Commercial Awareness Update 13th February by Ben Triggs

1. Brexit bill through the Commons

Last week the Brexit Bill passed through the House of Commons without amends, as 498 MPs voted to give the government the authority to trigger Article 50, with only 114 voting against. The Labour Party and other opposition MPs proposed multiple amendments to the bill, but were unable to gain enough support to change the bill. These included:

• One amendment would have forced Theresa May to give a report back to Parliament every two months – this was defeated by 333 to 284 votes
• Another amendment called for leaders of the devolved administrations to be consulted on any final Brexit deal – again 333 MPs voted against this compared to 276 for.

What happens next?

The bill continued to the House of Lords, where it will be debated and potentially amended. As an unelected institution, the Lords cannot reject the legislation but can recommend amendments to the bill – in this case the House of Commons will be called on again to debate the proposed amendments. Debates start on 20th February and are expected to continue into March. Many commentators suggest the House of Lords will push for amends, which would almost certainly delay Theresa May’s plan to trigger Article 50 by April. However, a Government source warned the House of Lords ‘faces abolition if they block Brexit’ – urging them to deliver the will of the British people.

In other Brexit news, it’s been reported that Chief EU negotiator Michel Barnier is set to demand £48 billion from the UK to leave the EU. The payment is to cover spending the UK has already committed to EU projects up until 2020 and to fund the pensions of officials. Several figures in the EU have suggested that a trade deal cannot be negotiated until a ‘divorce' settlement has been reached. 

Questions to ask yourself… After the public voted for Brexit, should the unelected House of Lords recommend amendments to the Brexit bill? Could the negotiations over the ‘divorce' settlement cause problems for future trade deals with the EU?

2. Snapchat's IPO

After huge speculation, Snapchat’s parent company Snap Inc. confirmed it would be publically floated on the New York Stock Exchange (NYSE). The social media app is expected to be valued at approximately $25 billion and aims to raise $3 billion funding from the IPO. The high valuation doesn’t mean they are making a profit. In 2016, Snap’s revenue was $404 million, but it posted a net loss of $514 million. The valuation is largely based on the potential for large profits  – Snapchat has 158 million daily active users, with an average user going on the app 18 times per day.

CEO Evan Spiegel and co-founder and CTO Robert Murphy have total control of the business, which means they won’t give current shareholders a vote on the public offering – the first time a stock will be made public without consultation of this form. The complete control the founders enjoy is considered a risk by many investment managers.

Could Snapchat go the same way as Twitter?

Last week, Snap’s rival Twitter announced a $167 million loss in the last three months of 2016. Twitter had 319 million active users in the quarter – up 4% compared to the previous year – but their losses almost doubled. On Thursday, the social media giant’s share price dropped 12% as a result of these new figures. It was believed Donald Trump’s use of Twitter and the publicity surrounding this would lead to a financial boost, but this didn’t materialise.

In November 2013, Twitter floated on the stock exchange with shares being offered at $26. On the day it went public, Twitter ended trading at $44.94, but after this latest announcement, shares are trading below $16 per share. Twitter’s strategy for making profit has failed thus far and with a declining user base, this is unlikely to change anytime soon. Snap inc. is growing rapidly at the moment, but staying relevant and a clear strategy for revenue generation is required to avoid a similar outcome.

Questions to ask yourself… How can Snap Inc. become profitable? What are the advantages of floating on the stock exchange? Why do some consider the total control enjoyed by Snap Inc. founders a potential problem?

3. Co-op bank is up for sale

The Co-operative Bank has put itself up for sale, aiming to attract a buyer to acquire all of the company's shares. The bank was bailed out by US hedge funds after almost collapsing in 2013, and has struggled to boost revenues since, due to low interest rates. A merger with Britannia Building Society around the time of the financial crisis caused major problems and in 2013 the bank announced a £1.5 billion black hole in its accounts. To save the bank from collapsing, lenders wrote off their debt in return for part ownership of the bank (a debt for equity swap). 

Co-op Bank hasn’t managed a return to profitability since 2013 and expects to make a loss this year, making it an unattractive prospect for many potential buyers. However, it has loyal 4 million customer base and has been championed for creating a distinct ethical brand within the market. TSB has been tipped as a potential buying and have stated they would consider the acquisition at the right price. After separating from Lloyds, TSB doesn’t have the scale needed to challenge the Big Five commercial banks – merging with Co-op Bank would give them a much larger market share.

