Toughing it out

Viewing the general air of gloom that now prevails in the current climate it is hard to remember the halcyon days of easy money (credit) and the all pervading feeling that the party would never stop.

 

There is no doubt the world and his wife embarked upon a collective spree for which we are now picking up the bill.

With the benefit of hindsight the warning signs were there to see but these were readily ignored.

One quotation springs to mind “they that sow the wind, shall reap the whirlwind".

The problem now is that as always there is an over-reaction and just as we never saw the top there is also the certainty that we will not see the bottom.

 

What is needed is a clear and unemotional assessment of the current climate, whilst few would dispute that difficult times lie ahead we are far from a financial Armageddon.

 

As always the markets are driven by fear and greed but the importance of sentiment should not be overlooked. Until and unless the Doomsayers gain a sense of perspective it will be hard to imagine business and economies on a sustained stable footing.

 

The Chinese Dragon catching its breath

Analysts report that growth in China's manufacturing sector slowed in April,  adding to concerns about the country's economic recovery.

A drop in new export orders was blamed for the decline, a sign of weak global demand.

Last year, China's economy grew at its slowest pace in 13 years.

New export orders contracted after a temporary rebound in March, suggesting external demand for China's exporters remains weak.

Banks have cut their full-year growth forecasts for China after an unexpected slowdown in the first quarter.

Growth in gross domestic product for the first three months of the year declined to an annual rate of 7.7%, compared with 7.9% in the previous three months.

The World Bank, as well as private sector banks, said they expected growth to slow to 8% this year, though that is still high by global standards.

The government has said it will take steps to try to support the economy.

European markets are crucially important to China but with European economies in a fragile state the implication for export growth is obvious and the potential for the Euro debt crisis to spread would result in a further decline in export growth in the months ahead.

Triple dip avoided but much still to be done

The Fitch credit ratings agency has downgraded the UK to AA+ owing to a weakened economic outlook.

The move, after Moody's downgrade in February, came as Chancellor George Osborne defended the government's austerity plan.

Fitch said its downgrade primarily reflected a weaker economic and fiscal outlook.

As the UK government wrestles with its debt burdens the only certainty is there is no silver bullet.

 

The all pervading sense of nervousness will continue to impact on all business sectors. The days of easy access to finance are long gone.

 

Companies need to focus on their exposure at every level ranging from inventory levels, rate of stock turn and the integrity of the debtor’s book.


Operating in this current climate of austerity will provide the ultimate challenge for those managing companies, be it an SME or a large multi-national corporation.

“Showrooming” adds to woes of hard pressed retail sector

  

The rate of retail outlets closing in the UK shows no sign of easing following a grim 2012, when a net 1,779 closed. That represents a 10-fold increase from the 174 in 2011 and reflected casualties including Game Group, JJB Sports, Blacks Leisure and Clinton Cards. Although many of the companies were salvaged in one form or another, hundreds of stores closed. 

With the rise of online shopping the chains did not need as many stores as they did in the past, a trend that looks set to accelerate this year. 

People have got less money in their pockets, employment is tighter and also we've seen a massive growth in the supermarkets in terms of non-food retail.

Now further adding to the problems of the “bricks and mortar retailers” is the rise of “showrooming”. Essentially customers going into a shop to browse but in reality an exercise to check out goods and then search on line for a more competitive deal.

The growth of online shopping is a juggernaut now accounting for 12% of retail sales - and forecast to be at least 30% by 2020. 

Those retailers who fail to exploit all areas of multi channel marketing whilst finding themselves saddled with the burgeoning costs of maintaining retail outlets will continue to suffer and produce more casualties in the sector in the coming months.

 

Companies struggling to secure funding

Latest figures from the Bank of England confirm that lending to businesses in the UK has fallen by a further £4.8bn in the three months to February.

That represents a fall of 4.4% in loans to companies and small firms from the same period a year earlier.

Despite previous rhetoric it is now apparent that some banks are still trying to increase their reserves, rather than lend more money out. 

As the Banks continue to labour under the weight of their previous errors the knock on effects are percolating down through the economy.

 

With both new and additional funding hard to access – now is the time to take a long hard look at your Company’s financial situation.  

Any approach to your Bankers could be very uncomfortable in the current climate so it is necessary to demonstrate you have full control of your exposure. Make sure that the Debtors book makes for healthy reading and that inventory control and stock turn are being monitored very closely.

Ironically it is the activities of Banks themselves who precipitated the ongoing crisis but that will not prevent them from playing hard ball with anyone trying to seek support for additional funding in the current climate.

 

Respect geography or suffer the consequences

 

One of the most valuable commodities available to any organisation is local knowledge.

