media as a very personal means of communication.

While business owners need to be involved in social media, especially in approving the strategy and monitoring its implementation, there are a number of ways to achieve this without doing it all your self or abandoning it to others. There are plenty of social media marketing firms but SMEs might consider outsourcing specific tasks to one or several specialists. This might be someone carrying out research for relevant topics as a source of content, drafting blogs and posts, editing them in consultation with the you, then posting them online to media that you specify. 

Over time the right specialist can help you achieve your social media marketing goals with the minimum of your time and cost.

In our view quality trumps quantity every time and it is better and more cost effective to produce fewer well-researched and presented pieces than to swamp the e-waves every day because that’s what some “guru” has advised.  Developing your brand may take longer but quality content will not damage your brand unlike trivia that may lead others to ‘unfollow’ you.

Please share your own experience of social media and also any techniques that might benefit others.

From little acorns……..

 

Our regular readers will know that we continue to liberally apply a pinch of salt to reports on the solidity of the much-heralded economic recovery for several reasons.

Firstly, most national news emanates from London and there is still a great gulf between the capital and the rest of the country. Much of London’s optimism is down to the enormous rise in the value of property which has contributed to London home owners feeling wealthier.

Secondly, a little-noticed report in late April in the Daily Telegraph noted the latest data from the Bank of England’s quarterly report showing that business lending, especially to smaller and medium-sized businesses, has continued to decline for the sixth successive quarter.

Thirdly, there is the evidence of our own eyes and ears. We are hearing that small and micro businesses are still facing tough trading conditions. Most are having to work hard for the money they make as well as dealing with continued uncertainty and experiencing the frustration of a long wait for the decision on every contract they pitch for.

Finally, the greatest impediment to recovery and growth remains a fear of interest rates. While they will inevitably rise, the concerns are threefold: 1. the ability to service them, 2. the impact on consumer spending and 3. whether banks and other secured lenders will call in their loans like they have in the recovery phase after previous recessions.

Interestingly, David Boyle, writing in the Business Guardian this week points out that talk of rebalancing the economy (from London to the regions and from financial to manufacturing sectors) seems to have morphed into little more than reducing the trade deficit.

He argues that far more attention needs to be paid to putting money into what he calls “ultra-micro-projects” perhaps by using existing resources such as waste land, unoccupied people and buildings for innovative small businesses that would bring money into the community.

It may not be glamorous, nor is it attractive to the policy makers, but given that the so-called recovery is taking place in a situation where there is still a large amount of business and consumer debt perhaps his idea has some merit?

Are businesses vulnerable to fraud?

 

One our investment portfolio companies, Music Room Direct, is a small internet retail business that supplies musically themed goods via online sales that are paid by credit card when the order is placed.

We were horrified to find that once the goods had been delivered the credit card transaction could be cancelled and the funds recalled. We immediately contacted our bank’s credit card administrator, who sent a form asking us to respond within 10 days.

We complied immediately but were horrified to find that our bank had already refunded the customer.

Fortunately on this particular occasion we were able to contact the customer who acknowledged their mistake  as an accounts department error and repaid the money immediately.

But when we questioned the administrator, Global Payments, which administers credit cards for several mainstream banks, it transpired that there is absolutely nothing we can do to protect ourselves from clients claiming a refund of the transaction.

While we acknowledge that consumers should be protected, this system clearly offers scope for the less scrupulous and fraudsters to order and pay for goods then to reclaim a refund when the goods arrive.

Have you come across this or any other “loopholes” that make small businesses vulnerable in a similar way?

Thinking of trading overseas? Where can you get help?

 

Businesses are being encouraged to sell their goods and services overseas as part of the drive to rebuild and rebalance the UK economy after the carnage unleashed by the 2008 crash.

Prime Minister, David Cameron, has set business a target of increasing exports by £1 trillion by 2020, but, if a recent reported comment by business secretary Vince Cable is accurate, businesses cannot expect any help from Government to do so.

So what is a small or a middle-sized business with little or no export experience outside the EU but with the potential to expand overseas to do?

Well actually, there is at least some Government help via the auspices of UKTI (UK Trade and Industry) which acts as a facilitator in organising trade missions to specific countries and pointers to local contacts and to the local issues to be aware or wary of.

Its website also has a very useful page called “where to go next” which details all the issues that a business will need to address to minimise and protect from risks.  These include legal advice on local employment, tax and other issues, insurance, access to export finance (including services provided by UK Export Finance) and specialist advice on risk and security.

While a business may be able to find all this expertise  relatively easily in London, it can be harder for businesses in the regions and the one glaring piece missing from the whole jigsaw puzzle is the existence of experts who can project manage or help a business to organise all these additional aspects.

Has your business considered moving into export markets? How difficult do you find organising all the elements?  Where have you gone for help?