Tuesday, 24 February 2015

Ireland facing second mortgage-related banking crisis?

A showdown is brewing up in Ireland between bank lenders and mortgage debt defaulters which if not properly handled could lead to far more than ugly scenes between the public and law enforcement agencies. It could threaten the fragile Irish banking system and even undermine Ireland's return to economic health, so the stakes are disturbingly high. The defaulters' movement draws its oxygen from historical precedent in the late 19th century when Ireland's Land League was formed to resist British landlords seeking to evict cottagers behind with their rents.

The land League movement won a major victory in restricting the rights of landlords in Ireland but a change to the law in 2013, at the behest of the EU, means that the Government has closed a loophole that had made foreclosures on certain mortgages almost impossible. The legal change now makes it much easier for lenders to recover their loans and is designed to cut the troubled banks' debt loads.

Home repossession is a highly charged, emotive subject and perhaps nowhere more so than in Ireland, given its long-standing culture vehemently opposed to evictions and repossessions. "Irish culture is opposed to evictions and repossessions for good historical reasons and that will not change," opined Brian Lucey, a finance professor at Trinity College Dublin. "Culture will always trump strategy," he added but the professor should remember that like God economics will not be mocked indefinitely and when abused too much can destroy empires. So what are the chances of delinquent home owners besting the bankers and ushering in a second banking crisis?

The sums involved are disturbingly high. According to Ireland's Central Bank the mortgages in arrears totalled 117,889, or 15.5% of all outstanding loans at the end of September 2014. While this was a 6.4% decline on the second quarter the number of accounts over 90 days in arrears was 84,995, while those over two years behind, valued at Eur 8 billion, continued to rise and was 7.6% of total outstanding balances on primary dwelling home properties. In addition, at the same time the buy-to-let delinquent mortgages over two years in arrears were 15,435, with an outstanding balance of Eur 4.8 billion, equivalent to 16.6% of total outstanding balances on all buy-to-let accounts. Moreover, the Central Bank's figures do not include the sale of mortgage loans to non-regulated entities, who like sharks smelling blood are now circling to profit from the misery of mortgage defaulters.

The modern Land League of resisters is, as part of its strategy, aligning with politicians to target those industries that have grown up around the mortgage crisis, including hedge funds, private equity, auctioneers and carpet baggers. One such example was when 60 Land League activists were prevented by police from reaching the home of a Dublin accountant said to be working for banks so that they could present him with a wreath commemorating the suicides of people weighed down by debt. The activists are well organized, harnessing cyberspace to interpose their bodies when beleagured home owners text them for help to prevent bailiffs entering their homes. "Our slogan is that we'll be there faster than an ambulance," said Jerry Beades, a former real estate developer who helped found the National Irish Land League last year. The activists' negative publicity is clearly adversely impacting those agencies helping in debt recovery, including disruption of real estate auctions. "From what we hear , they have a problem. They can't get sheriffs to repossess properties and they can't get get auctioneers to sell them," says Beades.

Just how effective the legal loophole was before closure in 2013 can be seen by the fact that despite the six figure number of serious mortgage arrears in the last three months of 2012 there were only 38 foreclosures. Now, however, banks have lodged 10,000 applications to foreclose on homes in the year through to September, four times as many as in the preceding year.

It is natural for aggrieved mortgage defaulters to blame others for their predicament and while there is some merit in taking this stance against lenders who acted imprudently in their exhuberance to lend the borrowers themselves cannot escape some blame for their naivety in financial matters and so should share some of the pain with the banks. That naivety would have been less if economics had been made mandatory in all schools from secondary level and should certainly be made so to prevent history repeating itself. It is an immutable law of economics that every boom precedes a bust.

There may be trouble ahead

It could be argued that already some of the banks involved in the Irish domestic real estate debacle, especially some British banks, have already taken their fair share of haircuts. The Royal Bank of Scotland, for example, while deciding to keep its Ulster Bank going has lost £15 billion since the financial crisis, while Lloyds' latest deal to sell its Irish mortgage portfolio to Goldman Sachs and the private equity group, CarVal, for £1.6 billion has reportedly led to a purchase price of less than half the face value of the underlying assets. Lloyds still has £1 billion of net exposure to Irish non performing loans but just six of Ireland's leading banks represent 90% of the total mortgage market.

