Monday, 30 November 2009

Can Scotland really be economically self sufficient?

On November 30th, the Scottish First Minsiter, Alex Salmond, marked St. Andrew's Day by unveiling his Government's plans for a referendum on Scottish Independence. Scotland has been part of the United Kingdom since 1707, when the Scottish Parliament voted to join the English parliament. The Scottish Parliament was subsequently reformed, within the Union, and with limited powers in 1999. While political historians continue to keenly debate the reasons for the Union, there is no doubt that it was gainful in the long run, and its hard to imagine the Industrial Revolution, so dependent on inputs from both sides of the border, being so successful without Scottish participation. The Union also gave Scotland, a country typical of Braudel's thesis of mountain nations less able to support their population, the access to the 'British' Empire that it had long craved.

One of the reasons for Union was that Scotland's own imperial adventure of the 1690s, the Darien scheme, had ended in an abject failure. This was a scheme that saw the formation of the Company of Scotland, which raised at least £400,000 in Scotland, as well as some funds in England, totalling roughly a fifth of Scotland's wealth at the time. The company sent colonists to claim territory in Panama, despite its being territory claimed, though not occupied by, Spain. The attempt to establish a colony called New Edinburgh failed abysmally, with only 300 of the original 1,200 colonists surviving the attempt, with tropical fever claiming the lives of most of the Scots. Tragically a second ship was despatched from Scotland because, in an era before electronic communication, it was not known that the first had failed, with similar results. The loss of savings through the scheme was not surprisingly catastrophic and union with England allowed Scots access to the Empire without incurring future risk. As I demonstrated in my PhD thesis, Scots went on to become very successful foreign investors, in agriculture in Australia and New Zealand, and in mining and cattle ranching the US, among ventures in many other industries and countries (note - the link is to a shorter seminar paper). It seems unlikely that these ventures would have occurred without the long run economic recovery made possible from Union through the agricultural and then industrial exports of the 18th and 19th centuries, many of them to a growing London economy.

Salmond has long claimed that Scotland would be better able to allocate its own resources if it were independent. To do this he has previously pointed towards smaller independent countries in Europe such as Luxembourg, Ireland and Iceland. Both of the latter have suffered disproportionately from the credit crunch, with top-heavy property based economies collapsing while creditor nations, themselves under pressure, sought recompense. The collapse of Iceland's banking system forced it to seek a £6bn emergency loan from the International Monetary Fund; unfortunately much of this will end up being spent recompensing savers abroad. Had Scotland been independent during the present crisis, then with RBS alone loosing around £24bn in 2008 the country would also have been driven to seek aid from the IMF; the whole of Scotland's GDP was £86bn in 2006 (although this excludes oil and gas revenue). To cover this loss alone Scotland would have been forced to spend a more than a quarter of its GDP. Oil and gas revenue might provide some temporary boost but are unlikely to remain substantial in the long term; a smaller economy would also provide more limited opportunities for the profitable reinvestment of these revenues. While the UK is struggling with national debt created by the recession, with the bailout of the banks not even shown on the national balance sheet, the chances of the UK economy growing significantly seem much greater than that of Scotland's alone. Nicholas Crafts writing in 2005 showed that Scotland had a market potential only around 35% of that of London in 1985, because the country continues to find itself on the European periphery. An independent Scotland would undoubtedly be pushed further to the periphery as European business activity centralises further into the London-Brussels-Ruhr-Zurich corridor; surely better for the country to continue to take advantage of its continuing connection to the wider UK so that it can have a more active stake in this centralisation.

Further Reading:

Crafts, N.F.R., 'Market Potential in British Regions, 1871-1931', Regional Studies issue 39, pp. 1159-1166.
Prebble, J., The Darien Disaster (London, 1968).
Tennent, K.D., Owned, monitored, but not always controlled: understanding the success and failure of Scottish free-standing companies, 1862-1910, unpublished PhD thesis, LSE, 2009.

