Tuesday, 19 January 2010

Cadbury sale not the last sweet in the packet

Today the Cadbury's board finally caved into an increased bid by the US food conglomerate Kraft. Unable to trust its shareholders to resist Kraft's offer, the UK chocolate manufacturer's board announced its support for the £11.5bn bid, worth 840p per share. This is a reminder that companies exist to create shareholder value, whatever their cultural role may be. The sale has not been popular in the UK media and with the UK government, with Enterprise Secretary Lord Mandelson, and then the Prime Minister himself warning Kraft that they do not want to see cuts in employment or production in the Cadbury business. However, perhaps Mandelson and Brown should not panic. We have been here before. Although Kraft purchased Terry's of York, the manufacturers of chocolate oranges in 1993 only to close UK production down in 2005, overseas multinationals generally have good form in the UK confectionery industry. In 1988 Rowntree Mackintosh, then the second largest UK manufacturer after Cadbury, was purchased by Nestle. Although Nestle stopped the UK production of Smarties at the Rowntree factory in York in 2006, the company continues to manufacture such best sellers as KitKat, Aero and Rolo chocolates in York, along with other sweets such as Fruit Pastilles, among others. Its also worth mentioning that the US company Mars has been producing chocolate at its Slough factory since 1932, with little production moved abroad. While chocolate is a commodity product of sorts, to improve the bars still relies on high level food science of the sort found in advanced economies such as the UK. Access to local supplies of milk is also important, while Cadbury's Bourneville factory in Birmingham remains ideally placed for food distribution. The UK remains an advanced market which demands luxury foodstuffs such as chocolate and there is little sign that demand is decreasing. Chocolate manufacture is an industry that is likely to remain in the UK for a long time to come.

Research Note: The Business Archives Council is currently acting to secure the Cadbury's archive.

Monday, 11 January 2010

The End of the Abbey Habit

Today saw the Spanish Banco Santander Group announce that it will be re-branding its UK subsidiaries Abbey and Bradford and Bingley as Santander UK with immediate effect. For Abbey, once an industry leader in the mortgage and savings market, and a pioneer of building society de-mutualisation in the late 1980s, this seems a sad end for a once well known British brand.

Abbey can trace its roots right back to the National Permanent Mutual Benefit Building Society established in London in 1849, in compliance with the 1836 Building Societies Act which allowed the creation of societies to lend money from subscribers to fund house building. In 1874 the Abbey Road & St. John's Wood Permanent Building Society was formed in north west London. In 1944 this society, now the UK's second largest merged with the National, by this point the sixth largest society, to create Abbey National, with assets of £80m, to exploit the expected post war building boom. The society, rooted in the affluent south east, prospered; by 1968 the society had assets of £1 billion and a network of 150 branches. Despite the poor economic conditions of the 1970s the society continued to prosper, compiling assets of £5.8bn by 1979, supported by a network of 500 branches. The brand was also a very strong one, with its clever logo of a couple holding up an umbrella that was also a house roof, while youngsters were told to 'get into the Abbey habit' (habit, Abbey, monks), later, saving with Abbey was 'the habit of a lifetime.'

In 1989 the Abbey National was the first building society to take advantage of the Thatcher government's de-regulation of banking, converting itself into a bank by granting its members shareholdings proportional to their savings. It would be easy, and lazy to suggest that the demutualisation of Abbey was what led to its eventual purchase by Santander in 2004. Like industry contemporaries Halifax and Northern Rock, there was nothing inherently wrong with Abbey National's business model as it stood. However, the company diversified into new operating areas in which it lacked experience, notably wholesale lending and the insurance industry. Exposure to the Enron collapse of 2001 coupled with a slowdown in the wholesale lending market damaged the Abbey National. In an attempt to fight back the company restructured in 2003, with new Chief Executive Luqman Arnold expensively re-launching the consumer brand by dropping the 'National' from the name, and introducing a new logo and colour scheme, to try to paper over the cracks. Consumers were not convinced by this however, despite the aim of the rebrand being to make the Abbey a more radical, friendly bank.

Santander steered Abbey capably through the financial crisis of the late noughties, notably avoiding exposure to the US sub-prime mortgage market. What remains less clear is how well Abbey's customers, and those of other banks, will take to the Santander name, so far only known in Britain via the company's sport sponsorships, notably in motor racing (Abbey's corporate identity has been identical to Santander's since 2004). One thing is for certain; the disappearance of the Abbey name is a reminder that nothing in business is permanent, even in 'permanent' mortgage banking.

