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This Presentation Is Dedicated To The Memory Of Michael Rosen
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From The Inside Looking Out
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May You Live In Interesting Times
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If Anyone Tells You They Know What’s Going To Happen Next…
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They Are Wrong
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A Macro View
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Living In A Minsky Moment
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… Success Breeds Excess…
… Excess Breads Collapse
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From…invest in anything even with the most minimum yield
To…investing in nothing but the safest government paper
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Result Of Three Factors
• Low interest rates
• Quarter of a century of low inflation and stability…
• Belief business cycle had gone and risk disappeared
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Globalisation And Convergence Catch Up
• Emerging markets growing 3x the developed world c 2001
• Resource intensive industrialising period
• The first fridges, tv’s cars, air conditioning
• Rapid growth will continue pressure on commodity prices
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What does it mean?
• Low interest rates
• Long term dollar bear market
• Structurally rising inflation
• Unwinding of excesses
• Paying down debt, higher savings, weaker demand
• Slower growth emerging markets as decoupling impossible
• Accepted and welcomed
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End Of US Consumer Being The Borrower And Spender Of Last Resort
Of The Global Economic System
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…And Now…The Perfect Storm
• Energy prices have quadrupled in past 4 years
• Oil prices highest level in real terms post war
• Commodity prices spiralling
• Turmoil and dislocation of the capital markets
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Times successful business show their metal
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The Credit Crunch
• Loan to value ratio step changes
• Cautious lending
• Requires capital of banks building up
• Viability of institutions business plan
• Can households service mortgages?
• Upside: In the 80’s interest rates doubled, unemployment
increased significantly
• Downside: 00’ Loans X7 income
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Don’t Look To The Bank Of England To Stimulate The Economy
• The NICE decade has ended
• The Bank of England Is focused on one measure only - Inflation
• Bank action to brings inflation on target (2%). Currently 3.8%.
Bank rate at 5%
• Squeeze on take home pay and real incomes
• Upside risk for inflation and downside risk to growth
• More on the upside
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Don’t Look To The Bank Of England To Stimulate The Economy
• Inflation high and output flat - not a sever downturn
• Negative quarters highly likely
• Cost shock from world economy impossible to absorb
• Government planning fiscal stimulus not a Central Bank initiative but
a political one
• Predicting inflation will come out on target
• http://www.bankofengland.co.uk/publications/inflationreport/2008.htm
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And If That Wasn’t Enough…
• Devaluation of sterling
• Impact the receipts of government
• Home owners reducing equity cushion
• CBI survey worst month in 25 years, firs half of August 2008
• Consumer confidence 32 points lower than August 2007 (gfk)
• Summer that retailer would like to forget
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A Macro View From Inside The Retailer
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Market Punishing Retail Stocks
• Retail stocks down 50% since August 2007
• Market nervous and looking for any signals
• Slight rumours send stocks sky high or crashing
• Quarterly reporting signposts
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Not As Protected In VC Held Businesses Either…
• Many retailers financed by VC
• Depends on the strength of fund
• Generally saddled with large debt funding
• Require cash to repay debt
• VC will continue to back retailers who generate cash sales
• Exit timescales being pushed back
• Sovereign Wealth Fund opportunities
• China, Singapore, Middle East
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Falling Sterling Value Will Increase Costs
• Previous upside of Pound:Dollar rate ending
• Export markets ‘pegged’ to US dollar
• Downside of Pound:Euro
• Cost increases
• Particularly hit non food retailers
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Volume To Mass Market Retailers Is Critical
• Economics built on volume and growing volume
• Building Fixed Costs Into Business…increases productivity with
increasing volumes…puts pressure on costs when volume falls
• Slight reductions in volume puts strain on balance sheet
• Fixed cost creep, depreciation of historic capital spending
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Cost Side Inflation
• Situation changed considerably
• Yesterday: Service inflation offset by commodity price deflation
• Today: Service inflation and commodity price inflation
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Reduction in Time Horizons
• If there is no short term, there is no long term
• Long term...next week
• Trading patterns difficult to read
• Decisions will be made late…
• Once made : implementation immediate…
• Look at activity in relation to quarterly reporting timelines
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Back to Basics
• Natural instincts going back to doing what they do best..
