Business News (November 2017)

Another Black Friday

Shoppers are expected to splash out over five working days this week, as the UK continues its affair with Black Friday, the US-inspired discount day.

British shoppers are expected to spend £10.1 billion in the week of Black Friday, nearly 4% higher than last year as more retailers take part in the American born promotional day. But the bargain fever seen in earlier years is thought unlikely to materialise as most activity will be online, with experts warning that the discounts are likely to be less exciting on the day, which falls on 24 November this year.

Companies are finding it harder to deliver big price cuts amid strong inflation, partly resulting from the fall in the value of the Pound since last year’s Brexit vote, as well as rising business rates and other costs.

“Increased cost prices will mean retailers are unable to offer the level of discounts advertised in 2016, meaning demand may waver as consumers feel less inclined to make bargain purchases on impulse,” said Eleanor Parr at retail analysis firm GlobalData.

Gary Caffell from the consumer advice website Moneysavingexpert.com said it was possible to get a good deal, but warned, “There’s a lot of duds out there so do your research. Just because something says it is 70% it doesn’t mean it is a good deal. It might be cheaper down the road.”

Parr added that electrical products, usually the main focus of Black Friday discounts, were likely to be most affected by inflation with fashion and homewares also affected. The fashion market has also endured a tough October and the ongoing relatively warm weather is likely to encourage stores to try and use Black Friday as a way to reduce stocks of coats and other cold weather gear.

Although Asda continues to play down Black Friday, with no special deals or activity planned on the day after well publicised tussles in a store three years ago, grocery discounter Lidl is joining the fray for the first time this year. Tesco is also ramping up activity, with more than 700 stores participating and 187 of its largest outlets opening at 1am for bargain hunters.

Amazon, which helped introduce Black Friday to the UK, kicks off its sale on Friday, but some online electrical stores – AO and rival Currys PC World – began offering discounts on Monday. Argos started on Wednesday. All are trying to avoid a big squeeze on their delivery and IT infrastructure by spreading demand over a longer period.

Retailers have also invested heavily in improving their computing capabilities and delivery networks after 2015, when as many as one in five online retailer’s websites crashed on Black Friday as a result of heavy network traffic, including John Lewis, Boots and Argos.

However, £1.74 million is expected to be spent every minute online in the UK on Black Friday, according to figures from online trade association IMRG and the couriers insurance firm Staveley Head, with £700 million estimated to be spent before 9am. Stavely Head predicts more than 82,000 vehicles will hit the road, with the top five delivery firms using nearly 20,000 extra vans and cars, with more than 80% of Black Friday purchases delivered to homes.

HS2 project shaken as Carillion issues profit warning

Shares in Carillion, the UK’s second-biggest construction firm, fell 48% last Friday after it issued its third profit warning since July and said it expected to breach its loan conditions. The firm blamed slower asset sales and delays to a Middle East project. Carillion is a major supplier to the government and helps to maintain schools and hospitals. It is also part of a consortium building the £56 billion HS2 high-speed rail link (see Business News (July 2017)).

The latest announcement follows separate profit warnings issued in July and September this year. In its latest update, the company said it might need “some form of recapitalisation” in order to revive its fortunes. Interim chief executive Keith Cochrane said, “Whilst we continue to target cash collections, reduce costs, execute disposals and focus on delivering for our customers, it is clear that significant challenges remain and more needs to be done to reduce net debt and rebuild the balance sheet.”

Carillion said profits for this year would be “materially lower than current market expectations”, and it now expected average net borrowing in 2017 to be between £875 million and £925 million. The company said that based on its latest forecasts, it expected that it would breach its financial covenants – agreements with its lenders – at the end of the year. The Cabinet Office said it had been “kept informed” of steps taken by Carillion to restructure its business.

The contractor plays an integral role in the UK’s services industry. As well as HS2, it has worked or is working on Crossrail, Battersea Power Station, the new Birmingham Library, and hundreds of schools, where it provides facility management services.