How many times has a venture ended badly owing to a basic failure to understand and deal with local market conditions?

Tesco is winding up its US chain of 199 Fresh & Easy shops, which have never made a profit, at a cost of £1.2bn.

As well as the US withdrawal, Tesco is exiting Japan and said it would take "a more measured approach to our growth in China".

This is a classic case of going for growth and failing to understand that a successful domestic business strategy does not always travel well.

For companies wishing to establish a commercial operation in the UK they are faced with a mature and sophisticated market. Although offering different challenges to operating in for example a developing market there are still obstacles in trying to establish a presence.

Operating overheads present a crucial challenge and this is where we can assist you to achieve a cost-effective solution to marketing your products in the UK. 

Take a look at our website www.glbconsulting.co.uk to see the services we offer.

 

Avoid damaging relationships with Suppliers

 

The most important component in any business relationship is the question of trust.  

The ultimate demonstration of trust and good faith is when a Supplier delivers goods to a Customer on Credit terms.  

It therefore is incumbent on the Buyer that they acknowledge this act of trust and observe the agreed payment terms.  

With the current pressures it is easy to understand the temptation of “pinching” a few days extra credit but this type of behaviour soon begins to pall.

Once a Supplier feels that their Buyer is taking undue advantage the relationship is damaged sometimes irreparably.  

For any relationship to be sustained there has to be mutual benefit. When a Buyer gains a reputation for persistently crossing the line the merit in maintaining the account is called into question.

 

Opportunity versus risk - the yin and yang of commerce.

 
Every business transaction contains an element of risk, yet at the same time how adequate are the mechanics and systems that are in place to manage these risks?

In recent years we have witnessed just how costly the laissez faire attitude to risk was in many institutions be they large corporations or smaller SME’s.

In the never ending quest for larger profits many of the saner measures of business were jettisoned.

An analysis of the most spectacular flame outs all have one common denominator – the architects of these calamities went hurtling over the cliff like lemmings.

There has never been a more pressing need to examine all areas of exposure.

A forensic analysis of the current Debtors Book might make for uncomfortable reading but like most unpleasant tasks it should not be ducked.

It is always preferable to take remedial action such as a write down whilst you are in control of your own destiny rather than have a 3^rd Party appointed to do it for you .

 

Auditing the Auditors

In recent times the flak following the recent failures in the global financial system has been largely directed at one sector i.e. the Banking industry. One group of participants have remained largely unscathed for their part in the train wreck, the Auditors.

There are now signs that the activities of this sector is coming under closer scrutiny.

Auditors are in a very privileged position and their integrity is paramount.

In the US authorities have filed criminal and civil charges against a former senior partner at accountancy giant KPMG over alleged insider trading.

It is claimed that Scott London passed information to a golfing friend, who then traded on the share tips.

KPMG resigned earlier this week as auditor to US companies Herbalife and Skechers after claims about its Los Angeles-based partner emerged.

However it is not just about illegal activity, there are many instances of conflict of interest such as taking on consultancy work for Clients and becoming too cosy with management teams.

John Griffith-Jones, the former boss of KPMG (and now head of the Financial Control Authoity) is under pressure after it emerged that he was involved in setting the terms of an investigation into the collapse of HBOS despite the fact that KPMG were auditors to HBOS from 2001 to 2009.

At the lower end of the scale it is all too easy for companies to bully the young staffers sent in to do the grunt work.

What chance has a newly appointed auditor walking around a factory warehouse to adequate value stock?

In reality they have to rely on the company for “valuations” and this can result in a totally inaccurate picture being presented. Very often the senior management of the company being audited and the auditors can end up signing off on a “nod and a wink”.

The validity of a company's accounts reflects both the integrity of the company which is being audited and that of it's auditors.

The cost of failing to grasp the nettle

There is a growing perception that bail outs organised by the EU are in effect kicking the can down the road. For example Portugal and Ireland are to be granted an extra seven years to pay back their emergency bailout loans.

In its latest report reviewing the Irish bail-out, the IMF criticised the "inadequate progress" of Irish banks.

There is particular concern that the Banks are failing to address non-performing loans and tackling home repossessions.

The IMF also expressed concern that Irish banks are still losing money even before putting cash aside to cover those bad loans.

As states such as Greece, Ireland and latterly Cyprus edged closer to the precipice there was a general sense of relief that defaults had been avoided and therefore the crisis was past.

As with all things in life there is also an element of wishful thinking, in the case of Cyprus the extent of the problem was not fully recognised.

