18 June 2015
Week in Brief:BUSINESS AND THE CITY
REVERSE DEFLATION: Economists were relieved to see Britain’s cost of living rise 0.1% in May, after a couple of months of deflation. Though it may seem counter-intuitive to welcome rising prices, the effects of deflation are little understood in modern economies, but generally felt to be damaging to the long term health of an economy. A low rate of inflation is thus probably the ideal position for the government’s management of the economy – a chance for some wage inflation which will increase real incomes, but with continuing low price rises, low interest rates, and minimum indexation pressures.
The main component of this reversal from deflation to inflation is rising transport costs, where both commercial road transport costs and airfares rose, but also some rises in the cost of foodstuffs. (Children will be pleased to know that the cost of toys and computer games both fell.). The outlook for the rest of the year is for a similar pattern, and possibly one or two months where we move marginally back into deflation. But overall economists expect the long term trend to be towards modestly increasing inflationary pressures. Depending, as always, on the price of oil…
SMALL ACORNS: More good economic news –the growth rate among small and medium sized businesses (“SME’s”) is back to the levels last seen before the recession began in 2008. The Enterprise Research Centre, run by a consortium of university business schools, which measures such things, says that a net 1.7m jobs were lost in the sector between 2008 and 2013, but that over the last year or so, 400,000 jobs have been created. SME’s are a major powerhouse of the economy – 60% of private sector employment is in businesses with less than 250 employees, and there are more than 5m such businesses in the UK, many just employing one or two people. They tend to be in the newest and thus main growth sectors – especially in technology related business – and tend to see faster rates of growth than large established old-economy firms – so are regarded by economists as vital to the health of the economy.
POST TROUBLE: Royal Mail, which was privatised in 2013, is once again the only door-to-door daily delivery service of post and parcels in the UK following the withdrawal of Whistl, its only competitor. Whistl, owned by the Dutch Post Office and better known under its old name of TNT, had been building a network in London, Liverpool and Manchester, but has now decided to pull out of the market and stick to parcel delivery on order. Whistl has argued that Royal Mail has been competing unfairly on price, but Royal Mail has countered that its universal delivery obligation (to make daily deliveries to every mainland address) means that the pricing structure in its wholesale business is key to making the door-to-door business economic. Now Ofcom, which is the regulator for the delivery and communications market, has announced that it will extend its investigation into the Royal Mail’s efficiency and performance, and competition in the market generally.
The problem for the Royal Mail is that it has very high fixed costs which support the daily delivery obligation. That means that they support a market which, with the inexorable growth of the internet, is in steady decline – 6% per year down for the last 5 years – we just don’t write letters any more. The parcels business is, in contrast, booming because of the growth in internet shopping and the consequent need for parcel delivery services. Although there is fierce competition in this market, Royal Mail with its national coverage does have a strong advantage here. But even this is being eroded – Amazon, one of its largest customer s a few years ago, is now building its own dedicated delivery service and the business remains at a local level a relatively easy market to enter by start-ups.
The government recently sold a further part of its remaining shareholding in Royal Mail, now owning just 15%. That exit strategy is increasingly looking like the right move.
HIGHER, YET: In the very heart of the City of London, at 22, Bishopsgate, there has long been a closed up building site with a concrete stump, the only sign that something was been built. “Was” is the operative word – no work has been done since 2010 when the construction of the office tower intended for there was abandoned with the onset of the recession and the impossibility of raising construction finance in the semi-closed funding market. Although other closed schemes rapidly restarted and are now taking advantage of rapidly rising office rents in a market with practically no available grade A space in or near the City, several attempts to restart 22 Bishopsgate have failed. The clue to the problem lies in its nickname – the Helterskelter. The design was an exciting curved swirl of a building; visually exciting maybe, but very expensive to build; non-economic in the eyes of many consultants called in to try to get things going again..
Now the challenge has been taken up by the veteran City developer, Sir Stuart Lipton, the founder and promoter of the massive Broadgate scheme which reinvigorated the north side of the City in the 1990’s. Lipton has brought in the rising architectural firm of PLP Architects, and together they have worked out a design which is cheaper to build but which will sit on the foundations and works already there. Not only that, it will be the tallest building in the City which always appeals to status conscious tenants. Planning should be procured quickly as the City Corporation is anxious to see something happen swiftly on this key site. All being well, the building will be opening its doors in 2019. Showing Lipton’s aspirations, the building has a new nickname – the Pinnacle.
MAJESTIC DECISION: Good news for those keen on a drink but short of cash. Majestic Wines, the highly regarded chain of warehouse based wine and drink retailers, is considering dropping its minimum 6 bottle purchase rule. Majestic was the first of the drink retailers to really seize the opportunities of selling from warehouse type units and it kept that wholesale feel by displaying cases and boxes and imposing the minimum purchase rule. It now has a chain of over 200 outlets. But more recently it has also built up a strong internet based business, reinforced last year by the acquisition of smaller rival Naked Wines, and virtual retailing is starting to erode the profitability of the traditional warehouse based business. Last year on-line sales were up 12% but in-store sales down 5%. That cost pressure is starting to hit profits, down 22%.
The business now has a new chief executive, Rowan Gormley, who was the founder and boss of Naked Wines. He is trialling the abolition of that six bottle minimum and is cutting the store opening programme which would have taken Majestic to around 330 outlets. He sees the need for a few more stores to give national coverage and to back the delivery capability for the on-line sales but will look carefully at the profitability and prospects for each existing unit.
KEY MARKET INDICES: (at 16 June 2015; comments refer to change on week; $ is US$)
Interest Rates:
UK£ Base rate: 0.5%, unchanged: 3 month 0.55% (unchanged); 5 year 1.48% (steady).
Europe€: 1 mth -0.08% (steady); 3 mth -0.45% (unchanged); 5 year 0.44% (unchanged)
US$: 1 mth 0.21% (steady); 3 mth 0.45% (increase); 5 year 1.79% (steady)
The Euro is showing increasing volatility, albeit within established trading ranges. This reflects mixed economic news, and the increasing tensions with Greece over debt rescheduling.
Currency Exchanges:
£/Euro: 1.37, £ slightly stronger
£/$: 1.56, slightly stronger
Euro/$: 1.12, steady
Gold oz: $1181, slight rise
Oil, Brent Crude: $63.95, rising slightly, but within recent patterns
London Stock Exchange: FTSE 100: 6,679. FTSE 350: 3,704
Key indicators continue recent stable patterns. The Stock market continues to fall gently back after the surge late last month.
