So a mad rush on Sunday evening to agree a deal providing an EU & IMF loan to Ireland. Ireland were really put under pressure, a deal had to be announced before the markets (stock markets and currency exchanges) opened on Monday morning as any ongoing uncertainty over the detail, and consequent reduction in confidence in their economy, would have resulted markets crashing.
In brief - you should read the detail some place more informed than here - they have agreed an 85bn Euro loan. A truely massive debt given the size of their economy. And before anyone again calls it a 'bail out' they will be paying 5.8% interest on this debt - admitedly this is less Irelands current bond yeilds & so cheaper to do this than to issue new bonds, but when you compare it against the 2.5% that I am currently paying interest on my mortgage... Clearly the banks beleive that I am less risky as a debtor than Ireland is - quite a shocking statement when you think about it. By 2014 Ireland will be spending 20% of all it's tax income on debt interest - assuming it doens't default on this debt!
It was very important for Europe that this deal was done in the hope that the markets would calm, and specifically Spanish and Portugese bond yeilds would fall. Sadly it seems this rescue package has not done enough to calm nerves and these bond yeilds have risen yet further, while stock markets all across Europe have fallen today by over 2%. If bond yeilds don't fall for Spain and Portugal then surely it will be a matter of months before they will need to raise new capital & will find this route unaffordable & be in a similar situation. How much money does the EU & IMF have left to lend??
Monday, 29 November 2010
International Retail Failure
As is quite predictable periods of slow economic growth retailers review their activities and divest from those that are not core. It does beg the question really of why or how they got into non-core activities in the first place, you should always stick to doing what you do best...
Anyway this week the news is full of International retailers pulling out of particular markets - mostly they will loose many millions of invested money in the process, and such withdrawal, although possibly the right strategic option now, highlights questionable decisions to invest in the first place some years ago when money was cheap.
Two such notable divestment this week are Carrefour divesting from Thailand - selling stores to Casino, and Metro group selling their Moroccan stores to Label Vie who runs Carrefour franchise stores in the country. So much for Metro group having such a well developed market scanning process to research the most appropirate markets to enter (Swoboda et al - sure you remember...). There is a common theme here though with consolidation in all markets driving retailers who have entered spotting opportunities to now divest on the realisation that they cannot acheive a market leading position in these markets. In Thailand Carrefour has simply lost the race to Tesco (Lotus) who enjoy strong market leadership. In the face of this Carrefour would rather exit and focus on market that they can lead and as such drive the sector in it's own direction.
Anyway this week the news is full of International retailers pulling out of particular markets - mostly they will loose many millions of invested money in the process, and such withdrawal, although possibly the right strategic option now, highlights questionable decisions to invest in the first place some years ago when money was cheap.
Two such notable divestment this week are Carrefour divesting from Thailand - selling stores to Casino, and Metro group selling their Moroccan stores to Label Vie who runs Carrefour franchise stores in the country. So much for Metro group having such a well developed market scanning process to research the most appropirate markets to enter (Swoboda et al - sure you remember...). There is a common theme here though with consolidation in all markets driving retailers who have entered spotting opportunities to now divest on the realisation that they cannot acheive a market leading position in these markets. In Thailand Carrefour has simply lost the race to Tesco (Lotus) who enjoy strong market leadership. In the face of this Carrefour would rather exit and focus on market that they can lead and as such drive the sector in it's own direction.
Tuesday, 23 November 2010
Retail Big Brother
Shoplifting costs retailers an estimated £4.88bn each year, so it's wise to go to great lengths to try to address the issue and catch the culprits. One growning approach is organised by Internet Eyes (http://www.interneteyes.co.uk/), where stores can provide anyone access to view on-line their cctv footage live. If anyone spots an issue they can simply click their mouse & a text is sent through to the store manager to investigate! With it being internet hosted anyone from around the world can log into your cameras and will be given cash rewards for providing good tip-offs. Quite who wants to spend their evening looking at the CCTV cameras from CostCutter I don't know, but it seems to be working.