Questions to ask yourself… Given its lack of profitability, would acquiring Co-op Bank be a smart move for TSB? Why is TSB’s lack of market share an issue?

4. The recalculation of business rates

CEOs of high street giants have warned many popular high streets will lose shops, restaurants and pubs due to the recalculation in business due to take effect in April. Business rates are charged on almost all non-domestic properties in proportion to the property value – Chancellor Philip Hammond commissioned an update to account for changes in property value since business rates were last set seven years ago. The new “rateable values” will have a dramatic impact on small and large businesses, especially in areas of London and the South East where property values have soared. For instance, Westfields in Shepherds Bush will see a 102% increase. In other areas of the country, rates will go down as commercial property prices have decreased. 

A transition arrangement proposed by the Government will limit the annual increase in the first year, but owners of Pizza Express, Greene King Pubs, Wagamama and many other chains have written to Hammond asking him to reconsider the increase.

Question to ask yourself… Should the government be charging higher rates on successful high streets, while the retail sector is already struggling?

Commercial Awareness Blog 7th February by Ben Triggs

1. Revised Bank of England growth forecast

Last week it was announced the Bank of England has revised its economic forecast for 2017 and now expect the economy to grow 2% - up from the previous prediction of 1.4%. The central bank has also forecasted lower unemployment and a slightly less sharp increase in inflation for the year ahead, as they react to further signs the public and business is dealing well with the impact of the Brexit vote. Despite this revised forecast, leaders of big firms believe Brexit is ‘already damaging business’. In a survey of senior executives from over 100 of the largest 500 companies in the UK, 58% felt the referendum was having a negative impact on their business.

In a rate setting meeting at the Bank of England, it was decided interest rates will be held at 0.25% and a programme of quantitative easing would continue. Quantitative easing is a process of creating money electronically, for the purpose of buying financial assets and inject capital into the economy. The Bank of England has committed to giving a further £20.7 billion to lenders, who have had profits cut by continued low interest rates. Regardless of the positive signs for the UK economy, it is unlikely the UK will see interest rate rises in the near future.

Questions to ask yourself… How will the markets react when the Government triggers Article 50? What are the potential problems of Quantitative Easing?

2. Tesco’s planned Booker takeover

Tesco stunned the grocery sector in January by announcing a plan to acquire wholesaler Booker in a £3.7 billion deal. The takeover has run into problems lately as the supermarket giant is struggling to convince the Competition and Markets Authority the deal is in the best interest of the customer. Booker is a cash-and-carry wholesaler supplying independent retailers and also owns the Londis, Budgens and Premier brands – shops which are independently owned but run as franchises. The deal would add 5,400 shops to Tesco’s network of small stores, but this could lead to Tesco having too much control of the grocery market in some areas. 

Analysts suggest Tesco may be forced to sell over 600 stores nationwide, which are situated less than 500 metres from a Booker owned store. However, Tesco’s suggest Booker’s franchise network operates independently, playing down the potential problem surrounding competition. Lawyers from Freshfields Bruckhaus Deringer and Clifford Chance have been enlisted to provide expertise on the takeover.

Tesco owns 28.3% of the total grocery market in the UK and the Booker takeover could add a further 2% to this share. According to analysts at Bank of America Merrill Lynch, this deal could trigger a merger between Sainsbury and Morrison.

Questions to ask yourself… Will this takeover have a negative impact for consumers? Could the takeover cause problems for small shop owners?

3. Apple and Facebook post strong results

Facebook has announced another very strong quarter of revenue and profit, as they again beat Wall Street expectations in Q4 of 2016. The social media firm earnt $8.81 billion in revenue – a 51% YoY growth - and profits reached $3.57 billion. Facebook’s ‘stickiness’ and continuing growing is defying expectation, with 1.86 billion active users on the social network last quarter (a 3.9% increase compared to the previous quarter).

It was also an excellent quarter for Apple, as huge iPhone 7 sales over Christmas marked its strongest ever quarter. Their net sales in Q4 were up 3% compared to the previous year, which was helped by record revenues in their Mac and Apple Watch division as well. In 2016, Apple had experienced three quarters of declining revenue, so these figures were a welcome improvement for the tech giants.

Despite strong iPhone sales, Apple last week was overtaken as the world’s most valuable brand by Google, after five years at the top spot. Analysts calculate the brand-worth in the top company each year as part of the Global 5000 rankings. In the report, Lego took over Disney as the world’s most powerful brand. The biggest losers in the ranking were fast food chains, as they struggle to break their association with unhealthy eating.

