Know your Market – Know your Customers
The year-end announcement by Tesco of a stunning £3 billion gross profit from worldwide operations was soon followed by the announcement it is expanding it’s F&F fashion offer into the growth economies of the Middle East and Central Asia through franchise deals. They seem to have learnt from their disastrous foray into the USA with the Fresh & Easy store brand. Partnering with an established local retailer ensure stores reflect local preferences rather than imposing a “one-size-fits-all” approach, as used for Fresh & Easy.

Knowing your customers and adapting your offer to suit is more important than ever if you’re selling into a non-European culture.
The Fresh & Easy format is much smaller than most American supermarkets and stores are located mainly in “blue collar” neighbourhoods on the US West coast – California, Nevada and Arizona. When it was launched at the end of 2007 it planned to open up to 1,000 outlets based upon a projected break even of 2013. The site of their equally-ambitious distribution centre acquired in Southern California is bigger than Disneyland.
But sales at the first 100 stores to open have been so poor that Fresh & Easy lost some £120 million last year and Tesco have mothballed many new openings. They seem increasingly likely to pull out of the USA altogether at a cost to themselves of some £1 billion which is affordable to the mighty T but must hurt neverthleless.
Tesco have blamed poor sales on the economic recession but US analysts say that’s wrong. What they failed to appreciate was just how deeply conservative (with a small C) American shoppers are – especially in blue collar neighbourhoods. Given that the US economy is so enormous and self-reliant (only 39% of US citizens own a passport, versus 71% in the UK) there’s little appetite for new-fangled British retail methods like self-service checkouts. Shoppers have complained about portions being too small for American appetites (have you ever seen the size of a US shopping trolley?) and short expiry dates on food items.
“I’m paying for the groceries so they need to pay for a full service checkout” is a common complaint despite prices being up to 15% cheaper than the competition. Marketing and products seem to be aimed at more affluent shoppers than the pickup truck-driving, steak-barbequing, good old boy. As one analyst said: “Fresh & Easy is a format muddle. Instead of promoting berry-flavoured gourmet cheese and Spanish sparkling wines, they need to focus on the basics: essential food and grocery items at the lowest possible prices.” Sounds like an Aldi format to me.
And talking of getting a caning…
I tend to shy away from politics but the blistering performance of UKIP in the local government elections was so remarkable I assume the coalition government is getting the message. One of the many issues to have eluded the coalition is how everyone dislikes any government which messes with their home – “an Englishman’s home is his Castle” etc. As well as reneging on the pre-election commitment to abolish Inheritance Tax, HMG have now introduced “empty-bedroom tax” on recipients of housing benefit who occupy Council and Association housing. How unimaginative. No-one likes new taxes but everyone does like opportunities, so why not encourage people to move back into work and use the national property stock more efficiently by incentivising them to let-out empty bedrooms? This could be administered through HMRC and the domestic rating system – and in return the pointless individual rating assessment of Market Hall stalls could be dropped.