Tuesday, 24 November 2009

UK Borders to close? The declining value of creative goods

More ructions in retail; this time one of the darlings of the out-of-town shopping sector, fast growing bookstore chain Borders, are suffering. Today its former UK subsidiary, which still trades under the name Borders froze new sales via its website while it supposedly finds a buyer; the company is losing money and does not have enough cash to survive until Christmas. Borders were one of the few US based retail chains to come into the UK at the same level of the market as its US based stores, the obvious other examples being WalMart which purchased ASDA in 1999, Safeway, which entered as long ago as 1962 but later sold its UK arm, and Woolworths, which entered the UK in 1909. The US part of Borders has also been finding life tough, having sold its UK operation in 2007, before the worst of the credit crunch hit, to concentrate on reviving its flagging fortunes in the US.

This decline is surely further evidence that diminishing returns in the once high value creative goods sector, that made up of products such as books, music, DVDs and computer games sales remains a serious problem, having already contributed to the decline of the store formerly known as Virgin Megastore, Zavvi and Woolworths in the UK. Competition from internet distributors of physical media such as Amazon has been one problem, and internet distribution via download another. Media can also store more nowadays and that has further driven the real prices consumers are willing to pay down. Physical shops that consumers actually have to visit are at a real disadvantage in this industry as browsing is not always necessary and items can easily be posted or sent digitally. As an example of the falling value of production in the industry, a long-playing album in 1968 cost around £2, which equates to around £25.99 in 2008 pounds using the Retail Price Index. Today its possible to download an album from Apple's iTunes, which probably has more tracks, for £7.99. iTunes' overheads are far lower as they don't have a distribution system or shop infrastructure to maintain, nor do customers have to spent time and money travelling there. It seems likely that the creative sector has a lot more pain ahead of it and pain which is not just a result of the present recession.

Thanks are due to

Wednesday, 18 November 2009

Boardroom Switches

Two UK companies previously featured on this blog have confirmed interesting management changes.

Marks and Spencer, the retailers, who two weeks ago announced the end of their own label only policy have appointed Mark Bolland, Chief Executive of competing retailer Morrisons. It will be interesting to see how Bolland copes as a newcomer to Marks and Spencer, a traditionally fairly insular organisation. Bolland has been very successful at Morrisons, managing to grow sales by 8% over the last year, and increasing market share from 10.8% to 11.8% over the last 15 months. It will be interesting to see how Bolland, a Dutchman, does at M&S; its last executive from overseas, Belgian retail expert Luc Vandevelde, had limited success during his tenure as Chairman and Chief Executive between 2000 and 2003.

Meanwhile struggling commercial broadcaster ITV have announced the appointment of former ASDA Chief Executive Archie Norman. Archie Norman has had a varied career, which also included stints as the Finance Director of Kingfisher, which owned Woolworths for many years, as well as being a Tory MP in William Hague's shadow cabinet. Norman's contribution at ASDA has probably been his biggest achievement so far. Norman remodelled ASDA, which which had pioneered the Hypermarket concept in Britain, on the US giant Wal-Mart, expanding the company's discount non-food lines and avoiding the move upmarket taken by other food retailers. Employment policies were also changed, with the introduction of new bonus structures and employee empowerment schemes inspired by those used by the fast growing Hi-Fi specialist store Richer Sounds. This strategy was so successful that when Wal-Mart was seeking to enter the UK market in 1999, but unable to do so on its own due to planning constraints, it simply purchased ASDA, which has continued to perform well under Wal-Mart ownership. Mr Norman now hopes to turn around ITV, claiming that he had even considered purchasing the company directly through his private equity company Aurigo Investment Partners. Its unclear if perhaps he will go outside of the UK to find inspiration this time, perhaps from the way that US TV broadcasting operates. It seems unlikely that with its core competency in television, which is essentially a declining technology, that ITV will be able to sustain itself alone in the long run. Perhaps Mr Norman can prepare the company so that one day it might become CBS or NBC UK? ABC's owners Disney have been mooted as possible purchasers for ITV in the past, after all.

Tuesday, 17 November 2009

Station Refurbishments - but the UK's worst ignored?