It has also been involved in major projects across the Middle East that include the New York University in Abu Dhabi and the Royal Opera House of Oman. Shares in the company have now fallen by about 90% this year. “The company is admitting what we’ve all already suspected: it will need some sort of debt restructuring,” said Sam Bland of JP Morgan. “More organic methods simply aren’t going to be feasible”.

“If debt restructuring happens, you have to presume that current shareholders would be left with very little value,” he added. In July this year, Carillion shares plunged after it had to set aside £845 million in provisions and its chief executive, Richard Howson, stepped down. At the time, the government was forced to seek assurances from Carillion’s partners on the HS2 project that they could step in to complete the work if necessary.

R and D credit subsidies ‘deadweight’

Most government support for research and development subsidies investments would have been made anyway ,according to a respected think tank. The Institute for Public Policy Research (IPPR) estimates that up to 80% of tax credits for research and development (R and D) are a ‘deadweight’.

It said the subsidy should be “largely abolished”, saving up to £1.9 billion a year. The Treasury said that R and D tax credits “help British businesses innovate and grow”. “For every £1 that goes on the relief, up to £2.35 in investment is created.

“Latest figures show that 83% of claims for R&D tax credits were from small and medium-sized enterprises,” a Treasury spokesperson said. The report comes just days before the government is expected to launch its industrial strategy. The aim of the strategy is to increase productivity, which has been weak for years in the UK and boost growth across the whole country.

“The government is in danger of missing the point in its industrial strategy,” said Michael Jacobs, director of the IPPR Commission on Economic Justice and co-author of its report. He said that the focus has been on sectors like cars and pharmaceuticals, where productivity is already high.

“The UK’s productivity problem lies in the vast majority of ordinary firms, in sectors such as retail, light manufacturing, tourism, hospitality and social care,” Mr Jacobs said. Productivity could be boosted by giving small and medium-sized companies classed as ‘good jobs employers’ a 1% cut in Corporation Tax. High quality jobs from such employers would meet a ‘good jobs standard’ on training, pay and benefits, working hours, career progression, participation in decision-making, and union representation.

The IPPR would also like to see the phasing-out of the patent box scheme, which gives firms a lower rate of Corporation Tax on profits earned from patented inventions. It says that in the 2014/15 financial year, 800 firms made use of the system, but 95% of the tax relief claimed went to 305 of the biggest UK companies.

“The evidence suggests that neither of these indirect support mechanisms through the tax system are effective at expanding and diversifying the UK’s base of innovating businesses,” the IPPR said in a discussion paper. “Both policies predominantly channel funds to large, established companies: deepening their existing advantage in the UK, rather than expanding advantage to new firms.”

The IPPR says that abolishing R and D tax credits and the patent box scheme would save around £3.6 billion annually, which could be spent on projects that would spur innovation more effectively. It says a new National Investment Bank should be created to invest in infrastructure, housing, business growth and innovation. It would like more money to be directed to Innovate UK, the government’s existing agency tasked with boosting productivity and innovation.

The Confederation of British Industry, which represents some of the UK’s biggest businesses, agreed that Innovate UK should get more support, but not at the expense of other programmes. “Getting rid of R and D tax credits and the Patent Box during a time of uncertainty, would in effect only serve as a tax on the UK’s most innovative firms.

“While more can be done to get SMEs [Small and Medium sized Enterprises] involved, more smaller businesses are using the tax credit each year,” said Tom Thackray, CBI innovation director.

UK economy continues to grow

UK retail sales continued to grow in October, easing fears over consumer spending. Sales volumes rose 0.3% in the month, better than the 0.1% consensus given by most City of London analysts. The results ease some of the fears of a plunge in consumer spending. A survey of retailers by the CBI had originally suggested the fastest rate of decline in sales in October since the UK’s last recession in 2009.  But the Office for National Statistics (ONS) reported on Thursday that sales volumes rose 0.3% in the month, better than the 0.1% consensus predicted, and partially reversing the previous month’s 0.7% fall. On a quarterly basis, sales volumes were up 0.9%.