Monday, 22 November 2010
The Euro - a dead idea
Ok so it is very easy to be clever in hindsight, but the idea of one currency being used in 16 very different countries with very different economies and thus economic needs was surely madness. The problem is that by sharing one currency exchange rates are fixed between these nations - no way of a currency devaluing to make exports more competitive or rising in value to make imports cheaper i.e. the economy adjusting to cope with the specific needs of that economy. Secondly and just as importantly, member countries have given away control of their interest rates (a key tool in managing your economy).
It's easy to make these comments today, the day when the news is full of the EU 'bail-out' of Ireland. Irelands strong economic growth in recent decades has long been used as a case study for the success of the Euro project, but now it is clear that such growth was unwise and unsustainable. When the global economy was growing Ireland experienced a huge property bubble - house prices rising very rapidly due to very low interest rates - yep remember set by the European Central Bank. Interest rates were way lower than Ireland needed them to be & quite simply their economy overheated and grew too fast. As soon as the credit crunch hit and property prices started to fall just slightly then the banks who had granted all those mortgages started to look shaky in face of defaults (mortgage holders struggling to meet their monthly repayments) and when property prices are falling the bank simply can't get it's money back by repossessing the house - there won't be enough equity left. So Ireland's government has had to invest something like 45bn euro to keep their banks afloat.
Right now when Irelands economy is in trouble it needs very low interest rates to stimulate some growth, but again fixed by European Central Bank Irelands interest rates are double what they are in Britain (ok still low but not low enough); & while the British pound has devalued by about 25% over the last 3 years to make our exports more attractive overseas, helping the UK economy out of our mess Irelands exchange rate to it's key trading partners is fixed.
Now a loan will be issued by Europe to Ireland to patch up the issues, and in return Ireland will have to promise to a series of tax and spending revisions that Europe agrees to. Key to these changes that Ireland are likely to have to agree to is raising of it's currently low levels of corporation tax... Making Ireland comparatively less competitive to international investors - no doubt helping other euro zone nations... So being part of the Euro not only caused the problem, but now is preventing the real solution to the problem, and in bail out the larger Eurozone countries are insisting on changes that will help their own economies!!
I'm pretty thank ful that Britain is nothing to do with it, but then yes we are - we will pay about 9bn euro to help bail out Ireland as a consequence of their Euro membership. Admittedly this is a self serving act given how much trade we do with Ireland but ironic none the less.
It's easy to make these comments today, the day when the news is full of the EU 'bail-out' of Ireland. Irelands strong economic growth in recent decades has long been used as a case study for the success of the Euro project, but now it is clear that such growth was unwise and unsustainable. When the global economy was growing Ireland experienced a huge property bubble - house prices rising very rapidly due to very low interest rates - yep remember set by the European Central Bank. Interest rates were way lower than Ireland needed them to be & quite simply their economy overheated and grew too fast. As soon as the credit crunch hit and property prices started to fall just slightly then the banks who had granted all those mortgages started to look shaky in face of defaults (mortgage holders struggling to meet their monthly repayments) and when property prices are falling the bank simply can't get it's money back by repossessing the house - there won't be enough equity left. So Ireland's government has had to invest something like 45bn euro to keep their banks afloat.
Right now when Irelands economy is in trouble it needs very low interest rates to stimulate some growth, but again fixed by European Central Bank Irelands interest rates are double what they are in Britain (ok still low but not low enough); & while the British pound has devalued by about 25% over the last 3 years to make our exports more attractive overseas, helping the UK economy out of our mess Irelands exchange rate to it's key trading partners is fixed.
Now a loan will be issued by Europe to Ireland to patch up the issues, and in return Ireland will have to promise to a series of tax and spending revisions that Europe agrees to. Key to these changes that Ireland are likely to have to agree to is raising of it's currently low levels of corporation tax... Making Ireland comparatively less competitive to international investors - no doubt helping other euro zone nations... So being part of the Euro not only caused the problem, but now is preventing the real solution to the problem, and in bail out the larger Eurozone countries are insisting on changes that will help their own economies!!