Questions to ask yourself… Has Apple just experienced a Christmas boost or is this growth set to stay? 

4. Trump to roll back regulation

Last week Donald Trump started the process of scaling back financial regulation by ordering a review into the 2010 Dodd-Frank act. One of Trump’s key election pledges was to roll back what he believes is excessive government intervention in finance.

What is the Dodd-Frank act?

Named after the Congressmen who campaigned for the act, it was created to rein in risky practices by banks and other financial companies, while ensuring the customer was given a fair deal. Its primary aim is to prevent another financial crisis like in 2008-09. The law reduced banks dependence on debt and made them create blueprints for handling future crises. It also led to the creation of the Financial Stability Council and the Consumer Financial Protection Bureau – the latter promotes higher levels of consumer protection.

Is deregulation a good thing?

Trump’s administration suggest the legislation has failed to achieve its goals and has hurt community banks, who have struggled to comply with a number of the new laws. They believe banks will now have better ability to set prices more efficiently, therefore benefitting the customer. Wall Street reacted positively to news of the review, with increases to the share price of leading bank – Goldman Sachs rose by 4%. However, many commentators are apprehensive about deregulation, as it increases the ‘too big to fail’ thinking returning, which prevented the finance sector forecasting the 2008 crisis.

Questions to ask yourself…  Could deregulation be a positive thing for customers? Which sectors could be disadvantaged from less financial regulation?

5. Vegetable rations in supermarkets

Supermarkets have set limits on sales of iceberg lettuce and broccoli, after a harvest drought caused by poor weather in southern Spain. Tesco has stopped customers buying more than three iceberg lettuces, while you can’t buy more than three broccolis from Morrison. The aim is to restrict larger buyers, such as restaurants and caterers, so regular customers don’t lose out. Approximately 80% of the UK’s vegetables comes from southern Spain and the bad weather across mainland Europe has also affected contingency supplies from Greece and Italy.

Leading supermarkets are trying to boost supply by importing vegetables from America. However, this will cost significantly more and is likely to lead to increased prices for the customer. It’s reported that Tesco icebergs now cost 79p, up from 50p.

Question to ask yourself… Is the UK too reliant on foreign imports? 

6. And finally... £1 million prize for engineers who made the selfie possible

The four engineers who created the technology which made the selfie possible have been awarded with the £1 million Queen Elizabeth Prize – the world’s top award for engineering innovation. Working in USA and Japan over many decades, they developed the imaging sensor technology used in all digital cameras and smartphones today. Their work made most film based photography redundant and made Skyping, instant digital photography and streaming digital films possible.

Question to ask yourself… How much impact has this invention had to the modern world? 

Commercial Awareness Update 23rd January

May outlines 'hard Brexit'

On Tuesday, PM Theresa May outlined a 12-point plan for a ‘hard Brexit’ and the upcoming negotiations with the remaining 27 EU countries. She confirmed Britain would leave the single market and regain control of their borders. Here are some of the key takings:

• Theresa May hopes to agree a fair deal for a close relationship with the EU, but will walk away if a reasonable exit deal cannot be negotiated. In this situation, Chancellor Philip Hammond proposed that Britain could lower corporation tax (currently set at 17%) to encourage business activity in Britain, instead of the EU. Leading European Parliament negotiator Guy Verhofstadt suggests this would turn Britain into a “deregulated tax haven”.
• Britain wouldn’t be under the jurisdiction of the European court of justice, allowing it sovereignty to create and amend their own laws.
• There would be no financial contribution into the EU, giving Britain more autonomy to choose which projects to fund.
• May is committed to ensuring the rights of the three million EU citizens living in the UK. However, she also suggested one or two EU countries refused to discuss the issue at this early stage.
• Britain would leave the free trade zone (the single market) and will strive to negotiate free trade deals around the world. However, May appeared more open to reaching an agreement within the Custom Union. A Custom Union agrees a set tariff for exports from outside the union – once in the union, these goods can be moved freely across borders.
• It was confirmed both Houses of Parliament will have a vote on the final Brexit deal

The business world reacted positively to Theresa May’s announcement, which provided more clarity to the forthcoming Brexit negotiations. The pound rose 4% against the dollar on Tuesday alone, after a sharp dip on the days preceding the speech. On the most part business is strongly against a hard Brexit, so it may come as a surprise the pound rose after May’s announcement. However, the markets hate uncertainty and providing clarity is likely to have a calming and often positive effect. This initial positivity didn’t stop analysts at Bank of America Merrill Lynch predicting May’s plan will cost up to 10% of Gross Domestic Product (GDP) over 15 years.