Clearly, borrowers should share the pain, especially as, according to one leading Irish bank, up to 20% of the arrears are so-called "strategic defaults" because the borrowers are unwilling rather than unable to make repayments. In a land famed for its chancers such a percentage is not implausible. Both sides are talking tough. AIB, Ireland's second biggest bank by assets, said that their market was preparing to step up enforcement action. "For someone just not paying their mortgage we will take a robust line," said the bank's chief executive. "There is no rent-free option any more." Karl Deeter, of Irish Mortgage Brokers, said the banks need to reconsider repossession of homes in long-term difficulties. "Once people get into long-term arrears it tends to be a one-way journey," he said. Economists have warned that any escalation in the mortgage crisis could force Ireland's fragile banks to raise more capital and delay the country's recovery. Ellen McQuaid, economist at Merrion Stockbrokers, warned: "As things currently stand banks are probably OK but if things continue to worsen on the arrears front then the banks could be in trouble."

It is impossible to calculate how much money is at risk but given the size and longevity of loan arrears the sums could easily run to many billions of Euros if a solution attempt is bungled. It is clearly not an option to allow reckless, naive borrowers to continue their debt welching unscathed. To do so would simply add to the burden of taxpayers and those at risk of more social security cuts.

Wednesday, 4 February 2015

Does Greece deserve more debt relief?

The growing consensus in parts of the British Press and global business media is that Greece should be released from much of its US$272 billion sovereign debt in the interests of ending the country's obvious social pains and restoring its economy to health, and by extension preserve the economic equanimity of Europe but is it a wise course of action, given the risks of contagion down the line and the likelihood that Greece will not take on board the absolute necessity for good political and economic governance?

The country's record of financial governance does not inspire optimism. Over the last 200 years Greece has defaulted on its sovereign debt obligations at least five times and the first recorded debt default goes back to the 4th century BC when 13 Greek city states borrowed money from the Temple of Delos, which ended with the temple nursing an 80% loss of principal. Clearly, Greece is a recidivist debt welcher of the first magnitude. Much of this malfeasance derives from the Greek psyche that drives the population to think it is their God-given right to evade taxes at all cost, thus forcing the Government to borrow ever-more huge amounts, which is not then spent honestly and wisely.

In terms of Government spending, for example, pensions are a good case in point. Although the official Greek retirement age is 65 early retirement is widespread and the average age of labour market exit is 62.4 years for men and 60.9 years for women. An OECD 2009 report discusses the early retirement problem in Greece by asserting: "The comparatively lax conditions to qualify for a minimum pension tend to increase incentives for early retirement. Despite their low level minimum pensions they are relatively generous in relation to the contributions paid by their beneficiaries which creates perverse incentives for certain workers to retire early without any reduction in benefits." These perverse incentives for workers to access early retirement schemes even included bizarre cases. For instance, pensions were given by the Greek State to daughters of military officers and various civil servants if they were not married!

The ubiquitous tax dodging problem is even more disturbing. Greece has suffered serious weakness in tax collection because of its large shadow economy and the real loss from tax evasion can hardly be calculated. One analysis, however, based on prestigious American institutions, suggests Euro28 billion in lost tax revenue in 2009 just from the self employed.  The highest tax evaders are doctors, lawyers, accountants, engineers, private tutors, artists and journalists.

There is no denying the enormity of the unprecedented shrinkage of the Greek economy, which has shrunk 25%, perhaps the worst in modern times, but neither is there any gainsaying of Greece's colossal economic mismanagement, corruption, cronyism, damaging labour restrictions and ineffectiveness at righting these parlous proclivities, which has brought it to its current parlous state. It is true that Greece has cut bloated pensions and raised taxes but their attempts to institute the bailout conditions from foreign creditors are evidently failing, though it seems that the Greek economy has started to grow again, albeit very feebly.

The public sector suffers substantial integrity gaps in both law and practice. A 2010 report, for instance, showed that only 2% of misbehaved civil servants were subjected to disciplinary procedures. A poor system of tax collection, helped by an opaque tax code, allows individuals and companies to bribe tax inspectors and evade taxes. According to a 2011 survey the cost of bribing tax inspectors to "arrange" tax audit activities is reported to range from Euro 100 to Euro 20,000. In such a climate as this it is hardly surprising that Greece is the lowest scored country in Europe for corruption in 2013. A global corruption index of 176 countries placed Greece at 94th position, with one being the cleanest and the 176th the foulest.