Latest analysis prepared by the country’s creditor’s forecasts that the cost of the bailout has increased to 23 billion Euros compared with the original costs which was put at 17.5 billion. This begs the question how many other countries have under-estimated the scale of their economic problems.

It is an incontrovertible truth that unless the period of grace is used to good effect then the problem will have merely been parked and will come back to haunt.

 

Looking to the East

 

Latest statistics from the Asian Development Bank (ADB) for developing Asia, which covers 45 nations, predict GDP would grow by 6.6% this year and by 6.7% in 2014.

The group of developing Asian nations includes major emerging economies such as China, India and Indonesia,

Economic growth across the group slowed to 6.1% in 2012, the lowest rate since 2009 when it was 6%.

Various factors are buffeting the region; strong capital inflows could feed asset bubbles. Political discord surrounding fiscal debates in the United States, austerity fatigue in the euro area, and border disputes in Asia could jeopardise macroeconomic stability.

Ongoing sluggishness in the United States, Euro area, and Japan suggests that developing Asia must continue to shift toward more domestic demand and trade with emerging markets.

The ADB forecast China's economy would expand by 8.2% this year, up from 7.8% last year, on the back of strong domestic demand and better export performance.

China's President, Xi Jinping, has recently stated that the days of double-digit economic growth in the country were likely to be over.

European markets remain crucially important to China but with European economies in a fragile state the implication for export growth is obvious.

The potential for the Euro  debt crisis to spread would result in a further decline in economic activity in the months ahead.

Telling you what you want to hear

 

One recurring theme from the analysis of losses made in the financial sector is that the Management were totally unaware of the risks which their institutions were running.

To be effective, risk management and risk controls rely on the people operating them.

As has been well documented all too often the corporate culture is dominated by fear and greed and these together make for a toxic combination.

When strategies fail and trading positions spiral out of control these two elements come very much to the fore. Fear can often lead to individuals embarking on an even more reckless course of action in the misguided belief that it will all come right – the gambler’s doubling up mentality.

At the same time recklessness is often driven by greed; the larger the risk the greater the reward should it prove to be a successful course of action.

Against this background it is incumbent on the Management to ask the uncomfortable questions and not merely rely on the assurance that all is well and going to plan.

It is always worth remembering that if something looks too good to be true it invariably is.

Today’s mantra – keep hacking away at the costs

  

With operating margins being continually squeezed it is imperative that costs are rigorously monitored.

 

Every sector is seeing the impact e.g. FedEx the world's second largest package Delivery Company have seen their customers moving business from air to slower and less expensive routes.

 

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

 

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel makes air freight too pricey.

 

Facing marked resistance from consumers to price increases and a greater level of competition those companies who are unable to control costs have an uncertain future.

 

Difficult times forge strong alliances

 

All too often the focus on the current economic background accentuates the negative. However one of the benefits emerging from the current business climate is the value that can be placed on a mutually beneficial Customer/ Supplier relationship.

 

As increasing numbers of business operate on a “just in time” inventory basis it is vital that a good understanding exists between supplier and Consumer.

 

In as much as a Supplier will be prepared to go the extra mile to ensure that his Buyer receives his goods on time and in good order so it behoves a Buyer to ensure that he pays as required and is not abusing the goodwill of his Supplier by “pinching” some extra period of credit.

 

If both parties work together in a professional and commercial manner then it will strengthen the relationship and both will emerge from the current difficult situation with a renewed confidence in each other and a better based business for the long term.

 

 

Wake up and smell the Coffee whilst you can

Retailers in the UK are rationing sales of powdered baby milk because of a surge in demand in China.

Danone, the manufacturer of Aptamil and Cow and Gate baby milk powder, said most supermarkets were introducing a restriction of two cans per customer.

It said the limit was to prevent some individuals from bulk-buying baby milk for "unofficial exports".

Danone said in a statement: "We understand that the increased demand is being fuelled by unofficial exports to China to satisfy the needs of parents who want Western brands for their babies."

Supermarkets Asda, Sainsbury's, Tesco and Morrisons said the purchase of certain brands would be limited to two units per customer per day.

Though this may seem an extreme response to a specific issue (the reaction to locally produced contaminated product), there is no denying the potential demand from China for food and agri products.

China will continue to be a major buyer in the international markets in response to demand from its burgeoning middle classes.

 

By 2020 China’s consumers will be spending an annual £ £3,830 billion and their Indian counterpart’s £2,200 billion contrast this with British consumers who spent £937 billion last year.

 

A Chinese person born in 2009 will consume 38 times as much over his lifetime compared to one born in 1960.

 

With a population in excess of 1.3 billion (approximately 20% of the world’s population) imagine the implication for Western consumers should an early morning cup of coffee become the beverage of choice!

