16 June 2016
Week in Brief: BUSINESS AND THE CITY
ASDA PRICE: The sack, it seems, is the ASDA price for its UK chief executive Andy Clarke. Walmart, who owns the UK big four grocer and supermarket chain, announced the change early this week, a shock apparently for Mr Clarke, an ASDA long-termer. Just the week before, he was at the annual Walmart conference talking about the orderly succession planning which over the next few years would see him replaced by heir apparent and carefully prepped Roger Burnley, currently at J Sainsbury but rejoining ASDA in October this year. Mr Clarke, the announcement said, will be replaced by ….Mr Clarke, in this case Sean Clarke, recently running Walmart China. It is that experience that may have earmarked him for taking over from Andy C; Sean C has successfully turned around Walmart’s China business. ASDA has been having a torrid time in the UK over the last few years, losing market share and profits – although shielded from the public glare of publicity that has surrounded Tesco and Sainsbury by the fact of its Walmart ownership. Over the last half year, ASDA sales have declined by over 10%, accentuating a trend seen over the last two years, and largely the result of the competition from the German owned discount supermarkets, Aldi and Lidl.
ASDA’s response to this threat, the core of Andy Clarke’s strategy, has not been to protect market share, but to protect profitability. That has meant trying to pass declining margins through to suppliers – all retailers do this of course, but ASDA has been especially robust in its approach – and not engaging in heavy discounting in the supermarkets. It has allowed market share to decline in the hope that brand loyalty and service would keep the customers coming in, whilst earmarking circa £500m for strategic customer attracting promotions and temporary price cuts. It increasingly seems that this policy does not work – in marked contrast to Tesco and Sainsbury who are now seeing their positions improve by competing head on with the discounters. Certainly that seems to be the opinion of Walmart’s board who have finally taken drastic action to try to change course.
TAKING A POUNDING: The increasing possibility that Britain will vote for Leave on 23rd June has been causing jitters in currency trading for several weeks, with the pound falling further against the US dollar and the euro this week. Sterling is now trading at recent record lows against both currencies, in spite of several reversals of trends as profit takers took the view that some sort of bottom had been reached. As we comment elsewhere in this week’s Shaw Sheet, markets do not like uncertainty, especially on this scale, and try to get to or below a worst possible place to protect themselves against possible outcomes. Of course, if the outcome turns out to be a vote to Remain, the result will be a remarkable spring upwards in sterling, and at the levels now being seen one would expect the rate of fall to be slowing as position takers took some bets on that outcome. But not yet (in contrast to the bookmakers who are giving good odds on Remaining). The one month projected sterling/dollar volatility index is still showing its highest levels since the 2008 crash – around 28% – which suggests sterling could fall further in the eight days left until the poll.
BANKING CHIEF’S STRESS (1): Bill Winters, the respected banking industry veteran who took over as chief executive at Standard Chartered Bank a year ago, is not happy. Mr Winters has done the normal, and usually right, things to turn the bank round as it struggled to recover from the after effects of the recession,of bad lending and of big penalties for lax internal controls. He wrote off everything that he could and held a £3.3bn rights issue to repair the bank’s corroded balance sheet. But he has several times criticized the internal culture of the bank, and has now allowed his comments to slip into the public arena, referring to lending activities among the banks staff, private and unauthorised joint ventures, and the misuse of expense allowances. Winters says that as an international bank, operating in many jurisdictions and under various regulatory regimes, it is difficult to police local variations and cultures, but it is essential for the banks reputation that internal cultures should adhere to rules in spirit and form. He has threatened to use the bank’s bonus systems to punish staff who do not stick closely to the culture he wishes the organisation to have.
BANKING CHIEF’S STRESS (2): There is stress round at Goldman Sachs too. Michael Sherwood, joint chief executive officer of Goldman’s international division – head of Goldman Sachs Europe in other words – was a principal advisor to Philip Green. He mandated his colleagues Anthony Gutman and Michael Casey to advise Sir Philip on his sale of BHS that is now causing such excitement and trouble for all concerned. As the Parliamentary Select Committee headed by the able and analytical Frank Field deepens its enquiries into what went on in the sale process, with especial emphasis on the underfunded pension fund, Goldman’s have been increasingly fingered by the MP’s as key in the advisory side of the whole sale structure, with Mr Sherwood being the top man and conduit to Philip Green. They asked him to go to be interviewed in person. Mr Sherwood declined, offering to provide written answers to questions. Hopefully Mr Sherwood’s advisors in this matter, whoever they may be, have pointed out that this line of response does not play well with Select Committees and that Mr Sherwood would be well advised to turn up looking helpful and well rehearsed.
POOR RATINGS: Not a good week for the Chancellor (again). He too is suffering troubles from committees of MP’s, quite apart from the chorus of fury that greeted his threat to hold an emergency budget and put tax rates up if Britain votes Leave next Thursday. The parliamentary standing committee which deals with local government have heavily criticised the Chancellor’s amendments to the Business Rate system, by which business property occupiers and tenants pay for local services. That rate burden has increased heavily over recent years – but is not borne by the increasingly significant e-businesses which occupy little space in comparison to their turnovers – and that generally in cheap locations. The Chancellor’s reforms were intended to try to create competition among local authorities for businesses through cuts in the rate burdens – but do not address what happens to local councils who see businesses leave and do not have the resources to make up the income shortfall. Not good enough, says the committee. Another headache for George this summer – if he is still in his current employment.
KEY MARKET INDICES:
(as at 14th June 2016; comments refer to changes on the week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.64% (rising; 5 year 0.74% (falling).
Euro€: 1 mth -0.29% (steady); 3 mth -0.27% (steady); 5 year -0.17% (falling)
US$: 1 mth 0.47% (steady); 3 mth 0.67% (rising); 5 year 1.07% (falling)
Currency Exchanges:
£/Euro: 1.26, £ weakening
£/$: 1.41, £ weakening
Euro/$: 1.13, € steady
Gold, oz: $1,283, rising
Aluminium, tonne: $1,604, slight rise
Copper, tonne: $4,510, falling
Oil, Brent Crude barrel: $48.00, modest fall
Wheat, tonne: £110, steady
London Stock Exchange: FTSE 100: 5,923 (steep falls). FTSE Allshare: 3,260 (falling)
Briefly: The markets are now marking the increasing possibility of a win for “Leave”. The FTSE indices have fallen steeply on the week, especially the FTSE100. (Worth noting: most European stock indices have fallen similar amounts over the period; some of this may be a consideration of a declining economic outlook generally.) Sterling has declined against the Euro and the US$. And as one might expect, gold, which has risen nearly 20% over the last six months, continues as the ultimate hedge in uncertain times, rising again over the last week.
If you enjoyed this article please share it using the buttons above.
Please click here if you would like a weekly email on publication of the Shaw Sheet
