21st Century Leviathan

The recent commissioning of the world’s largest container ship the Maersk's Majestic underscores the competitive nature of international shipping.

 

The vessel is a quarter of a mile long and has the capacity to transport 18,000 20-foot containers.

 

Manufacturers of electronics and mobile phones are shipping cargo by sea because competition was eroding their profit margins focussing their attention on cutting delivery costs.

 

Each 20 foot container can hold 13,000 smart phones with a transportation cost from China to Europe of 7 pence per unit and a transit time of approximately 25 days.

 

Currently there are over 6000 container vessels operating with a significant number engaged in the East to West trade routes.

China’s economic success remains export driven as illustrated by the cost of shipping a container. Inward from China to Europe costs around US$1500 with the reverse journey only commanding a rate of around US$700.

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 expensive.

Squeezing till the pips squeak

Against the current economic backdrop companies are constantly looking for ways to boost their bottom line.

 

Particularly over the past year we have seen companies trying to extend their payment terms by all manner of means – some fair, some foul.

 

In addition to this many are looking into the question of obtaining “rebates” from their suppliers.

 

Some retail chains have recently announced that they will be introducing a rebate scheme with effect from next year. Suppliers will be asked for a 0.75% rebate if their sales grew by 10%.

 

Earlier reports have suggested said the rebate would rise to 5.25% if sales grew by more than 50%.

 

Amongst suppliers there is always a battle to secure sales but there also has to been a commercial realism.

 

If by securing so-called “prestige” business the overall operating margin carries a disproportionate return then it becomes a question of commercial realism.

 

In such situations it may well be argued that such business is best left to others.

 

 

Keeping all the plates spinning

Managing a business in today’s environment is a complex affair – it has been likened to 3 dimensional gaming.

Particularly for the owners of SME’s it has never been harder to keep track of the various elements which are buffeting the business.

Now might be an appropriate time to run a check over those areas of the business most likely to cause problems in the coming months.

It is a self-evident truth that many a crisis could have been averted by timely intervention.

This is where an independent appraisal can identify areas of potential concern but more importantly the ways and means by which to address them.

The question that needs to be answered initially is – how long can I keep all those plates spinning?

 

Consumer confidence – weighed in the balance

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 that 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. Further evidenced this week by Prime Minister Cameron’s gaffe over the price of bread.

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.

People are looking for value as evidenced by the latest results from the discount supermarket group Aldi whose UK pre-tax profits surged 124% to £157.9m in 2012, with the company saying it attracted a million more shoppers through its doors.

The discount chain's latest accounts posted at Companies House show revenues up 41% to £3.9bn last year.

The economic recovery will only be sustained once the man in the street has regained confidence.

 

 

Adding value

When attempting to boost the bottom line there are 2 obvious courses of action, cut operating costs and generate additional revenue.

Many organisations opt to reduce staffing numbers as a quick fix but there is a danger that in line with reduced personnel there is an accompanying decline in operating standards. In such circumstances customers often choose to vote with their feet.

The Sales Director only has one shot in his/her armoury namely increase sales. Sales targets can always be raised but a sense of commercial realism also needs to be applied.

If you are marketing a totally unique product or service the task is easier but for the most part there are many companies offering a similar range of products in a broadly similar price range.

In many instances companies would be advised to make customer service their USP but this requires the commitment of a dedicated work force not one that is pre-occupied with the spectre of further redundancies.

 

Holding a tiger by the tail

  

Without doubt one of the most difficult challenges a business faces is diversification. Very often a company is faced with the dilemma of diminishing revenue returns and a tired business model which is either irrelevant or obsolete.

Diversification is seen as the solution to this dilemma. However, the mechanism for achieving this objective can be particularly difficult.
The first step is examining why the current business model is not working. This requires an honest appraisal from the Management in respect of their performance.

Then the areas of diversification have to be closely considered, very often people plunge into businesses in which they have little knowledge or experience and the results pretty quickly show up these deficiencies.

Thirdly one should always respect geography it may be very tempting to consider that there are opportunities just waiting to be picked up but to underestimate the advantage of local knowledge and conditions can again prove costly.

In essence diversification can provide the answer to a company’s need for increased revenue but without a clearly defined strategy it can equally provide another drain on an already embattled balance sheet

 

All that glitters

During the UK recession one business which went from strength to strength was pawn broking. As the price of gold soared and people sought quick and ready access to funds many opted to pawn jewellery.

Pawnbrokers such as Albemarle & Bond were among the beneficiaries of the financial crisis, with more people using their services as mainstream banks offered fewer loans

Nothing lasts forever and the 30% decline in the value of Gold since the end of 2011 is having a seriously damaging effect on the pawn broking industry. Albermarle & Bond the UK’s second largest pawn broking group is suffering the consequences of a fall in gold prices combined with a spiralling debt book.

At the end of December the groups borrowing stood at £50.3 million whereas profits for the year to the end of June are forecast to have fallen by around 50% to £12 million.

Now with the spectre of breaching its banking covenant there is the irony of a pawn broker looking to seek funds from its shareholders or trying to raise additional funding from other sources to secure its survival.