The Waitrose effect on house-values: a 'chicken or egg' issue?

According to an article* in The Daily Mail, Savills Estate Agents have examined how the cost of homes with a Waitrose in the same postcode compares to those in the rest of the same county.

The verdict was that the typical price of properties with a nearby branch was 25.3 per cent higher. For example, a home in Amersham, which has a neighbourhood Waitrose, typically costs £456,000, while the average for Buckinghamshire is £360,000. The situation is even more extreme in  London, where a local branch can add 50.3% to average prices....

Obviously 'quality of neighbourhood' comes very high on retailers' shopping lists when searching for new store locations, so it could be said that Waitrose tend to build in neighbourhoods where house prices are already at a premium...a good example of the chicken/egg conundrum often faced by NAMs in their attempts to distinguish cause and effect in the day-job... Either way, as the recession continues, it could be said that grocery sales even in 'Waitrose' areas will become increasingly vulnerable to discounter-appeal, the Aldi effect, eventually resulting in a downward pressure on house prices?

Accordingly, in relating house-price sensitivity to 'outside factors', it could be beneficial to get personal and explore the impact of continuing triple-dip recession (you don't really believe that 0.3% increase represents growth in the economy??) on a NAM's biggest asset...

Taking an investor's approach to house valuation, where a house is deemed to be worth twenty times its annual rental i.e. a 5% yield, the Amersham example at £450k would require a rental of £1,875/month to make it a viable investment.. In other words, it could be said that housing in the UK is overvalued, and in the event of continued economic flat-lining, house prices will eventually fall to a 'proper value'...

In most countries outside the UK & ROI, houses are regarded as homes, places to live, and not investment assets, and their use of a conservative 20x multiplier means they have been less susceptible to housing bubbles...and the consequent impact on spending.

All of this means that there is a potential 'housing-correction' in the UK pipeline that will prolong the flat-line demand, and this 'straight-curve' needs to be factored into NAMs' forecasts, in spite of political re-assurances to the contrary....

It follows that opportunities lie in wait for those NAMs that live in 'reality mode' while others await a return to normal.... 

* Housing prices near Waitrose

Use of Fixed Charge Cover to spot a customer going bust?

Given the financial turmoil of the past three years resulting in further retail casualties such as Game Group, and a number of others on the brink, it is obvious that the ‘usual ratios’ such as ROCE, Net Margin, Stockturn and Gearing may be insufficient in terms of providing early warnings of trouble for suppliers.

What makes a retailer vulnerable?
A recent article in Moneyweek.com flags up the fact that if a retailer leases rather than owns its shops, it is faced with regular fixed charges for rent that must be paid, irrespective of the level of sales and profits. Moreover, if a retailer also has fairly high gearing, the interest payments represent an additional fixed cost on the business.

These Fixed Charges are ‘Lease costs’ and ‘Interest on borrowing’ and need to be compared with the ‘available Operating Profit’ i.e. the Operating profit less Fixed charges.   (these can be found on the P&L ('Interest paid' and 'Operating Profit') and early in the Notes to the Accounts ('Lease expense'), after the Balance Sheet
(NB when you find the figures, check them with your finance colleagues). 

In other words, the Fixed Charge Cover (FCC) indicates the ability of a company to pay its Fixed Charges, irrespective of sales and profit performance. Failure to pay can result in liquidation.

The following analysis compares the ‘big four’ multiples in order to illustrate the calculation in practice.

Given that these are the most financially healthy retailers in the UK, other retailers could be vulnerable..

Some of the differences are interesting in that, for instance Morrisons, because it owns most of its shops, and has relatively little borrowing, combined with a good net margin, means that with an FCC of 13.3, Fixed Charge Payments are no burden to the company. However, in the case of Tesco and Sainsburys at 2.9 and 2.2 respectively, FCC is obviously more of an issue.....
Application to other retailers?

However, the real value of the ratio is in its application to most medium and smaller retailers that are running short of cash and are finding that Fixed Charge Payments are pushing them to the edge….

As in all cases of pending liquidation, those creditors that are first to spot the danger, can have the advantage of withdrawing their credit before the liquidator is appointed.
Ignoring the Fixed Charge Cover indicator?

If you still feel that all such matters are the responsibility of the Finance Department, remind yourself that if a customer goes bust owing you £150k, and your pre-tax net profit is 5%, you will need incremental sales of £3m to recover…

In which case, perhaps the application of Fixed Charge Cover analysis to your customers’ latest Annual Reports will help…?

Co-op profitability has a cost

For many years the Co-op was run as a ‘breakeven’ organisation in strict application of its shared-profits culture.