And here’s another bright idea – in the middle of “the worst recession for 60 years” why not scrap the HS2 high speed rail line and instead spend a fraction of that on high speed broadband to everywhere in the country to stimulate business development? The government is promoting HS2 to overcome the “North-South divide” but experience from Spain suggests High Speed Rail simply concentrates economic growth in the capital. PS: The business plan is based on a cost of £59 billion versus revenue of £33 billion. Do you reckon you could sell that to the Manager at your Bank?
And finally, the charming story has emerged of an unnamed 73-year old lady locked into a French supermarket over New Years Eve. Apparently she was doing some last-minute shopping In the Intermarche store near Lille when she felt dizzy and retired to the Ladies loo to recover. When she emerged ten minutes later the store was deserted and ferme. She then set off the alarm which was ignored by the local gendarmerie who were enjoying a knees-up, so instead she tried to get some kip in a back office. That didn’t work so she spent the night wandering the aisles looking for bargains before being discovered none the worse for wear the following day. A spokesman for Intermarche cunningly diverted attention from several rather fundamental management failures with typical Gallic sang froid. He announced the supermarket was packed with seasonal champagne and truffles but “she was too polite to help herself to food or drink”.
Having made her miss the New Years Eve I hope they had the decency to donate everything needed for a slap-up birthday party.
Burton Market: All Set for Change
It’s all change this summer at Burton on Trent where the historic Market Hall is set for a £1.6m refurbishment and conversion into a multi-use venue. In response to falling footfall over recent years the owners, East Staffordshire Borough Council have opted for a groundbreaking refurbishment which enables the building to be used as a Market Hall during the daytime and public entertainment venue in the evenings.
The imaginative design – by NRN Design of Manchester – will provide relocatable stalls on the sales floor which can be moved aside to create an evening auditorium for stage entertainment, shows or private receptions. Existing shops which front onto Market Place will be refurbished for catering and restaurant use and their upper floors knocked-through onto the unused balcony which overlooks the sales floor to create new dining and bar areas for evening use. Audience seating and a demountable stage will be provided for entertainment uses.
East Staffs have appointed Quarterbridge to organise the works which are due to be completed in 12-months time. A spokesperson said: “A multi-use conversion like this is an industry first, but making better use of the building for more hours per week is the key to protecting it and ensuring a sustainable future for it’s businesses. Imaginative design and imaginative management in partnership with the town centre team will create a new focus for Burton.”
Existing traders are being relocated to space with Burton’s Octagon Shopping Centre and a preletting campaign will kick-off next month aimed at offering a low-cost outlet to independent retailers from across the Derby/Stafford/Lichfield catchment. The Open Market will be relocated to Station Street to allow the new 6-day general Market to be extended with periodic Farmers, Flea, Arts & Crafts and Antiques Markets.
The multi-use proposal is being promoted as part of the Councils policy to stimulate Burton’s evening economy and challenge the night-time attractions of Nottingham, Derby and Leicester. The entertainment space will also be available for pop concerts, Cinema screenings, private functions and trade shows promoted in conjunction with town centre management – and maybe even indoor cricket!
For letting enquiries contact Hayden Ferriby on 01206 761000 or email: hayden.ferriby@quarterbridge.co.uk
Mean and Green: Supplier Discounts and Fatbergs