In support for the case to forgive a significant slice of Greek sovereign debt, perhaps one third to a half, the point is made that there are plenty of historical precedents for relief on such a scale. Most notably, Germany is cited after World War 2, when in 1953 Germany's creditors recognized that full payment of the country's debts would make revival harder and could destabilize all Europe. Consequently the creditors wrote off half of Germany's debts and made the rest contingent on economic performance. Such debt relief was in all parties' best interests but the comparison of Greece today with Germany after World War 2 is a crass one. The fact is, Germany's industries were shattered, its cities laid waste by war, and given its pre-war position in Europe as an economic power house it was absolutely essential to help Germany back to health. Germany's post war recovery proved an economic miracle, not least because of its business drive from a people imbued with an industrious spirit and respect for clean government and economic good governance. Those key attributes are still lacking in Greece, and without them any more debt relief on top of the billions of Euros already written off by private creditors and banks, would almost certainly be throwing more good money after bad.

Ireland and Finland have already voiced their concerns that Greece should not receive any more debt write-offs and it is plain to see why. Ireland received a bail out and endured much austerity for years as a pre-condition for loans. By following those conditions Ireland is now well on the road to economic recovery. Spain, too, has taken its medicine and is showing good signs of recovery. If Greece were let off scores of billions it would set a dangerous precedent. Other countries in the Mediterranean sphere, like Spain, Italy Portugal and even France whose economic integrity has left much to be desired, could clamour for similar relief, and that could herald the irremediable collapse of the Eurozone currency, and much worse.

This is not to argue that Greece should no longer he helped. There is a good case for extending the loan repayment periods and even, perhaps, suspend interest payments for a few years. But Greece should also help itself, but how? Greece has many islands in a balmy, desirable location. It could, for example, let these islands on 99-year leases, with favourable tax incentives, which alone would bring in billions of Euros in the short term. Longer term, Greece could make better use of its inexhaustible free sunshine by harnessing solar energy to supply the energy-hungry countries to the north. The infrastructure could be paid for by the energy importing countries like Germany provided the energy charges were low enough long term to justify the investment. It would also provide a much-needed boost to employment.

All efforts to help Greece back to prosperity and growth will, however, fail unless Greece is prepared to burn the canker of lousy governance from its soul forever. Perhaps the country would do well to learn a lesson from British history concerning the need to pay their taxes in full. From the late 17th century Britain had two key assets in its empire-building clashes with much larger empires: its system of Government credit, rested on confidence, and a fair tax burden, leading to a remarkably high level of compliance -- a situation that did not exist among England's enemies and so led to their downfall.

Sunday, 1 February 2015

Changing how history is taught could change its course benignly

History, quipped Henry Ford, is more or less bunk, meaning not that it is garbage but rather that one should make history today by living in the present and ignoring tradition. "The only history that is worth a tinker's damn is the history that we make today," he said. Yet if humanity is to progress righteously by making history today it is manifestly clear that history's lessons must be learned if its mistakes are not to be repeated. As the Spanish philosopher, Santyana, remarked: "Those who cannot remember the past are condemned to repeat it." Tragically, such ignorance of the past leads to continuation of modern and ancient ills like extremism, intolerance, pogroms, oppression, discrimination and xenophobia -- proving that history's valuable lessons are routinely ignored. Yet could a difference be made if history were taught differently in schools from secondary level and made mandatory?

The perceived problem with history teaching, it seems, is that it tends to confine students to study only their own country's history and only then for a very short history period. Moreover, there is always a risk that in closed, undemocratic societies the subject will be distorted and perverted for political and religious ends. The subject could also be viewed by many students as boring and dry. If, however, much more emphasis was placed on how history was fundamentally changed over the long term, ultimately for the better, embracing many nationalities and groups that mixed to cause and enrich such changes it would surely give students a less prejudiced view of other nationalities, religions and cultures -- cutting the risks from xenophobia, religious bigotry and racism. It would also make history more interesting.

Even today, invasions and wars begin which show why, if history's lessons had been given due cognizance, they could have been avoided and arguably no better current example of that, in logistics terms particularly, is the Afghan war. This harsh, arid, unforgiving, landlocked country, perfectly designed to confound invaders, made the logistics of supply not only breathtakingly costly but a nightmare. Twice before over the last 200 years the Afghans have humbled two world powers, Britain and Russia, whose arrogance seemingly ignored appalling logistical problems, and again, today, a coalition of world powers has been humbled as they leave with little to show for the blood and gold shed and an uncertain future for the Afghans.  

