Kraft-Heinz/Unilever- A Close Shave

Fram Hansotia

Kraft Heinz’s proposed £114bn bid for consumer products giant Unilever has fallen through under alleged pressure from the British Government, with conflicting reports about whether Unilever rejected the bid, or Kraft Heinz “amicably” withdrew it. It would have been the second largest deal in history, creating the world’s largest consumer goods company and uniting brands like Heinz ketchup, Marmite, Knorr, Dove, and Hellmann’s. Bloomberg Intelligence estimated it would have created a company with a market value worth approximately £250 billion out of the £1 trillion global packaged food index.


After crisis talks held on Sunday, 19th February, the companies were forced to agree that the deal could not be completed within the 28-day period stipulated by UK takeover laws. Despite the companies’ financials making a deal a possibility, the political uncertainty caused by upcoming elections in Netherlands, where Unilever is listed, could also have complicated a difficult negotiation.


It can be inferred that the initial idea of merging was based upon the increased strength of a single, unified company making it easier to weather the tough conditions that retailers and producers of consumer goods are dealing with. Another influencing factor for Kraft could have been the increased exposure to Unilever’s presence in emerging markets.


However, analysts focused on the stark differences in the organisational cultures, with Unilever’s commitment to corporate social responsibility and long-term growth, compared to 3G’s merciless attitude to profit maximisation, focused on making employees redundant and cost minimisation. Industry experts have suggested that the bid was an “opportunistic approach” by Kraft to use Unilever’s consistently strong balance sheet to finance its own takeover. 70% of Unilever’s shareholders are long-term investors (held shares for more than seven years), and were sceptical of the proposed benefits of the deal, as Kraft Heinz’s credit rating is five notches below Unilever’s, and its highly leveraged business model has left it just one notch above ‘junk’.


Unilever’s shares tumbled by more than 7pc after a joint statement was released on Sunday, stating that the deal had been called off. Due to the financial muscle and organisational size of both companies, another offer would have been accompanied by a prolonged process that analysts perceive would be damaging to both companies, as well as exceeding the stipulated period permitted by UK takeover rules. Coupled with the polar differences in organisational culture, this permits the prediction that negotiations are over, and a deal is off the table.


Tesco buys food wholesaler Booker

Fram Hansotia

Tesco has agreed a £3.7bn deal to buy wholesalers Booker, adding the FTSE 250 company’s network of cash & carry depots, convenience store brands, and food service business to its portfolio. Booker had sales of £5bn and an operating profit of £155m in the year to March 2016.


There are four main reasons why Tesco has bought Booker:

  • The deal allows Tesco to expand rapidly into the convenience store market, which has been the fastest growing sector of the grocery industry for several years. Tesco will add 5,400 stores to their current network of 2,900 small shops, where customers can collect online shopping and have access to Tesco’s services (banking, mobile phone network)
  • As consumer preferences have started shifting from bigger to smaller supermarkets, Tesco have found it difficult to find suitable sites for new Tesco Express, Metro and One Stop shops. The merger will allow Tesco to supply thousands of independent convenience stores, expanding their reach.
  • Booker’s food service business will allow Tesco to expand into catering supplies, a fast-growing sector as consumer preferences shift from cooking to dining out/ordering in.
  • Analysts claim the Booker deal will increase Tesco’s current buying power of £45bn by £2-3bn, increasing their share of UK grocery sales by 2%, while saving £175m a year in costs, in line with economies of scale.


In theory, Tesco’s increased purchasing clout and efficient operations should reduce prices, and shareholders have reacted positively to the proposed deal, with Tesco shares soaring 9.3% to 206.6p, while shares in Booker jumped up by 15.9pc, closing at 212.3p.


However, Tesco already controls nearly 30% of the UK grocery market, almost twice as much as its closest rival, Sainsbury’s, and already has a 17% share of the convenience store sector. If this merger is approved by regulatory authorities, it would take Tesco’s share of the convenience store sector to about 27%, and overall share of grocery sales to about 32%. Tesco believe the merger will be permitted because the 5,200 convenience stores that are added to their network will be run by independent operators, and so theoretically Tesco cannot control prices in these stores. However, Tesco’s biggest challenge will be convincing regulators that competition in the convenience store market will not be curtailed by the merger, as in some areas it is entirely possible that Tesco will run/supply every grocery outlet. Regulators will worry that Tesco’s increased clout will put a downward pressure on the profits of food and drink companies, farmers, and local grocery providers.