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Doing Fewer Things… But Doing Them Better
• Only do things that grow sales and are core
• Do it with less resource
• Cancelling projects
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Aggressively Drive Costs Out Of The Business
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Reduce Borrowings
• Sale and lease back
• Dispose of non core assets
• Exit marginal and non strategic business
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Reduce Capital Spending
• Capital spending impact on balance sheet and depreciation
• In capital constrained environment delay:
• New store openings
• Buying new sites
• Store re-fits
• Marginal range reviews
• Infrastructure and IT projects
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Improve Cash Flow
• Change supplier payment terms
• Rent payments
• Consignment stock
• Reduce number of suppliers
• Decrease stock holdings
• Cancellation of orders at short notice
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Pass The Hurt On…The Suppliers
• Better buying terms
• Re-negotiations
• Global re negotiations, consolidating volumes
• Volume rebate
• New store opening contributions
• Promotional support
• Delisting
• Squeezing every last drop out of the supply base
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Can’t Ride The Market, Need To Steal Market Share
• Riding market growth has ended
• Growth strategies need to focus on taking market share
• Aggressive competitive activity
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Value Is King
• Flight to value
• Must own the value proposition
• Discounters in all sectors seen as threat
• Sub value lines to compete with discounters
• Tesco launching 1,000 new range of products below their value
lines to take Aldi and Neto head on
• Price comparisons more common
• Promotional activity on KVI and value lines
• Brands for less…
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Three In One
Success = Building Customer Proposition + The Brand + Generating immediate Sales
In 2008 It’s Not Either Or
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Increasing ATV
• Turning shoppers in buyers
• Using the footfall to buy an extra item
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Sales Are Vanity - Profits Are Sanity
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Managing Sales V Margin Balance-Simple Yet Complex
• Strategic decisions resulting in different tactics
• Generate sales through cutting prices and reducing margins
• Profit implications if not matched by increasing sales and cost
reductions
• Maintain margin and reduce sales
• Sales and LFL, market share implications
• Reduction in profits
• Share price, ROCE ,cost of capital implications
• Need to do both on different occasions
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Innovation More Important Than Ever
• Why customers should buy
• Ranges
• Promotions
• Displays
• Shopper marketing
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Need Better Consumer Insight
• Getting closer to customers increases competitive advantage
• But needs to be:
• Quicker, more decision orientated for better buying decisions
and margin management
• What others are doing, worldwide that is working
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Christmas Planning
• Make or break for the year for many
• Buy is made and committed..
• ..its now about execution…turn into cash
• Cash v margin
• Not if… but when will discounting begin
• A game of russian roulette
• Whoever goes early will bring the others with them
• The consumer will win
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Looking For Growth In Other Markets
• Developing markets looking more attractive for some
• Requires significant investment…
• Growing interest in franchising and partnerships to reduce the risk
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Consolidate or Be Consolidated
• Survival of the fittest
• Mergers and consolidations in all sectors
• Grocery sector Sainsbury's most likely to get squeezed
• Discounters, Resurgent Morrisons, Price fighting Tecso, Deep
pocketed Asda (Wal*Mart)
• Well know high street names will disappear
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Growth
• Challenging times provide opportunities
• This is cyclical so there will be an upside
• Will be winners who will come out stronger
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Prying Open Tight Wallets
• Woo reluctant shoppers• Innovate, innovate, innovate• Innovative partnerships• Play up strengths• Video catalogues• Service• Multi channel• Demonstrate exceptional value• Loving customers• Become part of your customers lives
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Opportunities To Come Out Stronger And Fitter
The Winners
• Strong Brands
• Play to strengths
• Innovate
• Keep a dialogue going
• Offer exceptional value
• Aggressive promotions in targeted areas
• Sales + build brand
• Move fast
• Relentless focus on costs
• Customer focused proposition
• Superior business model
• Multiformat strategy
• Manage/margin volume mix
The Loosers
• Play dead
• Not well capitalised
• Cut customer service
• Tired propositions
• Generic promotions
• Formats that have ridden the
upside hard
• Burn margin
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This Presentation Is Dedicated To The Memory Of Michael Rosen