As anyone in mainstream business will appreciate, in order to result in breakeven, it is wiser to aim at say 5% net profit, and the result will probably be 0% or perhaps even 0.5% profit.

Reality of 'breaking even'

Aiming for breakeven in business can be a way of ensuring a loss-making year…

This breakeven approach and its consequential loss-making caused the failure of individual societies, resulting in them being absorbed into healthier parts of the movement. However, the Co-op still remained a confusing and inefficient trade partner for leading–edge suppliers, resulting in minimal levels of support, with most discretionary funds going to major customers that ran their businesses in a more traditional manner.

The penny drops…

Several years ago the Co-op apparently began to embrace the idea of making a profit, and even began to refer to ROCE and other KPIs in their annual reports.

All very encouraging for suppliers as the Co-op began to produce acceptable returns, encouraging increased investment of trade funding as a way of producing a viable alternative to the Big Four.

Testing the change in philosophy

The real test of this change in philosophy required the global financial crisis (a challenge to capitalism everywhere) to cause the Co-op to embrace the other side of the coin, cost-cutting and redundancies.

Latest reports indicate that the Co-op Group is preparing to further slash its food division’s workforce, as it seeks to cut costs amid tough trading at its grocery operation The job cuts in the food property team are part of its Unity Programme. This is the Co-op’s project to deliver a more co-ordinated strategy and efficiencies across over 4,800 retail trading outlets, including pharmacy, banking and funeral care.

The need for persistence

Despite the social cost, the Co-op needs to continue with this strategy, not only to maintain its profitability, but to demonstrate to its trading partners its determination to justify a level of partnership that compares with that currently given to the Big Four.

Above all, realistic suppliers need to support and cooperate with the Co-op, in this, the completion of their transition to ‘mainstream’ retailing…

Arrival of another Nokia moment?

Nokia, a manufacturer of rubber wellington boots, looked for a category that was such an early stage of development that every supplier was a beginner and began to make mobile phones i.e. Long established telecoms suppliers had no real advantage over new entrants.

It seems to me that we have now arrived at another 'Nokia moment' - a time when everything is changed, changed utterly, a time when the rules of the business game have so changed that all suppliers are at square one, demand is new, money has a new value, the consumer is more discerning, competitive set is different......

Opportunities abound for suppliers who treat this as a new market, re-identify consumer need, re-assess offering vs. available competition, re-evaluate routes to consumer, and especially trade partnerships i.e. time to re-evaluate product portfolio, customer portfolio and market match both brands and customers vs. latest consumer need.....

When a little means a lot…

The recession is teaching some of us that opportunities lie within:
A little extra vision
A little extra drive
A little extra value
A little extra difference
A little extra edge
A little extra speed
A little extra care
A little extra energy
A little extra space
A little extra ROI

And who knows, when all of these little advantages are added together, the resulting synergy might even help achieve sales of £1bn per week….!

Five success stories for recessionary times

Given the correct positioning and offer, it is possible for companies to prosper in recession.
In a move away from the doom and gloom the FT describes five private companies that are surviving and thriving in the downturn.

Skincare company Simple are outperforming the category with 11% growth vs. 1% (FT open-domain, folks)
With Poundland offering inexpensive self-indulgence (after all it is recession-time!) with 4% like-for-like, Timpson (keys and shoe repairs)making do with re-soles, Brompton folding bicycles to save on fares, and finally, E Bowman Stately Home repairs (keeping what you have, in good nick, especially the bankers* maintaining asset book values)

* NB See blog below for why retail rental prices will not be reducing to maintain occupancy, on any account!

Making sense in recession (1)

Retail landlords being challenged to apply common sense to an antique 3-month rental, upward-only rent review model (ie better to have a shop occupied at lower rent, than have an empty shell dragging down the environment surrounding those still open, a perpetual reminder to shoppers not to spend too much!)

Retailers turning over some products daily, yet taking 30-90 days to pay suppliers, picking up resentment and bad press in the process ( i.e. As one of the few business models taking cash in at one end, perhaps retailers should ‘buy’ additional margin with shorter credit periods, and solve both problems in one stroke?)

Suppliers still spreading resources and product portfolio evenly over all major customers, when partner-fit has changed radically in the past six months (i.e. time to reappraise entire product portfolio vs. recessionary consumer need, related to recessionary customer-profile in order to allocate recessionary resources (new mix of time money and people) to the recessionary customer profile on the basis of Invest, Maintain or Divest?)

