Monday, 18 May 2009

HSBC and The Case of the Wrong Viewfinder

The news from the retail sector has been a little better recently. However the story is still one of winners and losers. One retailer that has been losing steadily, even when most others were winning, is Jessops. We have highlighted their dismal prospects before in our Exceeding Expectations blog.

Apparently now they are fighting back. They were back in the news a few weeks ago with an interview with their Executive Chairman David Adams in the Telegraph, triggered by a reported £300,000 refit of their New Oxford Street store described as:

“… likely to be a blueprint for Jessops. The uncluttered store – sleek and black – has been designed to be a "house of brands" for all things camera-related”.

However, what really caught our attention were their reported negotiations with their bankers HSBC. As stated by the Telegraph -

Jessops are now "in a process" which is likely to end with a positive outcome. HSBC has appointed consultants to look at restructuring options, and is deciding – with the company's help – on the best capital structure and the level of debt.

Mr. Adams is coy about the options, but a debt-for-equity swap is an obvious, some say likely, option.”

All our alarm bells rang. Are HSBC seriously considering the possibility of debt-for-equity swap? That would mean making their own shareholders and stakeholders investors by proxy in Jessops!

Why would those investors and stakeholders want this? Every Competitive Strength signal is, and has been for some considerable time, that Jessops is in a Constrained condition, headed for The Abyss. What has changed that could possibly justify throwing good money after bad in this manner? What are HSBC looking at, what level of understanding do they have of the risks they could be taking with other peoples’ wealth?

Apparently, the report continues, it is all OK really - Jessops have a plan. First their offer is going to be as described by David Adams "… all about price, choice and service. On price, we will not be price leaders – we can't with our structure. But we can be competitive. Service is our big differentiator.” That is quite a challenge, considering that right now all the anecdotal evidence is that they are perceived as not being about any of those things, especially service. That's not just our opinion, just what Mary Portas had to say about them. (Link to article)

Then they are going to re-model their stores! This is the same “cunning plan” that is being pursued by the Abyss bound DSG, also a regular subject within these blogs. After the briefest of Hawthorne effect rallies, Jessops is likely to exhibit the same slither back to doom. Furthermore, even at half the cost of the Oxford Street store it would cost over £30 million to refit all their 211 stores.

So whilst HSBC and their consultants deploy their undoubted expertise in the use of the resources and processes of capitalism to find “… the best capital structure and the level of debt” for Jessops, we believe that what has been missing all along in the Jessops saga is “Common Sense”. And for a retailer, one particular bit of Common Sense.

Let us explain.

Once upon a time, if you wanted a good photographic print service you could choose from many options, ranging from the cheap but slow postal services to speedy but expensive retailers – and of course, very expensive specialist processors. Jessops had a special edge, their staff were really knowledgeable photographic enthusiasts, their quality and service compared very well with other retailers, and their prices were competitive. So they had footfall and they had customer relationships - the first and best opportunity to sell other products and services; that was sharpened because the main drivers in the business were brilliant buying coupled with systems and financial policies that were totally focused on service. Based on this, we customers upgraded cameras, bought accessories and sought advice. This all “made sense” and at this point in its history, Jessops was exhibiting many aspects of the high Competitive Strength condition of Excellence, with trading results to match.

By the time the Digital revolution arrived, Jessops had passed into other hands and “professional management”. The logic for the venture capitalists that bought the business was simple. Buy the market leader and then open more stores. This would deliver sales and profit growth to ensure a successful flotation within a few years and a handsome profit to the investors.

As was usual, it was a geared deal where the “lucky” subject of the purchase effectively financed much of the cost of its own change of “ownership”. Stocks were cut thus removing one of the key enablers of the previous exceptional customer service. Payment times to suppliers were lengthened thus seriously weakening their ability to negotiate the low purchase prices that previously had enabled them to offer their customers outstanding value and still make good margins. This converted the business almost instantaneously into a Competitive Strength level of Constrained.

As they had paid the people who knew the secrets of Jessops’ success large amounts of money to go away there was no one to tell them that, whilst this might be conventional business practice, it “didn’t make sense”. As the profits began to dwindle together with the prospects for flotation they set out to “cut costs” further by downgrading their quality of shop staff amongst other changes and further diluting their buying competence. It was not long before Jessops ceased to be a reliable source of advice (customer relationships, remember?) – or anything much else. One attempted flotation was pulled and then at the height of the bull market they managed to float at a deep discount and the shares have hardly been in sight of the flotation price since.

Now all this may be Capitalism but where is the Common Sense? Still nowhere it seems.

The only maintained standard (which kept me as a customer) was the in-shop Print Service with its excellent link to Hewlett Packard’s online Snapfish ordering process which provided collection in the local store (equals footfall, remember?).

Jessops had been visibly slow to react to the Digital revolution – an inevitable consequence of their Competitive Strength weakness. And so the spiral to today’s sad condition accelerated. Now, we suspect driven by their desperation to cut costs, this business has achieved another large step to destroy itself. They have replaced their own On-Line Photo-Print service linked with Snapfish, by a third party “partnership”. It is slower, not noticeably cheaper, and the nearest collection point for me is now 20 miles further away in another town – and worse still, a retail area that no one around here would ever choose to shop in. So now I am not a customer any more – me and the other 125,000 people in this borough. So, at one unthinking stroke, Jessops’ management have succeeded in reducing footfall. We wonder in how many other areas this pattern of folly is repeated?

So we ask HSBC – just what are you looking at – or peering through? How much of all this have you understood before taking a potentially absurd risk with other people’s wealth? We suspect that Bankers’ can get fascinated by the technicalities of financial engineering and can forget that other peoples’ shareholdings, savings, pension funds, insurances and security are at risk.

If there is one constantly trumpeted factor for the avoidance of failure in Retail, we are told that it is footfall. In other words, if you have it, whilst other shortcomings might eventually cause you to fail – if you don’t have footfall then you are doomed to fail regardless, it’s just "Common Sense". As a fact, Jessops have reduced their footfall and their operational management have shown that they are either so unaware or so arrogant that they have ignored this. This seems to us to be basic – basic, basic, basic! Unless there is a substantial hidden agenda, HSBC is starting to appear incompetent or desperate or possiby both!

We return to our constant cry – Bankers need to learn how to assess not just the accounts that their business customers’ provide (those can be sooooo creative!) but also the Comparative Competitive Strength of the enterprise. They need to learn how to look forwards and not just backwards, it’s just common sense!

This means that they need to learn the language of Competitive Strength and the enormous differences (over 100%) in financial potential (that means future performance, folks) that exist between the Constrained level and the Excellence or Free conditions. They need, perhaps, to consider using our Competitive Strength Report and process to provide a more robust and structured approach to their assessment of the future prospects of potential investment and banking decisions. And, since there seems to be so much that they can overlook in these matters, we suspect that they also need to transform their inter-personal communication skills to be able to conduct the level of penetrating conversation that would reveal key facts – e.g. in this case the footfall question. We wonder if due Diligence would be much better executed if accompanied by much more due Intelligence? We think that they need to get much smarter at Finding Out.

You can find out more about all of this by looking at the ChangeWORLD web site here, and the Competitive Strength page here – and the Finding Out page too!

Capitalism or .... Common Sense is brought to you by Steve Goodman and Tony Ericson. It is one of our "Excellence Quartet" of blogs promoting the cause of Excellence as the key to prosperity. Each blog has a new article each month using a recent business/financial topic to highlight different perspectives and conclusions from those obtained using conventional thinking and techniques. You can read the other three blogs at “Exceeding Expectations", "You're having a laugh ... Seriously?", "Business Bloop of the Month Award".