Questions to ask yourself… Is lowering corporation tax a viable tactic to encourage investment in the UK after Brexit? Can Theresa May achieve this plan for Brexit?

Inflation at two-year high

The UK’s inflation rate has jumped to its highest level since 2014. The annual rate of Consumer Prices Index (CPI) inflation increased to 1.6% in December, with air travel and food prices rising due to the weak pound. UK manufacturers are now paying 16% more for fuel and raw materials, which will be passed on to customers to help them maintain profitability. The Bank of England target a 2% rate of inflation but projections suggest it will be significantly higher by the end of 2017. Bank of England governor Mark Carney believes consumer confidence will be knocked by highly levels of inflation this year, causing an economic slowdown.  

Apple has announced a price increase of 25% for apps in the app store. UK prices will now match US prices numerically, so if it costs $0.99 in America it would cost £0.99 in the UK. Current currency rates and the cost of doing business in a country have been cited by Apple as reasons for the increases. 

In other news, Apple has filed a $1 billion lawsuit against chip manufacturer Qualcomm. The Korean company owns a number of patents and licenses their microchip technology. Apple claim they have abused their position as a market leader by overcharging them. Apple also suggest Qualcomm aimed to punish them for their cooperation in a South Korean investigation into Qualcomm's licensing policy.

Questions to ask yourself… Are there any benefits of high inflation? Should governments be doing more to encourage competition in the market place?

Dispute over Link cash machines

The future of free cash points is in doubt after banks called for a 20% reductions in the fees a bank incurs. Most of the 70,000 Link ATMs are free for the customer with banks pick up the costs. If you withdraw money from a cash point which doesn’t belong to your bank, there is a 17p charge which your bank pays to the bank that owns the cash point. For ATMs not owned by a bank – like at stations – there is a 25p charge which gets paid to the independent ATM operator. This is the charge banks want a decrease in fees or they have threatened to stop covering the cost – which will either mean the customer pays the fee or the cash point will close.

With the increase in debit card and contactless payments, banks suggest it isn’t economically viable to continue spending such large sums of money funding cash withdrawals. An agreement between Link and the banks is likely to be reached within the coming weeks. If not, there’s a possibility the public will go back to having to use their own bank’s ATMs for free withdrawals.

Questions to ask yourself… With new contactless technology, are ATMs becoming redundant? Should banks fund cash point withdrawals?

Angry Birds creator opening up in London 

The creators of Angry Birds are set to open a studio in London tasked with the development of new multiplayer games for mobile. The Finnish company Rovio will hire 20 people in central London over the next two years, after choosing London over other European cities for its expansion. The company laid off 100 employers in 2014 due to slower than expected growth following the massive success of the Angry Birds app in 2009. Recently, the success of the Angry Birds film boosted revenues and they hope to continue to bounce back with new development in London.

Question to ask yourself… How can London continue to strengthen as a tech hub?

Is technology making us impatient?

The benefits of technological advancement are undeniable and plentiful, however, while technology can enable us to work and live more easily, the risks are becoming more and more evident.

Cybercrime has already been identified as one of the most damaging challenges facing most industries, and that is not the only concern. The risks of negative qualities such as impatience and laziness developing are easily put down to ‘fearmongering’ by technophobes, however, their concerns are not entirely unjustified.

New technology means what we have faster access than ever before and our expectations of quick accessibility are getting too high. As next-day delivery comes more commonplace, a 3 to 5-day wait to receive your item seems absurd, and after catching up on your favourite programme online, waiting a whole 7 days to watch the next episode seems unbearable.

On a larger scale, while businesses can work more efficiently with technologies facilitating day-to-day activities, higher expectations can mar a company’s reputation and potentially decrease revenue. Nordstrom recently announced that they saw an 11% drop in online sales after visitors to their site experienced a slower response time of 0.5 seconds. This is damning for companies that are wanting to make use of new features requiring complex algorithms, such as 360-degree photos and improved user interfaces.

Our desire for fast service means that 50% of us will abandon a sale entirely if the web page takes longer than 3 seconds to load – this is compared to the 10-second wait it took for the same amount of people to leave the site just 3 years ago. In the multi-billion pound industries that make the most use of online shopping, the revenue lost from these sales is staggering.