The year-on-year growth rate of sales volumes dipped by 0.3%, which was the first annual fall since 2013, but this was mainly due to strong sales last October. “We are continuing to see an underlying picture of steady growth in retail sales”, said Kate Davis of the ONS.

“Retail sales were more resilient than I feared,” said Alan Clarke of Scotiabank. “This is in stark contrast to the survey data which were pointing to an absolute bloodbath.”

However, other economists had a more pessimistic reading of the figures. “Excluding auto fuel, retail sales grew 0.1% on the month,” said James Smith of ING. “Consumers are still remaining very cautious more generally, particularly when it comes to non-essentials.”

The UK economy has been largely sustained by consumer spending since the June 2016 Brexit vote. Growth this year has slowed as higher inflation has bitten into incomes and consumer confidence has dropped back. GDP is estimated to have expanded by 0.4% in the third quarter of 2017, slightly stronger than the 0.3% in the first two quarters, but weaker than expected growth in the Eurozone. The Bank of England last week raised interest rates for the first time in a decade in order to curb domestic inflationary pressures.

The ONS reported that the inflation rate was steady at 3% in October, although wages are growing at an annual rate of 2.2%, meaning that real wages are still contracting. The biggest contributor to retail sales volumes growth in October was from second-hand goods stores, in particular charity shops, auction houses and fine-art dealers, the ONS reported. Food store sales volumes fell.

SOS from M and S because of ASOS

Marks and Spencer has been usurped by online rival As Seen On Screen (ASOS). The 17-year-old fashion website has been biting at M and S’s heels for several months, but on Friday its shares gained 2%, bolstering its market value to £4.89 billion, making it a more valuable business than the 133-year-old high street giant, now worth £4.88 billion, according to Reuters data revealing the number of shares in issue.

Earlier this year, Cantor Fitzgerald analyst Mark Photiades predicted ASOS would leapfrog M and S as the go-to website, aimed at fashion hungry twenty-somethings, as it grows in stature, just as traditional store groups struggle to grow.

Earlier this month, M and S’s new chairman, Archie Norman, accused the struggling store chain of ‘drifting’ for more than 15 years. “This business has been drifting, under fulfilling its customer promise not for five years, not 10 years but 15 years and maybe beyond.”

The shift in retail power is being compared with the automotive industry, where the electric carmaker Tesla sped ahead of the 114-year-old Ford Motor Company in April to become the US’s most valuable car manufacturer. Similarly, the online retailer Amazon is now worth nearly twice as much as Walmart, after overtaking the American grocery chain in 2015.

Photiades said that 20 years ago, when online shopping was in its infancy and before ASOS was established, M and S had a market value of £16.9 billion. When ASOS floated on the stock market in October 2001, it was valued at £14 million, compared with £7.8 billion for M and S.

The market valuation of a company reflects expected future earnings. M and S remains bigger, both in sales and in terms of profit. ASOS recorded sales of £1.9 billion last year, compared with £10.6 billion at M and S. Profits were £80 million and £176.4 million, respectively.

Profits have been going backwards for several years at M and S despite its position as the UK’s biggest clothing retailer. It was making full-year profits of more than £1 bilion in 2008, but that figure has been whittled down by a long running slump in clothing sales. Since taking over a year ago the M and S chief executive, Steve Rowe, has stabilised the performance of its clothing arm and shut loss-making stores overseas. Unlike ASOS, Rowe also has to grapple with the challenging economics of its large store portfolio, as sales migrate online and fewer shoppers frequent the high street.

ASOS brags that it puts around 5,000 new items on its site each week – the equivalent of an entire Oxford Street shop – and is constantly adding new features to the site such as visual search, which allows customers to upload photos from social media to search for a similar outfit. Rowe says M and S’s ‘destiny’ also lies online, setting a target of one-third of sales online by 2022. But he warned that M and S will need to plough investment into its infrastructure to reach it.

Business News (October 2017)

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