Today advisors to the UK's Department of Transport published a report naming the UK's ten worst railway stations, claimed to fall short of 'proposed minimum standards'. The report recommends that the stations be specifically targeted for refurbishment. The ten stations named were:

Five of these stations are on the West Coast Main Line, or branches of it, which was recently upgraded in a £9bn project with central government funding, although cash was clearly not found to do anything about the state of the stations. Three of the stations, Barking, Clapham Junction, and Luton are busy south-eastern commuter stations which have been unloved by their franchisees for years, although keeping these stations in a good condition must be difficult due to the sheer numbers of people passing through them. Additionally with stations owned by Network Rail, the infrastructure provider and run by the franchisees, the division of responsibility for their long term condition is difficult to determine. A company which may only operate a site for a further five years does not have a great incentive to invest in it, particularly if the station is on a commuter route that locals will use regardless of its condition.

However, this may not be the full picture. The forgotten parts of the UK railway network are the large network of regional lines in the midlands, north and west of England. Such regional lines do not go anywhere near London and effectively exist to provide basic public transport. They are also not funded as well as their Scottish and Welsh counterparts. One such station on this network is Wakefield Kirkgate. Kirkgate is the second station in Wakefield, a town of 76,886 people, but in the 2006-7 financial year only 769 people bought tickets to or from it, though 61,000 changed trains there. While East Coast services to London serve the town's Westgate station, Kirkgate, is the neglected hub for four different regional rail routes, serving places like Leeds, Sheffield and Nottingham, and there are also plans for an 'open-access' service to London. The simple reasons that so few people travel to or from Wakefield via the station are its lack of staff, and the state of abandonment of many of its buildings, built in 1854, which make it a dangerous place to enter or exit at night. Kirkgate is typical of many Victorian stations which have lost services over the years in that many surplus buildings have been left, with no use found for them, and is in such a bad condition that a wall collapsed in 2008 crushing a parked car. The franchisee Northern Rail, which relies on government subsidy, are unwilling or unable to improve the station while Network Rail and the local council have also failed to act. The Rail Minister, Lord Adonis even admitted the station is the UK's worst 'medium-large station' when he visited in July 2009; in the same week a man was attacked at the station with a baseball bat. Worse still, a young woman was raped there in October 2008. Why then, did Kirkgate fail to make today's list? It couldn't possibly be because it has no Inter-City level services or is outside the south-east, could it? A business opportunity is being missed here, as more people would surely use the station if it was a safer and more attractive place.

Wednesday, 11 November 2009

GM update: Germany gives up on GM

A further update in the battle for state intervention in General Motors (see here and here) - today the German Economy Minister, Ranier Bruederie told GM that they would have to fund the restructuring of their European arm, Opel, alone. It now seems unlikely that GM will get state aid in Germany, a move unlikely to be popular with the German carworkers unions. The Germans are upset that GM had called off its decision to sell Opel to the Canadian parts manufacturer Magna, which was backed by the Russian state owned Sberbank. Magna had guaranteed Opel jobs in Germany in return for state aid. GM is presently 61% owned by the US government, (and 12% by Canada, making it a rare joint State Owned Enterprise). At its most sinister the reversed decision to sell to Magna might represent intervention from a US government concerned about technology transfer in the car industry to Russia, a present growth market. At its least sinister, the US government is putting pressure on GM to hold onto their European division, with its access to the EU and the growing Russian market to make the IPO that it is desperate to hold next year more attractive to investors. In Germany, meanwhile we have been treated to the rare spectacle of a government deciding not to intervene in the car industry. Although Germany may loose jobs in the short run if GM does decide to move Opel east, in the long run it will benefit from cheaper car imports. It just depends if this is a silver lining that the German government are prepared to accept. Given their history of intervention, other EU governments still seem likely to support GM remaining in the countries as far as EU law allows. Perhaps the tax payers of Europe will loose out while US and Canadian tax payers profit.

Sunday, 8 November 2009

Marks and Spencer: just another supermarket?