Firstly, the Mean: Retailing is tough and everyone is toughening-up – even the John Lewis Partnership, much-admired owners of Waitrose. One of JLP’s suppliers has released an advice note confirming the new JLP “growth rebate scheme” under which suppliers are required to give a rebate of up to 5.25pc of the value of their annual contract. This came soon after JLP reported a 16pc increase in pre-tax profits to £410m and Debenhams informed some suppliers it was cutting supply prices by 2pc and delaying payments from 90 to 120 days.
You don’t get to be a big retailer without being tough so most supply contracts already discount invoices for early settlement and impose a marketing levy on suppliers. The “growth rebate scheme” could be seen as another unwelcome turn of the screw but JLP justified it with:
“Our suppliers have…benefitted from increased profits levels through efficiencies provided from the increase in volumes…thanks to investment in new stores, refurbishments and growing online sales. The intention at all times is to develop a long-term business with benefits for our Partners and a sustainable growth opportunity for our supply base”.
The Forum of Private Business thought otherwise and branded JLP a bully and the scheme as outrageous. The FPB spokesman said: “What a way to treat your suppliers who are effectively having their pockets picked on the back of strong trading”. The supplier has understandably opted to remain anonymous but said:
“JLP has changed out of all recognition. It used to be the most supplier-friendly Company and highly ethical, in fact I would say the best. For any small Company to secure a contract with them is a fantastic opportunity and I have no doubt every supplier offers their very best price to JLP from the outset. Even though individually the staff are excellent the corporate culture now demands the staff extract every penny they can from their suppliers”.
I’m sorry, but I’m not surprised. Things are getting tougher and the “kipper season” is worse than ever for suppliers. First quarter cashflow has definitely got tougher over the last few years and the interminable round of chasing overdue payments has pushed some Market businesses over the edge. One Stallholder I know has accepted the inevitable and now takes a well-earned “buying holiday” instead. He closes down in late January and flies out to the Far East with his family to visit his suppliers. He spends a couple of few weeks traipsing around factories in China and Vietnam whilst the wife and kids lie around the swimming pool at the Hilton, then with a three-month advantage on offering new product lines he returns to the UK refreshed and ready for action. And the best bit of it is the costs are tax-deductible as buying trips. A clever bloke and one who doubtless puts the screws on his suppliers whilst he’s out there. What goes around, comes around.
Now for the Green: Thames Water and Utility Company 20C have announced a deal to fuel a power plant in East London with solidified grease – “Fatbergs” – excavated from London’s amazing Victorian sewer system. At present it costs Thames Water about £1 million/month to remove congealed fat and grease from their sewer system before sending them to landfill. Using them to fuel a power plant instead is a neat, green alternative.
Thames Water have agreed to buy back half the electricity generated to power Beckton sewage works and a desalination plant which creates fresh water for Londoners. When the desalination plant was originally proposed it was criticised for being too energy-intensive and former Mayor of London, Ken Livingstone suggested the money would be better spent mending leakages in distribution pipes than pumping more CO2 into the atmosphere. Good point Ken and one that prompted a rethink. The operators then proposed the plant would be fuelled entirely from renewable energy – fatbergs, waste cooking oil and animal tallow collected from London Restaurants (and Smithfield Market?)