If the deal goes through, it will be interesting to see whether it keeps a lid on price rises, or whether the takeover will give independent retailers less choice of supplier, increasing Tesco’s already dominant position in the UK grocery industry.


AO World, a Future in Europe

Hugh Schofield

Founded in 2000 due to a £1 bet between the present CEO, John Roberts and one of this good friends, online retailer of white goods, AO World has become one of the most influential players in the UK and a rising star in Europe. However, like all companies with business links with the UK, the vote to leave the EU has had many ramifications on their business plans and strategies. The terms of any future trade agreements between the UK and the EU remain uncertain. Businesses with an exposure to both the EU and the UK are the most at risk should the parties fail to agree on a favourable trade deal. Expansion into Europe now seems like a riskier bet than ever.

To understand how AO World may react to changes in the macroeconomic environment, we must first consider its past. After going public in 2014 at 72 times its projected earnings, its share price rose from 285p per share to 412p on optimism about the company’s prospects. The share price then decreased, as worse-than-expected results of an operating loss of £8.9 million were disclosed in mid-2015. This was due to an aggressive investment strategy in EU countries like Germany. This involved large amounts of capital in order to develop the infrastructure necessary for an national online retailer like AO World to have its own delivery service. CEO John Roberts famously claimed in June 2016 that “In Germany right now, we can deliver a washing machine faster than Deutsche Post can deliver a letter”. This shows that AO World will seek growth almost at any cost. The implications of this could be that Mr. Roberts could seek continued expansion even if the macroeconomic environment does not present ideal trading conditions.

AO World will be hit hard by the depreciation of the pound which will increase costs of expanding in Europe. The value in GBP of a €5 million investment in the EU has now increased from about £3.82 million to a £4.20 million investment. The sensible thing to do would perhaps be to scale back its European ambitions. But given AO World’s past record, this seems unlikely to happen. Raising capital from investors to fund further expansion, promising greater profits in future buttressed by the pound’s weakness is an option. So is diverting capital set aside to fund investments in the UK. This has the added benefit of not raising the debt of the company which already stands at £8 million for 2016. Having slightly gained market share in March of 2016 in the UK, there is an argument for reducing further domestic investment in favour of expansion into less saturated markets. This however comes with the potential pitfall of allowing UK rivals the chance to catch up making it harder to continue to grow in the future.

There are also the potential barriers to trade such as tariffs which could come into force after the UK leaves the EU. This is because many within the UK are demanding a hard Brexit whilst many in the rest of the EU view Brexit as a threat to the project and will attempt to make the negotiations as painful as possible. This implies that there exists a potential situation where UK based companies selling into the EU face increased costs due to not being a member of the single market. Increased cost would cause AO World to become less competitive compared to other companies on the continent resulting in a potential loss of market share. After remarks made by John Roberts stating that Europe is vital for future growth, it would be a huge blow for AO World especially due to the large amounts of capital invested in Europe. It therefore might make sense for AO World to simply invest in a new market that wouldn’t be affected by the EU-UK negotiations. However, with so many unknowns before the final deal and the UK government potentially having to get a bill pass through parliament making a ‘soft’ Brexit more likely, continued investment in the EU may still be the best course of action.

Based on the hardened rhetoric emanating from both EU leaders and Whitehall at the moment, regarding Brexit negotiations, a trade war seems increasingly likely. Analysts have mooted the prospect of the EU imposing regulations necessitating UK-based companies to relocate a certain percentage of their workforce to the EU to continue their operations there. This would likely invite tit-for-tat regulations from Britain, and prove to be a headache for businesses. But the EU may yet be dissuaded from adopting a hardened stance given that it stands to lose much by severing its links with the UK which has been an engine of growth even in a tough economic environment compared to the EU which is weighed down by the woes of the Italian and German banking sector, and will henceforth have to forego considerable contributions into the EU budget from the UK.

Overall, the outlook for AO World looks bright at this current time. Having been able to grab a sizable share of the UK white goods market and now quickly expanding into Europe, they have managed outperform and beat most if not all of their rivals. Changes to the trading relationships between the UK and the rest of the world will come with their own challenges but also their own opportunities. Even if trading relations between the UK and Europe sour, free trade deals could be secured between the UK and other countries. With AO World’s recent experience of expanding into new territories, it is very likely they would be successfully in any new markets that open themselves up.