The teaching of world history spanning millennia does, of course, present its own kind of logistical problems for students, like finding the time and teachers, who themselves may lack understanding of the vast scope of historicity. The problem could be eased, however, if national history was downplayed in favour of global, human and natural events that fundamentally changed the course of history far more than emperors, monarchs and other panjandrums.

Henry Ford himself could have done with such history lessons that might have tempered his well-known anti-Semitic views and their odious connexion involving use of slave labour in Nazi Germany's Ford factories, even before America entered the war. Great men also make great mistakes and the greatest of these often stem from ignorance of history and its disturbing infant of arrogance.

Friday, 30 January 2015

New combi-style articulated forklift transforms warehouse economics

The world's leading developer of articulated forklifts, the UK-based Translift Bendi,* has perfected a unique, man-up, combi-style forklift that delivers substantial cost savings when compared with conventional, dedicated, very narrow aisle (VNA) trucks. The label unique is well deserved because no other truck in the world can handle both order picking and pallet stacking functions concurrently.

This articulated, stand-on truck with working aisle width capability of only 1.6 mt has a separate, independent set of forks at the back which allows the driver to pick and stack concurrently without having to drop a pallet down to floor level to change from picking to stacking mode or vice versa. The standing position allows the driver when facing forwards to use the truck as a normal Bendi with a 1.2 tonne lift to 8 mt and the rear forks can be folded up out of the way if required. Turning round to face the back, the operator can place loads onto the pick pallet and raise or lower the forks as required to keep a comfortable and safe working height. Maximum lift for the order picking function is 6 mt.

This dual functionality on the go is the main unique selling point. The problem with conventional, man-up, combi-style trucks is that in order to change between order picking and full pallet load stacking functions the driver must return forks to ground level to change pallets. With the Bendi, however, the driver could be half way through an order picking list when he reaches an empty pallet location, which he can refill with the Bendi forks facing the forward direction of travel even though it already has a load on the order picking forks. Moreover, when leaving the racking aisles the driver can deposit two loads on the warehouse floor, thus doubling productivity.

Translift Bendi has made it clear that this unique development is not designed to replace ordinary, man-up order picking trucks, but rather to give warehouse operators the chance to gain big cash savings through space-saving gains, lower wage bills and fewer trucks over their current operations using order pickers and reach trucks in the same aisle. Where that happens the aisle must be at least 2.6 mt wide but the new Bendi man-up truck needs only 1.6 mt when carrying two pallet loads. Only at the aisle ends when changing aisles is more transfer space needed than a conventional, one-load Bendi.

The cost implications of this truck are remarkable. If, for example, a warehouse can reduce aisle widths from 2.6 mt to 1.6 mt it can gain up to 30% more pallet locations. It can also dispense with having two different types of truck -- Bendi and reach truck, and save £20,000 per reach truck driver. The Bendi asking price is £45,000 whereas similar spec VNA combi-style trucks would cost 60% more. Translift Bendi claims that in comparison their order picker is also 60% faster but in certain circumstances it could double, and not only for internal work. If, for example, when leaving a racking aisle with two pallet loads, one for picked goods and one with a full pallet load, it could deposit the order-picked load on the warehouse floor and then proceed straight out into the yard to load a lorry. Very few reach trucks have yard work capability and VNA trucks none at all. Productivity, therefore, could be doubled in such circumstances.

There is also an important safety issue. Many warehouses use both pedestrian order picking machines and reach trucks operating in the same aisle at the same time. This can never be an entirely safe scenario. The new Bendi picker, however, dispenses with that risk entirely.

Every now and then there is a major step change in forklift capabilities and cost effectiveness. This must surely be one of them.

Sunday, 25 January 2015

Will robots destabilize society?

Whenever leading British clerics make remarks of a political/economic nature they are often chastised by politicians, particularly of the right, for not sticking to theology, the implication being that they are ignoramuses on non-religious matters. The latest example is the Archbishop of Canterbury, Justin Welby's remarks to an audience on New York's Wall Street, warning that the rise of robots and gene therapy could allow a tiny elite of the super rich to amass more power while almost everyone else grows poorer. But as a former City of London oil executive Justin Welby could hardly be described as an ignoramus on economic issues and would probably shame many politicians on that score, whose profession is often seen as far below a theologian's calling.