OK, a power station fuelled by fatbergs is never going to be as cheap to run as one fuelled by natural gas but the accountants had read the Renewables Obligation Order 2002 which credits users of renewable fuel with Renewable Obligation Certificates. These can then be sold onto other UK electricity suppliers to offset their obligations to generate 20% of their electricity from renewable sources, or in effect pay a fine. That makes the figures work.
Now what’s this got to do with Markets? Well, a sophisticated industry has built up around managing energy costs and designing for energy efficiency. When refurbishing a Victorian Market Hall the Architect spends a lot of time worrying about roofs and drains. Out of sight means out of mind so the capital budget is often swallowed-up by 100 years of slinging anything down the drains. Precious little cash may be left to refurbish the stalls and install energy-efficient heating and lighting. Thanks to the Renewables Obligations Order and Feed-in tariffs those odd-looking photovoltaic panels and wind turbines on the roof are feeding electricity back into the grid which reduces your service charge. You can help as well by putting your waste cooking oil into the designated container, not down the drain and separating your cardboard for the manager to sell on at £50/ton.
Rising energy costs are here to stay and the days of smelly compactor bins leaking onto service yards will soon be in the past. Unfortunately, supplier discounts won’t be.
Two Dead Certs: Morrisons and the Cheltenham Gold Cup
A couple of interesting news events emerged from the “Big Four” Supermarkets in March – Morrisons are going online and Tesco have bought-into the Restaurant chain “Giraffe”. Look and learn.
Firstly, Morrisons – the Bradford-based chain is definitely worth watching. They announced as from 2014 they’ll be selling online so are negotiating a delivery deal with Ocado. For the last 13 years their management was sceptical about online sales but that has now changed. In the meantime they’ve swallowed-up the Safeway chain with less difficulty than predicted, dodged the horsemeat scandal because they run their own abbatoirs and developed their in-store “Market Street” offer which, I have to say, is not bad at all.
But last year Morrisons lost market share from 12.4% to 11.8% and like-for-like sales fell by 2%. The resulting 7% fall in before-tax profits was their first for several years although sales in London and the South East grew strongly. But they recognised they had a couple of problems and announced in February:
“We are at a structural disadvantage as we do not yet have a meaningful presence in either convenience stores or in online, the two fastest-growing sectors of the market.”
Not for long though, because they then snapped-up 62 stores in the South East from failed retailers Jessops, Blockbuster and HMV. This was much to the relief of High Street landlords and town centre managers. They were acquired at rock-bottom prices thanks to the recession and will now be converted into “M Local” convenience stores. Nice timing.
So what else made Morrisons’ change their mind about online sales? Maybe because they recognised it as THE growth area in retailing and maybe because they’d done their homework. The essence of running a profitable supermarket is keeping overheads down e.g. food handling (use self-service) and transport to the consumer (offer free parking and get them to come to you).
The problem with selling online is you get lumbered with the costs for stock-picking and deliveries, so an ever-cautious Morrisons hit on the strategy of purchasing a 10% stake in New York-based online grocer Fresh Direct. They then sent a team to the USA to learn how to run online sales profitably and are now using that experience to put the screws on Ocado. That’s the way to do it – learn from someone else’s experience.
Secondly, Tesco: The Company announced a purchase of the 50-unit Giraffe restaurant chain for some £48million as part of it’s strategy to turn Supermarkets into “all-day destinations”. This is common enough in Europe where edge-of-town Supermarkets often occupy the same building as smaller shops – jewellers, bakers, newsagents etc – and Tesco have already tied-into coffeehouse chain Harris and Hoole, bakery group Euphorium and online film service Blinkbox.
Their commercial director, Kevin Grace said:
“We’ve been doing a lot of thinking about retail destinations and how our stores might become somewhere that people spend more time, as well as shop. With more general merchandise moving online we have a great opportunity to rethink how we use the space in some of our larger stores. We want the dining experience to feel separate from the weekly shop because it’s a place where customers can take a break and relax.”
Being stuck all day in a Tesco sounds like the stuff of nightmares to me, similar to searching for an exit in an Ikea store. I’d question whether this can work outside the South East where retail sales are still buoyant. It all sounds a bit London’ish to me.
So finally, what lessons can be learnt from this: Self-service, free parking, online sales with a delivery service or a more leisure-based experience? Now that you have a long queue of impatient shoppers waiting to be served the dilemma is: How many tills do you need to provide?
At this point you need to study so-called queuing theory developed by Danish statistician Agner Erlang to improve the Copenhagen telephone exchange. Look it up on Wikipedia – this is heavyweight statistical probability stuff used by Supermarkets to calculate how many checkouts they need. It takes into account factors like balking (customers refusing to join a long queue), reneging (leaving a slow-moving queue) and jockeying (switching between queues). Somehow a Poisson comes into it as well – isn’t that French for “Fish”? You can also entertain yourself by testing the theory on your customers e.g. who has the sharpest elbows or heaviest handbag etc and gets served first?
Which got me wondering – could queuing theory be used to outwit Bookies? If there are X number of horses in a race over Y number of hurdles then making allowance for balking, reneging and jockeying will queuing theory predict which horse comes in first? I tried this at Cheltenham Gold Cup instead of my usual “bet on the jockey, not the horse” system. And I lost the lot. Boo Hoo. The theory didn’t know that Barry Geraghty and Bobs Worth had won the Hennessy Gold Cup back in December but the Bookies did.
The Gold Cup destroyed my belief in queuing theory and replaced it with barefoot theory. This predicts that you will never see a Bookie’s children walking around in bare feet.
A fiver, each way: “Market Matters” – March 2013
The joke potential of the horsemeat scandal is just too good to ignore:

