28 April 2016
Week In Brief: BUSINESS AND THE CITY
MOVES ON THE HIGH STREET: This was our first headline last week, looking at changes in estate agency, but it equally fits changes in retail, with the failure of both British Home Stores (“BHS”) and Austin Reed this week. Both are fine old British firms, both heavily exposed to fashion, and both have failed to move with the times. BHS was long owned by Sir Philip Green, owner of the Arcadia Group which encompasses Top Shop, Top Man, Dorothy Perkins and other high street names. Green has long been regarded as one of the great and good of British retail with generous support of many charities, and in his long-term sponsorship of the London College of Fashion which has made working in retail both more professional and more fashionable. At the moment though he is under an unaccustomed spotlight, as to both the complex offshore ownership of his businesses and the terms of the sale of BHS a year ago (for one pound), in particular the way in which the BHS pension fund was dealt with. 11,000 jobs are directly in danger from the failure of BHS, which appears to be beyond rescue in whole, and probably even in parts, though it occupies some pretty prime high street real estate. But not only have the jobs gone, so has any ability to top up the dramatically underfunded pension fund, the cost of which – £200m is the suggested figure, though the deficiency is actually over £500m – will now probably fall on the Pension Protection Fund. The Pension Regulator has announced that they will be examining both the current owner’s (Retail Acquisitions, a consortium led by Dominic Chappell) and Sir Philip’s conduct of the pension obligations of BHS, especially in light of the large dividends paid to the Green family interests at a time when the scheme was already under-funded. Sir Philip has offered to assist by injecting £80m into the scheme, but it may need more than that to calm down those baying for him.
Austin Reed also went into Administration this week, after prolonged rumours as to poor trading. Austin Reed made its name as a purveyor of upmarket suits to professional men, and in more recent years has diversified into tailoring for women and ownership of the Viyella brand. It is a declining market, trapped between the cheap off the peg suits being offered by (for instance) Top Man and Marks & Spencer, and the made to measure suits which are now favoured by many professionals and executives and often sold by “travelling tailors”, who attend the well-dressed types at their offices. Austin Reed formerly both made suits (at a modern factory in North Yorkshire) and retailed them on the high street, but the manufacturing has gone overseas and the retail chain has shrunk to 150 stores, albeit with a well-regarded on-line operation. Still, nothing saves a retailer in a decaying market. The Administrator intends for the time being to keep the shops trading in the hope of finding a buyer who would like a retail chain in good locations and might, perhaps, refocus the business. In the meantime, 1,000 jobs are at risk.
STERLING PERFORMANCE: With the announcement of the Referendum date, sterling began to slip against most major currencies, the slip turning into a slide after Boris Johnson came out for Brexit and “Leave” seemed to become a possibility. However, over the last couple of weeks sterling has first stabilised and now seems to be trending the other way. The “Remain” camp says this is because the opinion polls show a continuing majority who will vote In; the “Leave” camp says it is because the margin is narrow and the Undecided voters, who could swing it either way, are likely to vote “Leave” on the day. The most likely reason though is that the currency movement is mainly being driven by economic fundamentals. The basket of economies making up the value of the euro are not doing well at the moment and the value of the euro might well be expected to slip, just as it is doing. With the dollar it is more difficult to call, as the American economy is still doing well, but there signs of some faltering and there is certainly some political uncertainty around.
Some commentators also point to sterling shorting being unwound from positions that may look over-cooked at the moment and to the fact that demand for UK paper is good – a UK Government bond auction was well oversubscribed last week. In an uncertain world, the UK remains a safe haven.
NICE WORK: More reasons to blame the Referendum: the recently released work related figures for the UK economy showed an (admittedly small) fall in employment and also that wage growth was slower than had been forecast: 1.8% as against forecast 2.1%. To employers that might sound good, less need to increase wages and a bigger pool of alternative labour, but to the Government it is bad news. The Government wants the indicators the other way round. Unemployment is still too high, causing stress on the social budgets, and wage growth too low. This is not to say that the Government thinks the pay of senior business executives should be going up – that is becoming a major political embarrassment. Mr Corbyn’s Opposition team is starting to find its feet now, with Shadow Chancellor John MacDonnell writing a powerful letter to the Times this week arguing for major reductions in business leaders pay. Nor does the Government want the Civil Service salary bill going up; but in the private sector wage growth in line with productivity growth creates a feel good factor and feeds through to more investment, and more growth.
This is little to do with the Referendum. It is much more due to the increase coming along in the living wage, where employers are looking closely at surplus labour and shedding it; slowing exports to China, because of the problems there; and a continuing reluctance to spend on the high street (or retail park), born perhaps of prudence induced by the lean years still fresh in many memories.
ZIZZI ZERO: Further evidence of the theories above: Zizzi, the Italian style dining chain, has announced that in preparation for the increase in the minimum wage to £7.20 an hour, it is cutting staff dining benefits and adjusting the proportion of tips that can be retained by waiting staff. They will be split with the better paid kitchen staff, whose salaries will be kept down but whose overall remuneration should stay about the same. Café Nero has also cut staff benefits, and many employers of the low waged, led by Tesco, have cut back on overtime levels, bonuses, and benefits.
DEFENCE NO DEFENCE: Shares in Cobham, the defence and aircraft systems company, fell 20% on Tuesday after a second profits warning. The company thinks profits will fall £15m below previous forecasts, though it intends to maintain the dividend – not least because it also announced a £500m rights issue to reduce debt. Cobham is trying to diversify away from its defence based business, but this is proving slower and more expensive than the company hoped, though the board remains confident it is the right strategy.
KEY MARKET INDICES: (as at 26th April 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.64% (falling); 5 year 01.03% (rising).
Euro€: 1 mth -0.28% (steady); 3 mth -0.25% (steady); 5 year -0.09% (rising)
US$: 1 mth 0.46% (steady); 3 mth 0.50% (steady); 5 year 1.29% (rising)
Currency Exchanges:
£/Euro: 1.29, £ rising
£/$: 1.45, £ rising
Euro/$: 1.12, € steady
Gold, oz: $1,240, rising
Aluminium, tonne: $1,640, rising
Copper, tonne: $5,000, rising
Oil, Brent Crude barrel: $42.75, rising slightly
Wheat, tonne: £105, steady
London Stock Exchange: FTSE 100: 6,261 (falling). FTSE Allshare: 3,436 (falling)
Briefly: The pattern for April seems to be holding; commodities edging upwards, likewise oil. Sterling which has also been edging up against the dollar and euro continues to do so; Remainers saying this suggests that the vote will be to stay: Leavers that it reflects the opposite. See above for further commentary. Long term interest rates are also on the up and the graphologists are saying that this time the trend is likely to stay that way.
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