To some extent, the Archbishop's fears have already been realized. In real terms American incomes for the vast majority have declined while the top 10% saw a real income rise in recent years, and such disparity is worsening as a tiny majority now control much of America's wealth, a shift helped by legal but morally repugnant tax avoidance schemes whose architects' great wealth give them disproportionately great power to influence tax changes in their favour at the expense of the lower and middle income groups.

There are two key economic aspects to Justin Welby's claim: the rise of inequality of incomes and its implied threat to society and the second, perhaps more serious threat, arising from societal upheavals caused by automation and gene therapy which could reinforce the economic divide. But are his views on robots wrong, reflecting Luddite thinking? It is a difficult one to call but it is clearly a potentially destabilizing issue that will need very sensitive handling to prevent unwholesome consequences in the near future.

Inequality does, of course, matter, at least potentially because in democratic societies, in particular, great wealth brings great power and history shows that such power is often exercised against the public's best interests. But there is one key difference when comparing politics in democratic societies today against those of the past. Properly advised and motivated, electorates can curb the trend towards closet plutocracy, though arguably they have not shown much puissance in that respect so far. So that suggests the greater threat ostensibly is automation, but is there some woolly thinking here?

There is no doubt that futurologists from Thomas Malthus onwards often get it wrong because while their analyses of  problems were seemingly correct the assumptions on which they based their analyses were flawed, which is often why economists' forecasts are wrong. There can be no argument, however, that more repetitive, unskilled jobs will be taken by robots as their price tags slump and they become smarter and more versatile.

A good example of robot cheapening is the mobile Baxter robot endowed with assembly task abilities and costing only $25,000, about one tenth of a typical welding and paint-spraying robot. Even in low wage economies like China the lure of low-cost robots is irresistible. Apple supplier Foxconn, for example, has plans for investing in one million robots in China. As robot prices continue to fall demand will rise and it will by no means be confined to manufacturing tasks. For over 30 years, for example, supply chain functions like storage have seen steady inroads from automation, including both horizontal and vertical load movements, palletising and high speed sortation conveyors. Sometimes, however, the progress seemed a pace too fast, as in Britain 35 years ago when the Japanese forklift manufacturer, Komatsu, trialed a wire-guided driverless forklift that could handle horizontal movements and stacking tasks within racking aisles at what was then Britain's biggest brewer operating over 1,000 forklifts. Labour union alarm and pressure ensured that the revolutionary trucks were dropped. Today there is less union power and so employers will be more likely to embrace robotics.

A controlled, responsible move towards more automation should be desirable but there is a need to maintain a watching brief. New industries will arise to take up the slack in unemployment that may arise through more automation, provided the workforce is adequately educated  to take on the challenges. That is a big aspiration, and unfortunately societal breakdown in family values (one parent families, etc) stymies its realization.  

Sunday, 18 January 2015

UK retailers are crippling suppliers

UK food and drink retailers now face a perfect storm from the price wars raging among the big four grocers and with the surging discounter arrivistes like Lidl, Aldi and Poundland but it is their supply chain partners, and to a lesser extent their 3PLs (third party logistics providers) who face a hellish consequence from the squeeze imposed on them by the big four that account for over 75% of Britain's grocery market. It seems that over 100 food and drink producers are at risk of collapse over this price war and new research shows that the number of UK food manufacturers in "significant" risk soared by 92% to 1,410 businesses in the final quarter of last year. According to recent research, more than 100 of these companies will collapse into administration unless supermarkets treat their suppliers more fairly and trading improves. Neither is likely any time soon.

There have been retail "price wars" before but not of the kind now facing the industry, and certainly not on the same scale, brought on by years of declining consumer real incomes, a paradigm shift in shoppers' habits and the IT revolution that now allows shoppers to buy online the same product in different countries at the best price, so threatening the traditional bricks and mortar model of retailing. Price is now king, and the new heroes are the online facilitators and the discounters giving permanently low prices across all their SKUs, thanks to their business model that the big four cannot yet emulate without going through unprecedented, painful downsizing.

Even before the latest price wars broke out the big four had been squeezing their suppliers for years by using up to 60 different ploys, most notably extending payment periods from 30 days to three months and the ever-present threat of delisting if suppliers refused to come to heel. This attitude has cascaded all the way down the supply chain to the smallest suppliers. Given the most intense pressures yet on the supermarkets they are hardly likely to soften their attitudes to suppliers and that includes the 3PLs who themselves are struggling in difficult markets, even if the majority have five-year contracts with the big retailers. Woe betide them when their contracts come up for renewal.

