The hidden cost of cheap food

In a market where prices are squeezed to the absolute and in order to protect margins suspect practices and questionable ethics will inevitably come to the fore.

 

Recently the CEO of the Iceland Frozen Food chain cited the purchasing policies of local councils blaming them for driving down food quality with cheap food contracts for schools and hospitals.

 

Independent butchers (an endangered species in themselves) are trying to make capital by citing their credentials as reliable suppliers who have complete traceability of their product.

 

However the collapse in the number of independent retailers in face of the competition from the all powerful supermarkets means that this is likely to be a last hurrah rather than a return to the golden age of the British High Street.

 

In the UK overall household spending has failed to increase over the past 12 months.

 

This illustrates that higher inflation (currently 2.9%) and slow wage growth are squeezing household incomes and that is being felt in the UK's shops.

 

The current economic reality will continue to underpin the demand for cheap food but in satisfying this demand as was evidenced in the recent horse meat scandal there will be accompanying risks.

 

Chill wind blowing from the East- German exporters catch cold

Speaking in Washington, Lou Jiwei China's finance minister has hinted that the country’s economic growth may fall below 7% in 2013, but said that even this may not be the "bottom line".

That figure is below Beijing's official 7.5% target, and below most economists' forecasts for the country.

Mr Lou's comments highlight how rapidly the country is slowing down, as Beijing seeks to rein in a construction boom.

He also caused some confusion by implying that 7% was now the government's target, even though the target was set at 7.5% in March.

The government is particularly concerned about "wealth management products" (WMPs) - high-yielding investments sold to citizens with spare cash.

WMPs have been increasingly churned out by the banks - particularly the smaller banks.

The authorities fear that they are being used as a sneaky way to raise extra money to pour into the property market and other speculative activities.

However, WMPs also play a vital role in financing small privately-owned businesses, including China's dynamic small-scale exporters.

The German car industry is already feeling the impact of weaker export demand from China with Opel closing one of its factories next year. In China there are already reports of cash starved motor dealers refusing to deliver cars to car lots without upfront cash payments.

Any additional stuttering from the engine key to global recovery would have damaging impact on US and EU economies.

 

 

To the heart of the matter

 

One of the tests of the English legal system is “what would the man on the Clapham omnibus think?”- basically this is the reaction to any problem or situation that could be expected from a reasonably educated and intelligent but non-specialist person.


In the current economic climate many companies would do well to ask “what does the man standing in the queue at the Clapham Supermarket checkout think?”


The problem is (as we see all too regularly) many people running businesses (or for that matter senior politicians) are too removed from the realities of life to effectively understand the economic difficulties faced by the ordinary consumer.


It is a very easy exercise, a few minutes spent in the supermarket or on a garage forecourt will give a true insight into the problems and frustrations currently felt by the ordinary consumer.

If the squeeze on household incomes continues, Britain could be left in a fragile position, with even moderate additional increases in interest rates leading to a major surge in families with dangerous debt levels - especially among worse-off households.

Since 2007 the number of households spending at least 50% of their income on repayments has dropped by 270,000 to 600,000 because of falling interest rates.

But a rise in interest rates in the next four years could see Britain return to higher levels of household debt than before the financial crisis, which was sparked by US homeowners being unable to service their mortgage debt.

Until such times as the man in the street starts to regain some confidence there is little chance of economic recovery having a sustained momentum.

 

 

Playing the long game

 

The impact of the French Revolution? - “too early to say.”This was the response from Zhou Enlai  to questions in the early 1970s about the popular revolt in France almost two centuries earlier – buttress China’s reputation as a far-thinking, patient civilization.

 

The former premier’s answer has become a frequently deployed cliché, used as evidence of the sage Chinese ability to think long-term – in contrast to impatient westerners.

 

Fast forward to today and the ability of the Chinese to play the long-game has never been in more evidence.

 

In a single decade from 2001 up to 2010 Chinese trade with the rest of the world increased from £325 billion to £1.9 trillion.

 

Since 2005 China has invested £320 billion across the globe with 75% of this in developing countries.

 

There is an insatiable demand for raw materials to fuel the economic growth in China and commodities such as Oil, Minerals, Precious Metals and Fuel are the prizes for these investments.

 

The ongoing crisis in Western economies has provided ample opportunity for China to assert its economic strength and China has now usurped the US as the largest foreign investor in Germany.

 

Chinese companies are investing in such diverse areas as the French Wine industry or making acquisitions in the US/European Food Industry and this will undoubtedly continue as China accelerates its move into Western markets.

At the same time China has continued to extend its influence in Africa. In the latest development  China has agreed to give Nigeria a $1.1bn (£700m) low-interest loan to build much-needed infrastructure.

The money will help build roads, airport terminals in four cities, and a light-rail line for Nigeria's capital.

China will continue to invest heavily in Africa at it relies on it for oil and other natural resources.

The integrity of financial reporting

 

There is a growing trend in companies to camouflage poor performance with deliberate misreporting and suspect off-balance sheet shenanigans.

 

This practice is increasing, think of the recent problems with losses incurred by various Banks. It underscores the need for senior management to set clear defined operational and reporting procedures.

 

In many companies the Directors simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run. This was graphically illustrated by the recent testimonies of senior bankers to the House of Commons Select Committee looking into banking failures.

 

In trading environments it is not uncommon that totally unrealistic profit targets have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets.

 

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading. In the desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is!

 

If your company is bucking the trend in these difficult times it may well be that you are implementing a winning formula.

 

However history tells us that it is often a prudent course of action to look under a few stones – just in case.

 

Reading the runes

 

Very few companies implode like a supernova. The distress signals are visible for some time before the flame out.

Any analysis of a company’s published accounts or even monthly management accounts are by definition “out of date”.

It is vitally important that all counter parties are monitored closely and “real time”. In the case of customers look out for unusual ordering patterns, repeated delays in payments – these are early indicators of more serious problems ahead.

For any organisation facing mounting problems it is obvious that the solutions will of necessity be painful. However, radical and decisive surgery is often the only way to ensure a patient’s survival.

Many companies adopt the Mr Micawber attitude that “something will turn up”. In the overwhelming majority of such cases the only people likely to turn up are the administrators/liquidators.

Be it merely inertia or fear of addressing the issue the outcome will remain the same.

 

Everyman for himself

 

There is a growing trend from companies switching all their Suppliers to lengthened payment terms.

 

Such terms can only be served by larger organisation with adequate cash reserves. For the small to medium supplier it further ratchets up the pressure as Banks are unwilling to increase their credit lines.

 

For some time companies have sought to stretch the length of their payment terms by all manner of means both fair and foul.

 

As profit margins are further squeezed by increased operating costs the importance of maintaining cash flow is vital.

 

Business is hard-won in the current climate, but above all there has to be a commercial raison d’être for any transaction.

 

Mutual reciprocity has to be the basis for the Customer/Supplier relationship for it to remain worthwhile.