The media industry, too, is hit hard by the need for immediacy. Illegal streaming of film and music is largely put down to the increasing costs of visiting the cinema and buying or renting films. However, even programmes that are on TV for free (provided you have a TV license) at a much higher quality than copies found online are being illegally streamed at significant rates. This is particularly true of US programmes that are typically released months before in America than in other countries. People would rather watch a poorer quality copy of a programme as soon as it is released than wait a month or two to watch it with good quality video and audio. This realisation could be the reason for companies such as Netflix releasing an entire series of Orange is the New Black at midnight, rather than keeping the usual TV format of releasing a new episode each week. Similarly, the fact that illegal downloading of Game of Thrones episodes increased by 45% in 2015 has been credited as the reason the Series 5 and 6 were simulcast across 170 countries.

On a more positive note, a comparison could be made to smartphones, TVs and computers – the desired size of these devices seemingly takes turns between large and small. As technology advances, a larger device is required before companies work out how to get the same technology into a smaller area. Before long, new technology comes about, taking up more room in the device requiring bigger gadgets and so on. The same could be said about online markets – new technology requires complex algorithms which in turn means longer load times for web pages. In the last year, the average page load time has increased by 7% across the globe, with Australian consumers waiting for almost 52% longer than they did in 2015.  Soon, we will be seeing new ways to make the same technology simpler and quicker to load.

Understanding the dynamics in consumer expectations is vital for any company, and appreciating the cycle of innovation followed by speed can enable companies better prepare for the slower periods.

Sources:

http://www.bbc.co.uk/news/business-37100091

https://www.bostonglobe.com/lifestyle/style/2013/02/01/the-growing-culture-impatience-where-instant-gratification-makes-crave-more-instant-gratification/q8tWDNGeJB2mm45fQxtTQP/story.html

http://www.telegraph.co.uk/culture/tvandradio/game-of-thrones/11535248/Game-of-Thrones-simulcast-will-now-apply-to-UK-too.html


- Ellie Dobbyne

James Ford - Life Lessons from Earlham Hall to Singapore

On Monday 7th December, UEA graduate James Ford returned to Earlham Hall after 27 years. James is currently Senior Vice President and General Counsel for GlaxoSmithKline, the sixth largest pharmaceutical company in world, and his career has allowed him to work all over the world. He came back to UEA to give current students some advice on how to succeed in an international company.

Be authentic. 
One sentence that stuck out from James' talk was 'Be smart enough. Do not be the smartest.' While academic strengths are important, they are not the be-all and end-all. When working for such a large company, employees have to show that they can communicate and have chemistry with anyone that they meet. By being authentic, you can be more relatable and accessible to those you work with, and this is vital for any company to succeed.

Learn the basics. 
This seems pretty obvious. It is important to remember, especially in large companies, that there are masses of people who are above you when you are new to the industry. As James put it, you will be the 'snake's belly' for a while. Instead of being bogged down by making coffee and photocopying, take the opportunity to observe and learn how the company fits together and what your role in it could and will be.

Experiment early. 

When James was a trainee lawyer, he took the opportunity to go on secondment in Hong Kong. This was an unforgettable and invaluable experience. This willingness to adapt and throw himself into opportunities is how James started his career at what was SmithKline Beecham. After qualifying, James accepted a job in a private practice firm, with an appealing salary, but soon realised that it wasn't the firm for him. This experience pushed him to question whether he would be better suited in an in-house position and he ended up taking a job at SKB (now GSK).

Take calculated risks. 

Very similar to the above, risk-taking has been a key aspect throughout James' career. Starting out in London, he has gone on to accept positions across the globe, including America, Saudi Arabia and Australia. While James admitted that each time he and his family moved it was a struggle to adjust, he believed it was worth it, and that it made his job more interesting and rewarding. 

Believe in yourself. 

While in New York, James spent a difficult and stressful 5 months completing the New York Bar. American lawyers and British lawyers are trained to think differently, and James realised his potential to 'think both'. Fewer than 2% of the lawyers at GSK have dual qualifications, and this distinction led to James being offered a role in Singapore. This, for him, has been the most dynamic and diverse place to live, and has challenged him as he works in 120 markets and 36 departments. 

Finally, a piece of advice James himself was given: The harder you work, the luckier you will be. 

- Ellie Dobbyne