De Beers are a Girl’s Best Friend

Fram Hansotia

The increasing amount of synthetic diamonds have disrupted a market that is based upon the premise of relative scarcity justifying premium prices. Synthetic diamonds have the same physical and chemical properties as natural diamonds. The only way consumers can distinguish them as man-made is by the disclosures that companies attach, however this is only a legal requirement in the US. Although synthetic diamond production is in its nascent stages, Morgan Stanley estimated that it will “account for nearly one-tenth of rough-diamond sales within five years”.

De Beers, the world’s top producer (by value) of diamonds, saw its sales of rough gems fall to $470 million in the ninth sales cycle, compared with $494 million in the previous period. However, this may be due to the seasonal nature of the diamond industry, explaining why the firm’s CEO, Bruce Cleaver, said the sales were “in line with expected demand patterns”. Rough diamond prices have rebounded by 7.4% so far in 2016. However, senior executives have cautioned that the final period of 2016 could be more challenging. This can be attributed to the global demand for diamonds hitting a high of $81 billion in 2014, subsequently causing a supply-glut in 2015, and falling prices in 2016.

De Beers accounted for 42% of its owners’, Anglo American PLC’s, underlying earnings in the first half of 2016. Anglo American PLC wants to minimise the risk that synthetic diamonds pose to its largest profit driver, and have got rid of assets in coal and iron-ore, to focus their capital and resources on De Beers. At the moment, synthetic diamond production is insignificant compared to mined diamond production. For every 250,000-350,000 carats of synthetically produced rough diamonds, 135 million rough carats are mined annually. Despite this, synthetic diamonds are 20-30% cheaper than natural diamonds, which may result in consumers gravitating towards them.

Man-made stones are developed using a natural or synthetic diamond that acts as a seed, from which more gems are grown. Crystals are grown by exposing the seeds to carbon-based gases at extremely high temperatures in a diamond cultivator (shown in the image below).

Despite the cheaper selling price of synthetic diamonds, having to maintain intense growing conditions results in costs that are only slightly lower than those of naturally mined diamonds. In the long-term, this suggests that overall profit from natural diamonds should be higher, as natural diamonds command a higher selling price, and thus generate greater profit per unit.

If unmarked synthetic diamonds slipped into the natural diamonds’ supply chain, and were sold at a high price as mined diamonds, it could ruin a firm’s reputation if discovered. To prevent this, De Beer’s are marketing a cheap detector, called PhosView, that costs just $4500, and which would show a strong phosphorescent glow if pointed at synthetic stones. Although these detectors will mitigate some risk related to synthetic diamonds being marketed as natural, De Beer’s biggest concern regards synthetic diamonds that are worth less than 0.2 carats. These would not be cost-effective to screen, because of their size and value, and so it would be much easier for them to be marketed undetected as naturally mined, putting a De Beer’s reputation at risk.

While recognising that sales revenue is decreasing, De Beers is taking steps to ensure to maintain its status as a global market leader. It has trialled a change to its sales model by letting third party companies sell polished diamonds through its online auction business. This scheme gives registered, midstream businesses a channel to sell single stones to other registered parties. This new limited scope, business to business strategy is in response to customer demand for better services for polished diamonds. De Beers have attempted to regulate trading according to a range of ethical requirements, including seller integrity, documentation of manufacturing history, and a screening process to confirm authenticity.

With an eye on the future, and disruption to the market for naturally mined diamonds likely, this platform should act as a stage where buyers can be assured of the quality of product they are purchasing, driving up business for De Beers, and maintaining its reputation as an innovative market leader.




Where do You Want to go on Holiday?

The Brexit effect on the UK tourism and airline industry

Hugh Schofield

After the vote to leave the EU on the 23rd of June, the pound crashed from a high of $1.50 to about $1.26.  The pound to euro also devalued from just over €1.30 to €1.16. This decrease in the value of the pound has had many effects on the UK economy but most immediately on businesses reliant on UK tourism, to and from the UK. The stock prices of Ryanair and IAG (which owns Spain’s Iberia, Ireland’s Aer Lingus, Vueling and British Airways) saw a similar fall after the result.


As the pound devalues compared to other currencies, UK holidaymakers must spend more pounds to buy the same number of Euros/Dollars/etc. This means the cost of: accommodation; food; drink; etc will increase in relative terms compared to the pound. Brits will either have to spend more to get the same holiday experience, downgrade their plans or simply abandon them.