So a horse walks into a bar and the barman says: “Sorry mate, we don’t serve food in here”.
Public anguish at revelations that we’ve been eating Shergarburgers has now eclipsed outrage at tax-avoidance by Amazon and Starbucks. Environment Secretary Owen Paterson has told the Food Standards Agency to investigate claims that regular warnings of horsemeat entering the food chain were ignored. The Meat Hygiene Service allegedly warned DEFRA two years ago that the “horse passport” scheme designed to stop horsemeat from entering the food chain was not working – ironically because of concerns about British horsemeat exports of which there are some 9,000 animals a year. The service was worried about the 75 UK organisations which can issue horse passports and make it easy for fraudulent traders to export horse carcasses as beef.

Ignoring the warnings may have been doubly-unfortunate as the Romanian government has banned horse carts from public roads as “not consistent with membership of the EU” and horsemeat has sometimes been found to contain the veterinary anti-inflammatory drug phenylbutazone. This can be dangerous to humans but the risks are pretty slim so anyone consuming horsemeat is likely to remain stable.

Where did all the horses end up? Not, it seems the Welsh retirement home for pit ponies in Pontypridd but the French meat processor, Spanghero near Toulouse. This agricultural co-operative is accused of fraudulently re-labelling some 750 tonnes of horsemeat before selling it onto manufacturers like Findus who churned-out some 4.5 million ready-made meals in 13 countries. The irony of selling horsemeat onto the “Rosbifs” may not have been lost on the French government but given how snobby they are about their reputation for cuisine the Consumer Affairs Minister Benoit Hamon promptly closed it down.
Testing by the FSA has so far identified seven different products which have been withdrawn from sale: Tesco value frozen burgers and spaghetti bolognese, Aldi’s special frozen beef lasagne and spaghetti bolognese, the Co-op’s frozen quarter-pounder burgers, Findus beef lasagne and Rangeland’s catering burgers. There’s no mention of any other Quarterpandas. The Chief Executive of the FSA, Catherine Brown has confirmed the number of people in schools, prisons and hospitals who have unknowingly eaten horsemeat will never be known but also confirmed there is no public health risk as it was hygienically processed. She did though admit that personally she wouldn’t eat a Findus Lasagne and the solution was more accurate testing and labelling. From now on, meat processors will have to face more hurdles.

Some industry sources are claiming EU Directive 854/2004 is the root cause of the scandal. The BSE and E-Coli.crises of the 1990’s forced the UK to introduce stringent inspection requirements to a point where our meat hygiene regime was generally considered to be the best in the world. A meat inspector would be present on a daily basis in meat processing plants inspecting carcasses and coldrooms, but after the directive the FSA and DEFRA cut costs and staff numbers from 1,700 to around 800 today. As a result it might now be anything up to 8 weeks between inspections which leaves plenty of time for a rogue operator to pass off horsemeat as beef to his customers.

The 2006 EU Directive defined the inspection requirements so that inspectors need only be present “with a frequency appropriate to achieving the objectives of this regulation”. This so-called “light touch” approach is consistent with EU policy of placing responsibility for safety on producers by self-assessment of the risks rather than enforcing compliance through government inspection. This is obviously much cheaper to implement and consistent with EU directives on issues such as Health & Safety. The ultimate sanction for non-compliance is criminal prosecution and an unlimited fine.
In response to the public outcry the FSA has now introduced additional unannounced inspections at meat plants, but whether this is happening at foreign plants is unclear. Unison, the trade union representing the meat inspectors said: “Meat inspection, Environmental health and Trading standard services have been severely reduced by government cuts and light touch regulation. Consumer confidence in meat products is once again very low and true consumer protection will not be achieved until daily, unannounced inspections are back in place.”

If you want to know more about what has gone wrong with the food chain I can recommend two books by investigative journalist Joanna Blythman: “Shopped: The shocking power of British supermarkets” and “Bad Food Britain – How a nation ruined it’s appetite”. Sources close to Downing Street say Owen Paterson has already bought up all unsold copies. In a newspaper article Joanna pointed out the blindingly-obvious:
“If we want to eat safe, wholesome food that won’t make us fat or ill, we need to choose unprocessed ingredients and cook them ourselves. The very essence of food processing is taking apart natural foods and reinventing them in a value-added form that is more lucrative for their makers. The horsemeat fiasco has merely provided us with a snapshot of just how under-policed, and liable to fraud and adulteration, manufactured ready meals and processed meat products really are”.
So a man orders a burger in a restaurant. The waitress says: “Would you like anything on that?” and he says: “Yes, a fiver each way”.
Gone, without a trace: “Market Matters” – February 2013
Last month’s revelation that anything up to 29% of the meat in some economy beefburgers is horsemeat was great news for everyone who likes a good joke. Of course you don’t know what goes into them – but everyone does know they can give you the trots.

