14 January 2016
Week in Brief:BUSINESS AND THE CITY
COMFORT AT THE TILL: Surprise results of the season were those from Big Four grocer WM Morrison who said that like for like sales were up 0.2% in the last nine weeks of 2015. Not all that impressive perhaps, but when the rise and rise of the discount chains is eroding sales performance at all four leading UK chains, and even hitting Waitrose, it is unexpected for Morrison, who have been seen as the weakest of the four leaders. Indeed, it is the first time that turnover has risen in four years. Analysts had been expected a fall of around 2% but quickly attributed this improvement to the new management broom of new chief executive David Potts, who took over from Dalton Phillips after his defenestration about a year ago. Potts has moved quickly to close twenty one loss making outlets and to sell the loss making chain of convenience outlets. Another seven stores will close this year, but that, says Potts, will be the end of the closure programme. On the positive side, Potts has made changes to the buying side, which has brought in lower costs deals that has been passed onto customers along with further savings. And there is more to come – Potts wants to produce another £500m of headline savings for customers in 2016. That will presumably hit the bottom line last year and this, but if he can get loyal customers back into the stores and keep them, then the business should get back on track. This may be further bad news for Tesco, who have not announced their trading figures yet, but must be seeing some familiar techniques at their yellow facaded rival – Potts and his new Chairman Andrew Higginson are both former senior Tesco executives.
REGULAR SPOT: Each week the oil price further confounds the market; how low can it go? The answer last week looked like US$35 a barrel, but that was wrong; this week it fell to $32. And the analysts are now saying that with no signs of any increase in demand, huge stocks in every conceivable container, and the production pumps still running full pelt, the bottom may be $20, though with Saudi production costs at under $5 a barrel and Iranian oil about to come back to the world market, there is no reason why it should stop there. For the West as a net consumer of oil this is not bad news – though prudence would suggest that there could come a time when the oil rigs are abandoned and the shale beds buried when we might see a rapid escalation of the price as OPEC reasserts itself, so we should be prepared for only a temporary advantage. One immediate casualty though are four thousand employees of BP Group, including six hundred in its North Sea business who are to be made redundant in the next few months as the giant producer and retailer struggles to control costs. This follows four thousand job cuts last year, and there may well be yet more to come. The view now is that none of the North Sea producers are making money and that is not going to change in the near future, raising concerns as to whether the North Sea fields will soon have to be mothballed, although BP says it continues to take a long term perspective on investment into production.
WHERE THE MONEY IS: One of the most awaited decisions in the financial sector is what HSBC will do about the location of its headquarters. It was made known a year or so ago that the banking group, concerned about the costs of its UK domiciled HQ and the dampening effect of Western style regulation on its business growth (to say nothing of the cost) was very seriously considering moving back east – which is where it also sees future strongest growth prospects. But times have changed since then with Chancellor George Osborne signalling that he appreciates the problems UK banks face and subtly lightening the regulators hand on the banking neck. And HSBC has found it difficult to work out where it could put the domicile of a bank this size, with growing concerns over the future of Hong Kong, and a feeling that Singapore is not in the right league. But one alternative might be the USA which has also moved to lessen the regulatory burden on banks and has an entrepreneurial spirit that might suit HSBC and a political stability that certainly would. The board is likely to make a decision very soon, having considered the issue several times already.
BUDGET DINING: Greggs is a staple of the British High Street which feels as though it has always been there, selling sausage rolls and pastries and sandwiches at bargain prices. In fact, unless you lived in north Newcastle, forty years ago the chances are that you would not have heard of Greggs; it was only then, still in family ownership, that it started to grow to national prominence. Now, with over sixteen hundred stores it is a budget alternative to Starbucks, Costa, Café Nero and all those places that charge a premium and take an age to give you a cup of hot water with dubiously fresh ground beans. Greggs even has branches in the City, proving that the value formula can work almost anywhere. But the world is always evolving and Greggs has been moving along with it, introducing health ranges and widening the offering, and pursuing a rolling programme of refurbishing the shops. Now it is moving into trendyness territory with the imminent introduction of flat white coffee to go. This has done it no harm at all with the share price up seventy per cent over 2015. The last quarter showed some slowing of comparative growth at 2.3 % but the company is making confident noises about the outlook for 2016.
FINE DINING: Would lunch be a finer experience if you owned the restaurant? Certainly those who saw Sir Terence Conran at his usual table in his very own Blue Print Café overlooking Tower Bridge noted that he always seemed to be enjoying what was on his plate. From that Conran went on to build the chain which became Conran Restaurants, now D&D London, and owners of many tables worth of fine dining, including Le Pont de la Tour, Quaglino’s, and Coq D’Argent, and another thirty one outlets in London, Leeds, Tokyo, New York, and Paris. Now its customers may be able to emulate Sir Terence as the group hopes to float at some point soon – it has just announced that turnover last year was up four per cent. The business is run by Des Gunewardena who has been involved as chief executive from the outset and a few years ago also took over from Sir T as chairman. He has done what many observers regard as almost impossible – grow a substantial chain of up market restaurants whilst maintaining their individuality and quality standards. D&D is owned by the management and LDC, an equity fund, so presumably some sort of exit strategy will certainly be needed in due course – especially as the group may be valued in an IPO at over £100 million.
KEY MARKET INDICES: (at 12th January 2016; comments refer to changes on one week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.59% (steady); 5 year 1.25% (falling).
Euro€: 1 mth -0.15% (steady); 3 mth-0.09% (steady); 5 year 0.14% (steady)
US$: 1 mth 0.62% (steady); 3 mth 0.86% (rising); 5 year 1.50% (falling)
Currency Exchanges:
£/Euro: 1.34, £ falling
£/$: 1.45, £ falling
Euro/$: 1.08, € rising
Gold, oz: $1,106, slight rise
Aluminium, tonne: $1,471, steady
Copper, tonne: $4,401, falling
Oil, Brent Crude barrel: $31.85, further heavy fall
Wheat, tonne: £111, steady
London Stock Exchange: FTSE 100: 5,871 (falling). FTSE Allshare: 3,252 (falling)
Briefly: The Christmas break is now over, and the markets resumed much as before; commodities continue to be weak with copper still trading down and oil dropping. Gold is the one potential glittery spot which may reflect rising tensions in the Middle East. The LSE reversed post-holiday gains and FTSE100 dropped back below 6,000; both UK and USA medium term (5 year) interest rates fell. Sterling is still weak against the dollar and continues to give up its recent rise against the Euro.