It is difficult to see through the battle smoke how all the players will react to what seems like a permanent sea-change in shopper's habits. What seems in little doubt, however, is that the big supermarkets will have to cease being all things to all buyers by selling the widest range of goods possible, typically 40,000 SKUs in a large superstore. This is their Achilles' heel when dealing with the nimbler discounters whose stock lines would be less than 1,600 and nearly all popular, fast movers, a key requisite for minimising the most costly of warehouse functions -- huge inventory holding costs.

What must now seem reasonably clear, however, is that the big supermarkets will slash their stock lines to ease their cash flow problems and that means many suppliers facing widespread product delisting and charges for those who are lucky enough to see their products remain displayed on shelves. If the number of food retailers in significant distress, up 58% year-on-year, according to one report, to 4,552 in the final quarter of 2014 is bad enough the picture is even worse for the troubled food and beverage makers who saw a 92% rise. In desperation, the larger manufacturers are easing their plight by shifting the burden onto their smaller suppliers, as Heinz, the baked bean maker, has reportedly done by extending the term suppliers must wait for repayment from 45 days to 97 days. The climate in the milk industry is even direr, which over the last 10 years has seen the number of dairy farmers halve to under 10,000, though this industry's problems have more to do with supply and demand issues rather than retail wars. Yet more trouble is brewing in the poultry business, Britain's biggest selling meat, where price cutting threatens a profit collapse.

The extent of the problem, both political and economic, is potentially huge, given the 3.6 million people employed in UK food supply chains alone but there is much more potential pain on the horizon for traditional retailers and even online sellers like Amazon, Ebay and Alibaba, and it will come from further cyberspace innovations. The traditional retailers who want to survive the coming tsunami from the ether will have to offer an online service and be flexible with their pricing strategy and delivery times.

A good example of a potential game-changer is a new American online start-up called, founded my Marc Lore, a veteran of website shopping and former employee of Amazon. He wants to re-invent the wholesale shopping club for customers who will find just about everything they need in return for an annual fee of US$49.99 after a 90-day free trial period. Lore claims that Jet's prices will be 10-15% lower than anywhere else online partly because, unlike other online competitors, there is no money being made on the transaction. All income derives from the annual fee. Shoppers will also be able to extract more savings if they are prepared to let Jet discover how to deliver goods as economically as possible. Prices, for example, can drop if a shopper combines multiple orders with a single shipment or is willing to wait for a seller offering a more economical shipping option.

Birth and progress are rarely painless and never entirely beautiful. The problem for politicians will be to manage the inevitable upheavals that will affect so many in retailing as sensibly as possible but it could well prove beyond their capabilities.

Tuesday, 6 January 2015

UK retailing suffers Chinese curse

Few things can be eternally certain in UK retailing but what cannot be in doubt is that the industry is about to suffer the ancient Chinese curse of "May you live through interesting times." But what does it mean for the logistics industry, and ultimately the large property companies and pension funds so reliant on their retail property investments? At least three strands of shopping habits are convulsing the industry and a fourth could emerge to see the disintermediation of bricks and mortar retailers in favour of consumer goods producers selling directly to their customers, with or without the use of vast, shared-user order picking stores. This fourth horseman of the apocalypse could wrest back control of the industry from retailers to producers who have for many years suffered bullying by virtue of the big four* retailers' domination of the UK grocery market. Such retailers use up to 60 different odious ploys to squeeze their suppliers, which in turn has forced some of the bigger suppliers to adopt similar tactics with their smaller suppliers.

The catalyst for this development has its roots back in 2007 when casino economics had the banking industry in its thrall. The inevitable banking crisis in 2008 which this writer warned about in the January 2007 issue of Warehouse & Logistics News midwifed a long period of declining real incomes which forced consumers to seek value for money. Today price is king, which hopefully heralds an end to the big four's odious price-changing tricks and their suspicious, cozy cartel behaviour which have never acted fully in the shoppers' best interests. Now the shoppers' and food producers have the power to bring the big four to heel.