What is not so funny is why the UK Food Standards Agency and DEFRA had to rely on the Irish authorities to point out what everyone knew all along – you get what you pay for. DNA-testing of meat products is normal practice at the Food Safety Authority of Ireland because their economy is so dependent on beef product exports. The Irish farming community is also very quick to act when quality issues are at stake, whether it’s growth hormones in beef from Brazil or the risk of importing Foot & Mouth disease.
The Irish FSA identified the problem back in November and promptly told Tesco, Iceland, Aldi and Lidl. Since then their main supplier, ABP Food Group has closed down production at their subsidiaries, Silvercrest Foods in Ireland and Dalepak Hambleton in Yorkshire. Liffey Foods, another Irish Company was also warned-off well before the UK’s ten biggest food retailers took action. In the UK only Waitrose and Marks & Spencer remain unaffected as they have no connection with ABP.
Anne McIntosh MP, Chairperson of the Parliamentary Environment Select Committee pronounced that this news was “Stunning… considering all the care that is taken in this country, and all the efforts with food labelling” – and rather missed the point. The problem in the UK is not the producer or retailer but the poor food safety legislation which allowed this situation to arise.

The FSA: Still falling at the first fence.
The UK Food Standards Agency was established in 2001 in the wake of the “Mad Cow” scandal specifically to protect consumers by ensuring nothing nasty like BSE-infected beef enters the food chain. It was also made responsible for ensuring the accurate labelling of foodstuffs, but after losing a battle to introduce colour-coded warnings about salt and fat content in ready-meals it was accused of caving-in to pressure from retailers.
Since then it has had a shake-up but still continues to fall at the first fence. It’s food policy division seems incapable of outwitting producers to ensure accurate labelling and has never insisted on DNA-testing of ingredients. Instead, day-to-day enforcement is delegated to Council Trading Standards departments who struggle within a framework of poor legislation and evasive labelling by retailers.
But what it is good at is issuing confusing advice about eating too much red meat or suggesting a 0.5% reduction in saturated fat in biscuits would save the NHS £500 million per year. When pressed on TV interview to explain the causal link between red meat and bowel cancer the FSA spokesperson eventually admitted: “We don’t
know why”.

Mmmm, nice. Might give you the trots though.
Food labelling legislation remains vague, to put it mildly. It allows a Lincolnshire Sausage containing absolutely no British ingredients to be legitimately labelled as “Produced in Britain” provided the ingredients are processed here. It also remains perfectly lawful for food producers to import horsemeat from Poland (as seems to have happened in this instance) before processing it into economy burgers. There is the threat of prosecution for retailers who fail to accurately declare the ingredients but not their place of origin or whether they have been DNA-tested. Thanks to refrigerated shipping a beef steer may be raised in Botswana before being exported to Spain for butchering and the trimmings sent to Yorkshire to be combined with other ingredients into an economy burger. Standard procedure means imports are tested for bacteria and heavy metals but not for DNA content, so if someone at the wholesaler slips a side of horsemeat into the trimmings who’s to know?
Since 2006 EU regulation 178/2002 requires all EU food businesses to establish traceability throughout the food chain so having been handed a PR disaster by their suppliers I imagine Tesco must be a bit hacked-off with ABP Food Group. I wouldn’t give decent odds on the future career prospects of the Polish buyer who didn’t know the difference between Kon and Wolowina. Thankfully the meat appears to have been processed hygienically so there is no risk to public health and the retailers will probably just get a slap on the wrist for mis-labelling the ingredients. More importantly the FSA may now introduce DNA-testing as a
matter of course rather than relying on the Irish to blow the whistle.

La Boucherie Chevaline: Still common enough in France
Of course abroad they’ve got far fewer scruples about eating horsemeat or anything with four legs, unless it’s a table. You can still find a Boucherie Chevaline in large French towns, often advertised by a nice model of a horse over the shopfront. I’m told horsemeat is very similar to beef and less gamey than pheasant but personally I’m iffy about eating something which may have been someone’s pet. But many French shoppers prefer My Lidl Pony.
Of course there are two ways round this problem. Go out and kill your meat yourself or buy your meat and burgers from a Market butcher. If he’s got a nice big red face that’s a good sign, and better still if he’s got lots of “Best in Show” rosettes and certificates decorating his stall. He’ll know all about traceability and quality and still be competitively-priced.
And remember – if you like economy burgers don’t be surprised if you wake up one morning with a bit between your teeth.




















