22 December 2016
Week In Brief: BUSINESS AND THE CITY
FOOD WARS: There seems to be no let-up in the struggle for market share, and for profits, between the supermarket chains. Tesco has announced that it has reversed its previous policy of selling off its supermarkets and then leasing them back, the idea of that approach being to save capital which could be used to expand the business (we know what happened next). Now under new management, the group has decided that it would like to own its premises wherever it can. The logic now is that Tesco can raise capital fairly cheaply but having third party landlords exposes the cost base to ever increasing rents – and then to uncertainty when leases expire. So Tesco is buying sites when they come up at attractive enough prices. This is a long term way of bolstering profit performance but is further evidence that Tesco is focussing hard on its core business, selling food.
As is Lidl, one of its major competitors. Lidl, German owned, has enjoyed remarkable success in the UK food retail market – not least by stealing the historic “pile it high and sell it cheap” mantra of Tesco founder, Jack Cohen. Lidl, and its German rival, Aldi, have been a major factor in the difficulties faced by the big four UK supermarket chains, and the effect on Tesco in particular has been well documented. Even with margins greatly reduced for all contenders, Lidl continue to expand their operations and have recently opened a major distribution centre in Southampton, with others to follow shortly in Wednesbury, Doncaster, and Exeter. Now it has announced a further £1.5bn expansion in the UK, which includes a new headquarters at Tolworth, Surrey, and a further 700 or so new stores – doubling the number of existing outlets. Of these around 250 will be in Greater London, which will be serious competition not just for the big four operators, but also for the smaller family-owned grocery outlets that so far have managed to survive in secondary high street locations and on suburban street corners. Lidl reckon this will create 5,000 new jobs in their business over the next three years. Like Tesco, Lidl likes to own its own stores, and plans to build and own the new HQ at Tolworth itself.
SIPPING THE TONIC: Your festive glass this year may well be full of gin – and after years of rapid growth for the vodka distillers, gin, historically Londoner’s spirit of choice, has now become the booze to be boozing, and has seen rapid growth in consumption. A lot of this has been driven by the growth in small distilleries – some of them literally run out of the maker’s back room. The government’s relaxation of the minimum quantity rule in spirits production was slow to take off but now there is a boom in independent producers, with new offerings almost appearing every month. Gin sales have grown 40% over the last five years and now are estimated at £1bn a year, closing in on whisky which sells about £1.28bn (though whisky’s export sales are much greater). That growth is from the independent distillers – indeed, they are believed to have eaten into the sales of the traditional market leaders such as Gordon’s. One of the leading independents is Sipsmith, distilled in the capital near the Thames in Chiswick, which opened for business in 2009 making a traditional London recipe gin. But Sipsmith has decided to sell itself to one of the major’s – Beam Suntory – who have the international distribution network to help Sipsmith along in the next stage of growth. No price has been disclosed, but the two founders, Sam Goldsworthy and Fairfax Hall, should be in line for a jolly Christmas this year.
END OF THE ROAD: For Duncan Lawrie, a long-standing private bank, now owned by Camellia, a conglomerate, which has decided to close the bank down after failing to stem losses. The asset management business and a small loan book are been sold off, to Brewin Dolphin and Arbuthnot Latham respectively. The bank has stopped taking deposits and existing depositors will be repaid in full. It is not likely to be the last niche bank to close – increasing costs of regulation and competing for depositors against peer to peer lenders make it very difficult to operate profitably at this end of the market.
HAPPY CHRISTMAS IN THE GULF: Not just in the Gulf; the oil production and refining industry and oil owners are expected to have a positive 2017, says a new report from Wood Mackenzie, a leading consultancy specialising in advice to the oil business. It expects the recent movement in the oil price to be maintained, and that a barrel of oil will trade in the mid US$50’s range throughout the year. This means that oil companies will once again return to cash flow positive and that oil producers will see a much better return. For desert based producers practically all that increase (from mid US$20’s a few months ago) will be new free cash, a big help to countries such as Iraq and Saudi Arabia who have expensive social programmes. For the oil companies it means that they can begin to consider investing once more. But it is a fine balance – if the price rises too high, that starts to promote new investment into alternative energy sources and it makes most shale resources and fracking technology viable (the break-even level is generally thought to be around $50/52 a barrel). There may be interesting side effects as well – the emphasis in the oil companies on efficiencies over the last years has created permanent cost savings, but has left the weaker companies financially weak and vulnerable to takeover – so good for some corporate advisers and bankers.
The key question though is whether the restraints on production agreed by OPEC and some friends such as Russia will hold. If the price starts to move further up, over $60 and onwards, then it will make a significant difference to high cost producers such as the Russians and it should stick; if it hovers around where it is now, then they will be seeing improved income, but not much. One key question is whether the Russians need to invest more into their oil extraction businesses to keep the oil flowing, or if they could in the short term open the taps wider to keep cash flowing, even at the expense of long term production capability. Not the sort of thing Mr Putin is likely to tell us…
HAPPY NEW YEAR TO UK TAX PAYERS? The Treasury has said that the government stake in Lloyds Bank Group is now below 7%, valued at current prices at about £3.5bn. The intention was to sell the remaining stake in one big hit, but the policy of trickling shares out slowly is working well, without seemingly forcing the share price down, so in 2017 it is likely that process will continue. As sales now total £17.5bn as against the £20.3bn of the cost of the bailout, a small surplus looks within reach.
KEY MARKET INDICES: (as at 20th December 2016; comments refer to changes on last 7 days; $ is US$)
Interest Rates:
UK£ Base rate: 0.25%, unchanged: 3 month 0.38% (steady); 5 year 0.87% (rising).
Euro€: 1 mth -0.37% (steady); 3 mth -0.31% (slight fall); 5 year -0.02% (fall)
US$: 1 mth 0.74% (rising); 3 mth 0.99% (rising); 5 year 2.06% (rising)
Currency Exchanges:
£/Euro: 1.19, £ steady
£/$: 1.24, £ falling
Euro/$: 1.03, € falling
Gold, oz: $1,138, fall
Aluminium, tonne: $1,717, slight fall
Copper, tonne: $5,561, fall
Oil, Brent Crude barrel: $54.91, falling
Wheat, tonne: £135, steady
London Stock Exchange: FTSE 100: 7,012 (rise). FTSE Allshare: 3,803 (rising)
Briefly: Last week most commodity prices were up; this week showed the traditional Christmas pattern – most moved down. Oil seems established in a new trading range – see above. Perhaps the most interesting movements though are in dollar interest rates, continuing up, reacting to the likelihood that the Trump Administration will move to fiscally based management of the economy, rather than the monetary policy we have seen under President Obama. That is likely to lead to changes in UK and Euro interest rates too – only marginally factored in so far…
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 ShawSheet