The sea change in shoppers' habits involve a shift away from the big, out-of-town retail stores to smaller, retail convenience shops, the remorseless rise of online shopping and, in particular, a move towards the foreign-owned retail discounters of Aldi and Lidl who are taking market share from the big four. The last of these was not surprising to this writer who 25 years ago visited the Danish discount retailer, Netto, who arrived in northern England shortly after and long before Aldi and Lidl came to Britain. Netto's business model was impressively slick.It realized the importance of moving as much inventory as possible for fast turnover, for which it had to harness IT and high speed sortation conveyors at its only NDC (national distribution centre) serving all 120 of its shops nationwide. To achieve this, Netto restricted its SKUs to 600 popular, fast-moving items, and when fast movers became slow they were quickly dropped in favour of new, expected popular items. The result was that all EPOS-connected 120 shops downloaded their daily sales by close of day to the NDC which served as the picking instructions for order replenishment overnight for delivery before shop openings the next morning. Consequently, 90% of all goods stored passed through the NDC every 24 hours, so vast sums of money were not tied up in slow-moving stocks. Depending on the value of inventories held, the cost of holding stocks can dwarf all other warehouse costs combined. This is a key reason why the discounters can undercut the big four by up to 30% across a broad range of products without having to compromise on product quality. Another big help to them was their no-frills shop displays which made store start up costs much cheaper.

The big four tried to be all things to all shoppers by stocking everything under the sun, much of which were slow movers. At that time 25 years ago I commented in Materials Handling News that "If this business model ever crossed the North Sea to Britain it would give the big grocery retailers nightmares." Belatedly, the big four realize this and so are now converting their larger stores into smaller supermarkets, allocating the freed up space to catering, creches, gyms and other smaller tenants, a practice adopted in France by Carrefour and Casino. Some of the large supermarket space freed up could also be used as dark stores -- supermarkets without customers which are used to pack online grocery orders. Sainsbury has diversified in a different way by teaming up with Netto of Denmark to open small convenience stores with a limited stock range to compete with the rapidly growing Aldi and Lidl. Even so, some executives and analysts believe that Tesco, Sainsbury and Morrisons will need to close one in five stores to protect their profits.
Declining market shares and profits for the big four mean that supermarkets face billions of pounds in property writedowns, which will have a knock-on effect on property companies because many retailers have sold their freehold sites to landlords for lease back. While that would pose no immediate problems where leases are long, as time passes there will be an income problem for landlords because if underlying rental values fall with leases getting shorter then valuation yields need to reflect that. Some landlords and big grocers could convert their land into housing but that seems only likely to work in London, rather than the provinces where stores are most under pressure to shut. To make matters worse, the big store chains value the land on their balance sheets at around twice what it would fetch if sold off for housing and Tesco, in particular, is highly geared.

                                                 Property bust?

These significant retail property holdings (Tesco's alone are valued at £11.5 billion) could pose sleepless nights for pension funds who have so much invested in retail properties, and by extension fears for pensioners' incomes because the revolution new technology has wrought in the retail world affects far more than the big four retailers. For some years now e-commerce has shaken up retailing, with online shopping sales for 2014 expected to hit £100 billion in 2014, and while this appears to have contributed to some high street shop closures could it be made much worse by upheavals within the e-commerce world, both actual and potential. Among the actual is the advent of Alibaba, a Chinese-based e-commerce giant that recently raised US$20 billion on the New York stock market. The value of goods sold through its portals in 2013 hit $248 billion, twice what Amazon achieved and three times as much as Ebay, but unlike them it offers a truly global online marketplace to enable border-hopping commerce that bypasses middlemen. Shoppers will be able to compare prices of the same product in different countries as well as source generic products at the cheapest price. Buyers will have a world of sellers from which to buy anything and the increased competition is likely to standardise and depress prices globally.

An example of a potential e-commerce threat is the ability of major food and household consumer producers to band together to finance huge, shared order picking centres for direct home delivery to shoppers so as to disintermediate the current retail set-up which involves unnecessary retailer costs and profit margins. If this and the Alibaba effect succeeded then the sparks would fly upwards for landlords and pension funds.

To some extent, the disruptive e-commerce events have already forced changes in the logistics industry. These include making loading bays more flexible to accommodate a wider range of delivery vehicles from 40-ft double-deck trailers to medium and small vans for home deliveries. Dedicated e-commerce fulfillment centres are also being built. But it seems the good times are over for the logistics equipment providers used to a decade of the big four's huge expansion spree. According to one consultancy, large supermarket openings will roughly halve in the 2015-16 financial year to 1.5 million ft2 compared with the preceding year. On the other hand, demand for delivery vans should continue strong.
*Tesco, Sainsbury, Asda, Morrisons