This week the British retailer Marks and Spencer (M&S) made a seminal announcement. On Wednesday M&S Chief Executive Stuart Rose announced that the company will soon be selling 400 different branded products in its food departments. This might not sound like an unusual announcement, particularly to non-UK readers, but M&S have sold own brand food since at least 1941, and from about 1950 onwards sold only their own brand. Sixty years on the company has at last chosen to abandon this famous policy. Rose has claimed that this is what consumers want.

Marks and Spencer has always been a slightly eccentric company. It was founded in the late 19th Century by Micheal Marks, a Russian-Jewish immigrant turned Leeds market trader. In 1894 he entered a partnership with Thomas Spencer, who's background was in the Yorkshire woollen industry. The two established a network of 'Penny Bazaars', variety stores selling household products, at this time similar to Woolworths. Transactions costs were reduced by allowing consumers to browse and choose their own purchases; the standard price of one penny meant that consumers did not have to ask the price or barter, also helping to encourage repeat custom. Although it mainly concentrated on clothing after the First World War, the company began selling tinned food in the 1920s, gradually extending into other ranges. The company also gradually moved upmarket, stocking quality products at affordable prices. In 1928 M&S registered its St Micheal trademark named after Micheal Marks; this name was used by the company on everything it stocked from the 1950s onwards. The application of the brand to all ranges was so comprehensive that a running joke among the British public was that M&S's bananas had the St Micheal trademark running through the inside of them like a stick of seaside rock. There was a risk that the brand might be spread a little thinly, but the company was able to retain the loyalty of most shoppers in its middle class market segment.

Some specialist food retailers, particularly Sainsbury's, and Tesco after 1977, copied this tactic to some extent, introducing premium own range products for everything alongside branded products, while moving to out of town locations with car parks and often providing in-store services that M&S did not such as customer toilets and cafe/restaurants, as well as accepting credit cards. This has left Marks and Spencer as specialists in premium products that people buy as an occasional treat rather than somewhere that people do their weekly shopping. Under pressure as pre-tax profits fell from over £1bn in the 1997/8 financial year to only £145m in 2000/1, in 2000 the St Micheal brand was abandoned for the 'Marks and Spencer' brand on all products. This further underlined the company's retreat into occasional purchases such as party food and ready meals; last Wednesday Rose noted that the company was doing particularly badly in such low order product areas as laundry, personal care, pet foods and beer; all frequent purchases in which branding is important for the consumer. In the case of the first three, the consumer often values a brand as being effective for purpose, in the case of beer the consumer may want to buy Carlsberg or Stella Artois because he likes their taste; M&S beer may be more of an unknown quantity! This announcement is seminal because M&S have indicated that they do not want to retreat into speciality foods but to continue to compete as a supermarket; by doing so they have conceded that their brand alone is no longer effective to compete as a food retailer. It will be interesting to see if M&S will prosper with this approach, or if paradoxically the public reacts less enthusiastically, perhaps fearing that M&S's abandonment of its own brand policy may signal a reduction in product quality by the retailer. Will you now be persuaded to shop at M&S because you can buy Persil, Lynx, Whiskas or San Miguel?

Wednesday, 4 November 2009

GM execute an international U-turn

On September 24th this blog commented on the viability of the volume car industry in mature economies, using the UK as a case study to argue that the industry has generally only been sustained by government intervention of some sort. Today an international row has opened up between at least five countries over state intervention in the car industry. The US company General Motors (GM), featured in Alfred D. Chandler's 1962 book Strategy and Structure as an example of a successful multi-divisional corporation, was forced into bankruptcy earlier this year. The US government provided US$60bn of new financing for the firm; a new GM company was registered to purchase the operations and trademarks of the old. Presently the US government owns 61% of the new company, while Canada owns 12% of the equity. Effectively this makes the company a US State Owned Enterprise (SOE), although the US Government claims not to be involving itself in the day to day management of the company.