Expectations of waning tourism caused Ryanair to cut its profit forecast by 5% (on the 18/10/16).  Surprisingly enough, despite an initial fall in its share price, Ryanair is once again trading at pre-Brexit levels. Perhaps this is because investors believe it is well suited to weather the effects of Brexit as Brits with shrunken pockets will choose to skimp on luxury air travel and choose Ryanair over its less frugal competitors. Ryanair’s diversified network across a number of European countries and its plans for further expansion ensure that it will be more resilient to troubles at home than domestically focusses rivals.


Similarly, IAG has endured a difficult few months as it has issued a 4% decrease in its operating profit in the third quarter of 2016 leading to a 4% fall in its share price. IAG blamed the decrease on the “tough operating environment” as British Airways cut long-term profits. However, like Ryanair, IAG is seen by analysts to be in a better position than many of its rivals like Lufthansa and Air France-KLM as it had already started a program of cost cutting in order to compete with budget airlines like Ryanair and EasyJet.


However, there may be some winners in these circumstances- the UK tourism industry, as the falling pound makes the UK a budget friendly travel destination. According to the chief executive of Merlin Entertainments, Nick Varney,  “We will get more Eurozone visitors coming in as it will be relatively cheaper to holiday in the UK. My view is that this scenario will endure and the pound will settle at a more competitive rate”.


However, this may be only a temporary change in fortunes for the UK as after Brexit, tighter immigration laws may decrease the number of foreign visitors into the UK and any extra visa charges may also deter European holiday makers from making a trip to the UK. The Office for National Statistics stated that overseas residents made 2% fewer holidays to the UK in the three months before September 2016, relative to the same time last year. This may be because of an increased anti-immigration feeling by UK citizens, that is felt by foreigners. This means that fewer people see the UK as a holiday destination even with the devaluation of the pound.


The change in the value of the pound has dramatically changed the face of the UK tourism industry but the changes might not be over quite yet. According to the Office of National Statistics, in the three months up to September 2016, UK residents visiting foreign countries actually increased by 7% compared with the same period last year. This may be because holidays are planned and booked in advance, therefore the full decline in interest in overseas holidays from Brits might not be fully felt by airline companies. This means that there may be tough times ahead for those with large exposure to any particular part of the UK tourism industry.


Also, the pound has started to increase in value again, up from $1.20 in October to $1.25, when the UK government’s plans for triggering Article 50 were derailed by a high court ruling and up to $1.26 after Trump won the 2016 US presidential election. This means that if there are further events that cause the pound to increase in value like an increased chance in ‘soft’ or ‘smooth’ Brexit, then the pound may start to break the $1.30 and approach the $1.40 mark. This would cause the pound to start to reach pre-Brexit levels, meaning that status quo before the referendum will start to return. Thus, the changes in the UK tourism industry will be short lived. However, there may be a long term increase in tourism to the UK, due to the increased media coverage in other countries, meaning if the pound was to increase then there may be some surplus benefit to tourism.


Overall there is massive uncertainty in the UK tourism industry over the future direction of travel. For airlines, the sharp decrease in the price of oil since 2014 has been a blessing- Delta Air Lines saved around $2 billion dollars, net of its hedges, in 2015 alone, and there is potential that oil prices will increase in the coming months. In addition, there could be a decrease in demand from UK residents for flights. Although it has not happened yet, according to the Office for National Statistics, it is a logical consequence from the devaluating of the pound. This would mean that airlines operating out of the UK may suffer as they feel the effect of less demand and increased cost, so could be pushed into the red. Local UK tourism might also not feel the predicted effects of Brexit. This is because increased visitation was partly due to a 2% rise in business trips to the UK. Therefore, part of the rise may be temporary as businesses seek to plan for the long terms effects of Brexit, not an increase in the number of people site-seeing in the UK. This means for all involved, there is massive uncertainty with sudden changes in the value of the pound and oil happening overnight, and Article 50 looming overhead, meaning well-made plans can quite literally, be destroyed overnight.

Black Friday brings little cheer for retailers

Fram Hansotia

‘Black Friday’, the day after Thanksgiving, traditionally referred to as the first day of the year when retailers in the US turned profitable, or shifted “into the black”. Over time, online retailers like Amazon have realized the potential of increasing sales by offering one-off discounts to global customers. British retailers have been slower to react. However, in the last 6 years, this tradition has crossed the Atlantic and the cut-rate prices are now a fixture of the UK retail calendar. In 2014, the day became a media sensation, with widely publicized scenes of chaos in stores across the country.