 

 

Eurozone- few signs of comfort

 

The rate of unemployment in the Eurozone has hit a record high of 12%, official figures have shown.

The number of people unemployed in the 17 member states rose by 33,000 during February, to hit 19.07 million, the statistics agency Eurostat said.

The Eurozone economy is currently in recession, having contracted for the past three consecutive quarters. Early indications are that there was further contraction in the first quarter of 2013.

The short-term economic outlook remains bleak, given that many governments are cutting spending and raising taxes as they struggle to control high deficits and rising debt levels.

The austerity measures in many countries - mostly in southern Europe - have combined tax rises with cuts in salaries, pensions, benefits and social services.

 

Apart from the social cost the spectre of unemployment represents a major threat to economic recovery within the EU together with all the global implications it brings.

 

 

It’s the same old song

IFormer Goldman Sachs trader Matthew Marshall Taylor has pleaded guilty to defrauding the bank with an $8.3bn (£5.5bn) unauthorised trade in 2007.

Taylor was dismissed in December 2007 after the incident, which resulted in a $118m loss for the Wall Street bank.

Yet again it is the familiar sorry story of a trader exceeding his position limit in pursuit of a large bonus with the management complicit through their own greed or ignorance.

It’s only the “epic losses” which get the publicity but there is no doubt that many similar situations where the financial fall-out has not been so spectacular have been quietly written off.

The banks are keen to talk about cultural change and a back to basics approach.

These statements are meant to allay the concerns of not only the shareholders but also the regulatory bodies.

However there is a world of difference between intent and action and there will undoubtedly be more “spectaculars” reported in the coming months. 

 

The cost of stating the obvious

Having received fines totalling £290m by UK and US regulators for attempting to rig the key Libor interest rate between 2005 and 2009 Barclays appointed corporate lawyer-turned-investment banker Anthony Salz to carry out a review of the Banks operating systems and procedures.

The report’s findings are not surprising, these included an "over-emphasis" on short-term financial performance, reinforced by a bonus and pay culture that rewarded money-making over serving the interests of customers and clients.

Salz also commented that there was a sense that senior management did not want to hear bad news, and that the employees should instead solve problems on their own.

The report is a comprehensive document totalling 236 pages, which cost the Bank almost £18 million in fees (well its only money).

No doubt the present Management of the Bank will take some comfort from the public mea culpa but essentially the report only served to highlight that which was already well known.

In concise terms the failure comes down to short-termism combined with a general failure of management.

Will anything change? The jury is still out.

 

Chill wind blowing through the retail sector

 

Very often the best indicators are the least sophisticated. The UK retail sector remains in a very fragile state – the clearest evidence of this can be seen as you walk down any High Street.

One in 10 retailers are now classified as “zombie” businesses who find themselves in the precarious position of servicing the interest on their debt but unable to repay the capital.

Retailers are struggling against the backdrop of poor Christmas sales and the adverse weather for the first quarter of 2013 which has severely impacted on footfall.

At the same time the rising number and popularity of charity shops tell underscore that many families are struggling. Consumers struggle with debt and job insecurity.

As the knock on effect percolate back down the chain many businesses will suffer.

These conditions will lead to some extreme measures e.g. the recent demand from the owners of Laura Ashley asking for “an immediate price reduction of 10% from suppliers” an action which has been described as tantamount to “killing its own suppliers”.

 External factors by definition are difficult to handle but at the same time in-house disciplines can at least provide some insulation.

Cash-flow will remain difficult to manage so as always strict governance of Debtor and inventory control will provide some measure of comfort.

Do you really know your Customers?

 

In a few short years, rapid advances in technology have transformed the way we all conduct business.

Much of business is today conducted in the so-called virtual world of paperless trading. However, we should never forget that essentially commerce is about people trading together.

Whilst Computer “stop loss” mechanisms are the order of the day for “paper trading” the reality of the real world is that goods need to be moved from point of production to point of consumption and obviously this cannot be achieved via a computer terminal.

There is an old adage “know your customer,” this dictate has never been more important than in these uncertain and dangerous times. One of the biggest problems associated with the rise of e-commerce has been the accompanying lack of personal contact between a company and its customers.

Obviously this is not an issue for an online retailers selling products over the net and being paid via a Debit Card or Pay Pal etc.

However, there is an increasing tendency for B2B sales to be concluded by email or even SMS. The personal element has been lost and so has the identity and customer relationship. The surest way to avoid problems is by knowing your customer and understanding their business.

It is not possible to nurture this relationship and mutual understanding thru a key pad and email ordering system.