Wednesday, 6 January 2010

Lord Mandelson sets out his path to UK recovery; is it the right one?

This blog enters 2010 with a look into the UK's industrial future. Today the Business Secretary Lord Mandelson showcased his new policy agenda 'Going for Growth: Building Britain's future economy' in a lengthy speech at the Work Foundation. This blogger was pleased to be given an invitation, and duly took it up. This speech has got a little lost among the news noise of a possible Labour leadership challenge and bad weather in the UK, but it remains important, and also suggests that the government are at least aware that economic growth is the way to get the UK out of debt.

In terms of business policy Lord Mandelson is broadly suggesting that the UK should look away from solely relying upon the financial sector for economic growth and tax revenue. Government will aim to set up new partnerships with the private sector to drive capital investment, while the government will attempt to pressurize firms to improve the links between pay and performance. The sectors to be concentrated on will generally be knowledge intensive, such as electronics, the nuclear industry, plastics, biotechnology and low carbon industries. A regional approach will be pursued, with Regional Development Agencies working closely with Universities in their areas to establish new R&D centres of excellence. These will include a plastic and electronics centre of excellence in County Durham and a nuclear centre of excellence in Yorkshire. Herman Hauser, mentioned on this blog previously in his role as co-founder of Acorn Computers, will report on the possibility of the UK emulating the German Fraunhofer Society to establish a new research concentration. Universities will also be expected to commercialise their work further.

A new Technology Strategy Board will direct all these new research activities, as well as the new Innovation Investment Fund, which will make grants to SMEs of between £2-10m. Some funding will also be given to infrastructure development, although this will require private sector co-operation, but will involve the further expansion of broadband internet access and railway electrification among other projects. Lord Mandelson also has lofty aims for corporate culture; with former Courtaulds Chairman, and present Chair of the Financial Reporting Council Christopher Hogg having undertaken a review of corporate governance. Among the most striking of proposals was that any company making a major acquisition would have to set out a full manifesto for the future of the assets, including what would happen to the head office and R&D functions as well as the productive assets of the company. We were also told that the fiscal plans now set out by the Conservatives suggest that they have no real plan for the future beyond cutting public spending, prolonging recession. An interesting policy agenda for sure, and one which Mandelson claims will see a 'new politics of production and growth.'

But how realistic is this policy agenda? Very little was said in the speech about the future of the service sector, surely now the most important element of the UK economy (and infact the most important element of the economy since at least the mid-nineteenth century). It is true that British manufacturing, while continuing to shrink in employment terms has become more productive, and also true that the UK continues to have a good record in scientific research. The UK also already has a good record in knowledge industries, particularly the niche low-economy-of-scale parts of them. It may also be the case that under such a research intensive policy a lot of highly skilled and high earning jobs will be created, but its less clear that the UK will be able to capture the longer term rents of these inventions. The UK already has a fantastic historic record in invention, with inventions as diverse as the steam engine and polyester fabric historically emerging from its economy. However in both fields it has been clear that just because a country invents something, it does not confer permanent competitive advantage upon that country in manufacture, with today very little polyester fabric manufacture remaining in the UK. The UK is also likely to be unable to competitive advantage in the manufacture of these new products for long, at least for the mass market; as the adoption curve for a new technology rises, the returns per unit from its production fall, and maufacturing is likely to move to developing countries.

While it is worth investing in R&D to the extent that it will generate TFP growth in the UK, it seems that Lord Mandelson may risk placing Britian's eggs dangerously in this basket too, perhaps creating the risk of a UK based 'green technology' bubble reminiscent of the Californian dot-com bubble of 1999-2000. To reduce this over-dependence, surely Lord Mandelson should be looking to further development of the UK's service sector away from manufacturing. Most of the value of products is actually created through their distribution and retailing, not their manufacture. Additionally, in an online world services are becoming increasingly exportable, while knowledge can remain an important input. The UK should also target research resources towards service industries to help them to remain a competitive source of employment in the UK, not just attempting to create a new manufacturing sector which is unlikely to have a great life expectancy. The UK can have a vibrant economic future which need not only mean relative economic decline, but this will only be possible if growth comes from all the sectors in which the UK is strong, not just some of them.


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.