As mentioned on Sept 24th GM was close to selling its European subsidiary Opel, which also includes the UK brand name Vauxhall, to the Canadian car parts manufacturer Magna. Today GM announced that it had reversed the decision to sell Opel to Magna, and would instead be pressing ahead with 10,000 redundancies in Europe, from a workforce of 55,000. This decision was motivated by a wish to remain within the European market, which GM says is starting to improve. GM are also thought not to want to miss out on expansion in the growing Russian market, a motive perhaps driven by the US Government's wish to float GM on the stock exchange as soon as possible. It will be easier to do this if GM has strong growth prospects. Meanwhile the German government and car unions are unhappy with GM's decision as they had negotiated a guarantee from Magna not to close any German factories. The German government is now also demanding the return of a €1.5bn bridging loan made to Opel to keep it going while the sale was negotiating, while the IG Metall union has announced a series of walk-outs in protest. Meanwhile in the UK the government and trade unions welcomed the news as it meant that factory closures in the UK now seem less likely. Even the Russians are in the mix - their state owned Sberbank had provided capital for the Magna takeover, and Russian Prime Minister Vladimir Putin announced that the Sberbank-Magna consortium would 'carry out a deep legal analysis of the situation' with GM.

Why then are all these governments fighting for their share of influence over GM? The US, Canada, Germany, and the UK can all be considered to have mature economies, while Russia's economy perhaps presents the main growth opportunity for the car manufacturing industry. It appears that the western governments were again acting to try to halt the long term decline of car manufacturing in their particular jurisdictions. Yet it surely seems likely that while government intervention may prolong the decline of the industry, as previously argued emerging economies like Russia are likely to be in a position to maintain production most economically in future. To complicate matters we now have an SOE in the unusual position of operating across borders, although as with other SOEs that operate across borders such as √Člectricit√© de France or Deutsche Bahn, it is unclear why the firm should be an SOE if it is operated like a private firm. Once again, it is clear that governments should accept that if an industry is declining, the government should concentrate on encouraging replacement industries to develop, rather than trying to keep dead ducks alive.

A Public-Private Partnership not the right way ahead for Royal Mail

Chris Colvin today posted a very well argued article on the Guardian's Comment is Free site suggesting that part-privatizing the UK's beleaguered postal service, Royal Mail through some kind of Public-Private Partnership (PPP) would be a poor idea. The argument runs that part-privatization could be attractive to a government, either Labour or Conservative, because theoretically it would allow for some immediate reduction in national debt while improving productivity. Colvin mentions that PPP has a very poor record in the UK, with companies keen to take on contracts for government without bearing the risk related to them, resulting in moral hazard. This certainly seems to have been the issue with previous PPP projects; the London Underground (LU) was forced by central government to outsource maintenance and infrastructure upgrades to two private companies, Tube Lines and Metronet in 2003. Metronet entered administration in 2007, a failure blamed on poor corporate governance, and its activities have since been absorbed back into LU. The UK National Audit Office reported earlier this year that the failure may have cost the taxpayer as much as £410m. Such a failure in the postal system could end up being even more costly to the public, perhaps more so than managed decline in the public sector.

Monday, 2 November 2009

Banking update: RBS and Lloyds parts to be sold off to the cheapest bidder too?

Tonight the BBC are reporting that a major announcement will be made by the UK Government tomorrow, November 3, regarding the future of the Lloyds and RBS banks that it owns major stakes in following the bailouts of last year. It seems likely that tomorrow's proposal for Lloyds and RBS will be similar to the proposal for Northern Rock featured on this blog last week. At present speculation suggests that both banks will have to split off parts of their branch network to form new 'good banks' (without toxic assets) for sale within four years, while the taxpayer keeps all the bad bits. As with the Northern Rock, the good part of which seems likely to be sold off before the 2010 election, surely the worry must be that four years will not be sufficient for the taxpayer to gain a return on the banks as they return to profitability. However, the hope must be in the Lloyds case that this will undo last year's shotgun marriage between Lloyds TSB and HBOS, one of the largest mergers in UK corporate history, and which the Office of Fair Trading recommended against due to the combined market share of the two banks combined. Whatever happens is bound to be very interesting indeed - it will be interesting to see where this will leave the remains of Scotland's banking industry.


About Me

London, United Kingdom
I'm Lecturer in Management at The York Management School, at The University of York, UK. I teach strategic management to undergraduate and masters students, as well as running the masters dissertation module. My research focuses on business and management history.