I'm pretty thank ful that Britain is nothing to do with it, but then yes we are - we will pay about 9bn euro to help bail out Ireland as a consequence of their Euro membership. Admittedly this is a self serving act given how much trade we do with Ireland but ironic none the less.
International Market Scanning
In yesterdays lecture we discussed market scanning & one example given was Halfords ignoring the expertly researched (self flattery - no one else will do it!) report that was submitted to it in 2005 outlining the sensible expansion target countries. At the end of the lecture I was asked whether they had actually been successful in the Czech Republic - I didn't know the answer as while companies are required to publish the corporate results they will rarely break this down market by market. Little did I know that yesterday Halfords provided an update to the city announcing their withdrawal from their international operations in Central Europe (see story below). I am not quite arrogant enough to suggest that they would definitely have been successful if they had adopted the strategy that I proposed, but it is worth reflecting on the fact that in the face of a carefully researched plan developed by someone who had some knowledge of international retailing was rejected in favour of an internal and more anecdotal strategy. How many millions of pounds of have been wasted in setting up and developing a chain of stores over many years and then withdrawing. & the key role of the MD is?? To maximise shareholder value. Sometimes Egos get in the way!
Below extract from http://www.theretailbulletin.com/
Halfords group delivers 13% profit before tax growth
Thursday November 18th 2010
In its interim results for the 26 weeks to 1st October 2010. Halfords group reported revenue of £456.3m, up 7.3% with like-for-like sales decreasing by 4.9%.
Operating profit was up 11.5% to £69.1m representing 15.1% of sales (2009: 14.6%). Profit before tax was £68.7m, up 12.8%.
The Group has seen sales and market share growth in Car Maintenance, Premium Cycling and Outdoor Leisure.
Multi-channel accounts for c.9% of total revenue after further strong growth.
David Wild, Chief Executive, commented on the results,"This has been a period of considerable progress for the Group. In addition to increasing profits, we have successfully completed a number of significant change initiatives. These include the reconfiguration of the Group's warehouse and distribution network, the remodelling of staffing structures and the closure of our Central European operations. In total these reduce costs, enhance customer service and provide a strong platform for our next phase of growth that will be clearly focussed in the UK. We are also pleased to have concluded the refinancing of the Group's debt arrangements on favourable terms.
Our Autocentres business has made good progress, gaining market share. Our development plan is on track with 15 new centres to be opened and the entire network to be re-branded Halfords Autocentres by the end of the financial year. In Spring 2011 we will launch a national advertising campaign to drive sales and firmly position Halfords as the UK's leading independent operator in garage servicing and auto repair. We remain enthusiastic about our investment in this adjacent sector and the opportunity it provides for further profitable growth.
During this period we have demonstrated that Halfords is a resilient and cash generative business that can adapt to our customers' changing needs and deliver growth initiatives for the future. Consumer spending is clearly under pressure and we believe this environment will continue into 2011. We hold market-leading positions however and remain confident that our strategy will deliver long-term sustainable earnings growth.
In the six weeks since the end of the half-year, trading conditions for Retail have remained challenging with like-for-like sales at -5.0%. Autocentres' performance has been encouraging resulting in like-for-like sales growth of +1.2%. We would expect profits for the full financial year to be within the range of market expectations."
Irelands Debt Issues
Friday 19th Nov 2010
The Irish economic problems continue to evolve. As discussed yesterday there would be conditions to any EU 'bail-out' (loan). It seems that Germany and France are putting Ireland under pressure to raise their levels of Corporation Tax - this would in theory increase the levels of tax revenue and thus help restore Irelands economy to balance, however cynics would argue that the French and Germans wish this change so that Ireland becomes less competitive to foreign investment, a levelling of corporation tax rates across Europe would in this case help France and Germany. This provides a snapshot into why Ireland is resisting taking an EU loan. Remember though it's choices are limited - if it cannot afford to raise money by selling bonds (as the rate of interest is too high), then it has to reduce the need for borrowing (a slow and painful process of budget cuts) or take the 'bail out'...
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