14 September 2017

Week in Brief:BUSINESS AND THE CITY

BUILDING A NEW MODEL:  You might think that with Lego popping up on so much family time advertising – not to say those damn bricks all over your carpet if you have children of a certain age – that things must be good for the Danish domiciled toymaker.  But far from it; it seems.  As the chairman, Jorgen vig Knudstrop, said last week “The car has run off the road and we are a bit stuck in the ditch”. Which is a very frank way of revealing that sales revenue is 5% down in the first half of 2017 – the first time it has declined since 2004.  Lego has a chequered profitability history this century, but overall has seen some pretty impressive growth, and indeed remains a very profitable company – but one that is increasingly worried about where sales are going to be coming from in the next months and years.  The reason can be easily guessed; children seem to prefer virtual games to real bricks.  Lego has tried to tap into that market in a way that still might attract its junior customers to the traditional Lego offering, with concepts such as Lego Batman and Nexo Knights, and whilst these have had some success they have not been nearly as successful as hoped; at the same time the company’s cost base has increased enormously.  It has, for instance, 18,000 employees – up from 6,000 or so in 2004, and insiders say a lot of this extra effort is going into complex internal reporting and administration.  Mr Knudstorp is now trying to get a grip on costs by reducing the workforce by some 1,400 jobs and getting some efficiencies in how new products are developed and presented to the market.  One of the jobs already removed is that of Bali Padda, formerly chief operating officer and largely responsible for the internal reporting structures, who was promoted only in January to chief executive.  After just eight months in the job, he was asked to leave in August.

GOLD PLATED:  The silly season is over in the media – just as well as not even the silliest financial sub-editor would run this one:  Goldman Sachs is launching a UK retail banking operation.  From Masters of the Universe to sending out paying-in books is an unlikely step, but Goldman’s is on the way.  They hired Des McDaid formerly of Lloyds TSB earlier this summer and he is busy finding a support team and planning to set up a call centre, with the aim of opening an on-line banking business next year.  There are no plans to start opening high street branches; the UK operation is following in the footsteps of a similar operation in the USA which opened up about a couple of years ago. These new businesses are aimed at customers of considerable resources – those who have spare cash to put on deposit and want a good rate of interest on it.  There is however no effective minimum deposit and the bank in the US offers a range of deposit accounts.  It is understood to have taken amounts well above projections, so much so that the bank has opened a lending business – called, for reasons which no doubt make sense to Goldmans, “Marcus”, which has also done very well, making around US$1bn in loans in its first nine months trading.  But it is the deposit side which is driving this new activity – banks increasingly want to diversify their sources of funding, and consumer deposits for a stable institution with a reliable platform can be very useful indeed.  Also, as Goldman’s have realised, rich depositors offer interesting opportunities for selling other products, into a market which is still very focussed, in the UK at least, around a small number of big banks whose customers are much less loyal than they used to be.

HABEOUS CORPUS:  But not yet.  Body Shop, once one of the most visible and probably the coolest of British retailers, changed hands last week when L’Oreal finalised its sale to Natura Cosmeticos, the Brazilian retail group.  Natura also announced the departure of chief executive Jeremy Schwartz  and said he would be replaced by a new one; in fact they said the hire had been made, declining to provide a name – though they said he was British and male.  Well, that narrows it down a bit.  The price paid by Natura for the business was around €1bn, taking the group into the increasingly big time – it expects combined sales to be about US$3.7bn and it will have 18,000 employees (plus the mystery one).  Body Shop has lost its way somewhat since the death of founder Anita Roddick and its subsequent sale by the Roddick family; her entrepreneurial flair got it lots of free publicity, but also the business has faced challenges from newcomers such as Lush, and from traditional retailers such as Boots who now have organic ranges of their own.  Natura said it wants to refresh Body Shop’s retail offer, and also explore new marketing routes, such as the direct sales agents it uses in its Brazilian business.  It is said to have 1.8 million of them.

PILE IT HIGHER:  Another British retail chain though continues to prosper.  Primark, owned ultimately by the Canadian Weston family but run through their Associated British Foods business, says it has had a good summer and that trading margins are up – its forecast in the spring was that they would be down because of the weakness of sterling.  That does not come off spectacular sales growth – up about 1% says the company, but is  due to clever buying and good stock control.  That 1% should go straight through to the profit line, which should be further assisted by the 30 new shops it opened over the last year, three of which are in the USA.  ABF’s food business did not do quite so well – revenue was flat and margins were squeezed, though currency gains should help profits along.

COOL, MAN:  Clinical depression is an ever increasing problem in many Western countries, with much stress and strain for individuals and families and loss of both productivity and pleasure, to say nothing of further demands on the National Health Service.  Now the latest possible solution: magic mushrooms.  Not smoking them; that might ease or intensify depression.  But all those hippies who use them to feel better about life may have a point – scientists have discovered that psilocybin, which is the “magic” bit, can indeed have a very beneficial effect on patients with depression when properly prepared and administered – up to a third of patients show great improvements and there do not seem to be any significant bad side effects.  Compass Pathways, which is a British company recently started up to research into and produce a new generation of cheaper and more effective drugs, is the leading researcher in this area and is now discussing drug trials with European regulators.

KEY MARKET INDICES:

(as at 12th September 2017; comments refer to net changes on last 7 days; $ is US$)

Interest Rates:

UK£ Base rate: 0.25%, (unchanged): 3 month 0.29% (rise); 5 yr 0.72% (rise).

Euro€: 1 mth -0.37% (steady); 3 mth -0.33% (steady); 5 year 0.06% (rise)

US$: 1 mth 1.24% (rise); 3 mth 1.31% (fall); 5 year 1.77% (fall) 

Currency Exchanges:

£/Euro: 1.11, £ rising

£/$: 1.32, £ steady

Euro/$: 1.19 € slightly stronger

Commodities:

Gold, oz: $1,328 slight fall

Aluminium, tonne: $2,100 slight rise

Copper, tonne:  $6,736 slight fall

Iron Ore, tonne:   $75.22, fall

Oil, Brent Crude barrel: $54.30 rise

Wheat, tonne: £142, fall

London Stock Exchange: FTSE 100: 7,404 (steady).  FTSE Allshare: 4,057 (steady)

Briefly:

Last week’s performance with almost everything rising looked too good to be true and this week proved it – though most measures marked time rather than any spectacular movements.  However, the pound strengthened against the dollar and fractionally against the euro on rumours of sterling rate rises coming down the track, and wheat prices fell with most of the harvest in Europe and the USA in.

 

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