Recession-Buying and the Big Picture

With Retail Buyers theoretically operating on two KPIs - Increases in Sales and Gross Margin, a key issue for suppliers has to be the extent to which buyers are driven by the Big Issues of Recessionary impact upon overall company profitability (ROCE)
Given that ROCE performance drives the share price, and many buyers are being incentivised via share options, then perhaps it is reasonable to assume that they can be encouraged to take a more holistic view in the day-job and add more productive financial measures. The fact that they resort to (crude) demands for lower prices to increase sales and gross margins is just what they do…almost as bad as KAMs being driven by boxes achievement.

The Recession provides a need and an opportunity to do better…

Thrifty US shoppers trade grocery aisles for grocery auctions

The growing popularity of grocery auctions — which sell leftover or damaged goods from supermarkets, distribution centers and food service suppliers — comes at a time when people are stretching their grocery budgets by using more coupons, buying inferior cuts of meat, and choosing store brands over national brands.
The increased interest has fueled growth in the auctions, which can be found in at least nine states from Oklahoma to New York.
Apart from the moral issues re making food more available to those in need, 'past-sellby date' grocery auctions indicate a need for branded suppliers to somehow 're-enter' the distribution process, possibly via a shortening brand code-life.
If not, suppliers run the risk of damage to brand equity caused by the growing disparities between advertising-induced expectation of the brand and the consumer's experience upon opening the box…

Recession-beating retailers: preppy, edgy or just cheap

Superdry is a fast-growing (+31%) British retailer (More) in recession with booming sales, no debt and a store opening programme in the UK and abroad. It has never advertised, never held a sale and has celebrities like David Beckham modelling its clothes not because they are getting paid to do so, but because they seem to like them.
Superdry is just one of the relatively upmarket retail brands (like Jack Wills, Reiss, All saints and Joules) aimed at teenagers and twentysomethings who are unhampered by the financial challenges currently facing their parents.
In other words, revisiting your consumer need-set, and your ability to meet it better than the competition, has to be a way to join the recession-busters..
And cut out anything surplus to consumer need, before the market does it on your behalf...

Recession, what recession?

One of the most confusing aspects of the current recession is why everyone in the shops still looks the same, appears to be buying as before.
(Reminds me of when, as a new brand manager, I drove very slowly to work on the morning my first 1/4 page advert broke in Woman's Own to try to guage the reactions of my target consumer in the street....)
Sure, some high street shops have closed (15% national average, but 40+% in Liverpool, mabey not looking in the right places?)
Customers are still living off pre-christmas stocks (we hope) and the cheque-in-the -post is taking longer to arrive...and customer agreement decisions are floating to higher levels in the hierarchy, and being rejected more often...
Realists know that the recession is here, but it needs time to establish a working pattern..recognisable to all.
However, like bankruptcy, recession starts very slowly and suddenly becomes unstoppable...
This means that NAMs & KAMs have to try to gain the innovator's advantage by anticipating the obvious and taking action now.
Doing a 'what if' on various levels of doomsday scenario is not a case of succumbing to a doom 'n gloom view.
In fact, leading-edge creative thinking recommends that the best ideas can be generated by imagining oneself at the solution stage, and then looking back to try to clarify the pathway... the essence of a what-if.
Success in a recession, as in fast growing categories, is about realism used as a basis for action, faster than the other guy, but slowly enough to work out and implement the options...playing to your competitive differences
All else is detail

Cutting thru the jargon?

News that the government are issuing jargon-guidance to local government offices seems like a breakthrough for common sense. A list of 200 banned words will go countrywide today (more), but is unlikely to include words used at the highest level...i.e.
"Quantitative easing" (no, not a new political-laxative), as we all now know, means the process of producing more money (but not actually printing it) by unconditional crediting of chosen bank accounts, at no apparent cost, except perhaps to government credibility. (No surprise that this drove one reader to write to the Times saying: " I now understand 'quantitative easing', but now realise that I no longer understand what 'money' means")
Why does this all seem like something people were put in prison for, in less sophisticated times?

Eliminating jargon takes enormous moral courage, and explaining ideas as if to a 5yr old runs the risk that understanding may result in probing of speaker's rationale and a demand for change.
The real emphasis should be on explaining why this recession is going to be the worst on record, and last for three years, at least.
It is crucial for NAMs & KAMs to see through the 'doom & gloom' and find ways of maintaining the business, in the meantime, while others 'wait and see'.
This 'new business model' means getting down to the basics of consumer need, using this to rationalise product portfolios, and in turn focus on customer-partners in terms of invest, maintain and divest, all with the aim of achieving an adequate Reward for Risk, i.e Return on Capital Employed.
Not rocket science, but in spite of this, have a look around at all the suppliers still trying to do old things better. Got to be an advantage in being different...