However, this year there have been increasing concerns about the impact it has on retailers’ bottom lines. A study conducted for the ‘Future of Retail’ report by LCP Consulting surveyed 100 retailers in the UK and US. 61% of UK retailers saw Black Friday as ‘unprofitable and unsustainable promotion’, up from 32% in 2015, as compared to 35% in the US. After the Brexit vote resulted in the devaluation of sterling, several retailers forecast an inflating cost base in the future. Their attempt to counter this by increasing prices may be the reason why they have a negative attitude towards Black Friday and the associated promotions.


Asda, one of the pioneers of Black Friday in the UK, opted out of participating in 2015 as the management felt they ran enough promotions during the year. This was in response to feedback stating that customers did not want to be pressured by a day of sales, coupled with the questionable logic of discounting during the busiest period of the year. Instead, Asda has committed to investing £26 million in cutting the price of food and drink throughout the festive season. Similarly, Amazon has incorporated Cyber Monday and a Black Friday Deal Store, running until December 22nd, to smoothen customers’ purchasing habits and reduce the pressure associated with a single day of promotions. The actions of these retailers will have a negative impact on the absolute value of sales on Black Friday, however they might have a positive effect on overall sales during the festive period.


LCP predicts that 7.5 million parcels would be sold with next-day-delivery, and approximately 5 million parcels bought on Black Friday will be returned – an increase in returns of 50% in the week following Black Friday. Retailers must manage these returns, reimburse customers and resell the merchandise within a short enough time period to avoid having to mark items down.


LCP research also finds that Black Friday has polarizing effects. Some retailers have high levels of organization and high levels of returns, while some adopt a chaotic approach and fail to manage peak events. These predictions mean that the true success of Black Friday is driven by the flexibility of retailers in maintaining their supply chain capabilities, upon which revenue and profit margins are dependent.


In opposition to LCP’s dire outlook , PwC’s forecasts for Black Friday 2016 show:

  • Total Black Friday revenue in the UK growing 38% to £2.9 billion
  • Average spend planned per adult customer: £203
    • Online purchases planned: 77%
    • In-store purchases planned: 17%


Although revenue was forecast to increase, the study does not forecast the expected operating costs, preventing the calculation of overall profit and profit margins.

The large percentage of online purchases planned is consistent with the increasing share of total retail sales made online. Unlike the US, Black Friday is not a public holiday in the UK. This is an explanatory factor for the higher number of online sales, and the insubstantial increase in footfall in UK stores on Black Friday.



Ultimately, retailers seem to be facing a prisoner’s dilemma. Initially, they participated in Black Friday to gain a competitive advantage within their industry. Then it became an industry trend, and everyone’s margins were affected by lower prices despite unchanged costs. Instead of starting the peak festive season with full-price sales and maximum revenue, retailers that participate in Black Friday are forced to begin the season with promotions, and then spend the rest of the season increasing prices back to full price.

The majority of UK retailers seem to have agreed on Black Friday’s margin-erosive nature, and it will be interesting to see if they follow Asda’s example and disassociate from Black Friday, preferring to invest in year-round promotions instead. Or, whether the perceived competitive pressure may result in many retailers continuing to participate in Black Friday sales, despite the prospect of short term losses and disruption to their supply chain.



M&S – an Uncertain Future

by Fram Hansotia

Marks and Spencer Group plc (M&S), established in 1884, is a major British multinational retailer based in the UK that specializes in clothing, home products, and food products. It has over 1,380 stores around the world and is a member of the FTSE 100 Index. In 1998, the company became the first British retailer to cross £1 billion in pre-tax profit, although it subsequently went into a slump, and hasn’t hit those heights since. This year’s half-year report has been particularly jarring – struggling clothing sales coupled with a £200 million injection into its pension fund, resulted in a new, turnaround strategy to try and arrest their financial slide. This has led to M&S new CEO Steve Rowe having to point M&S in a new direction.


Statutory profit nosedived by 88.4% – from £216 million in September last year to £25.1 million this October, after a one-off change to its pension scheme, as well as lower clothing and food sales. M&S closed its defined pension scheme at a cost of £154.3 million, with a further £25 million expected to be spent over the next three years. Free cash flow (operating cash flow – operating expenditures, i.e. the cash a company can distribute among its security holders without adversely affecting operations) fell 32% to £174m and net debt increased by 2%. This is likely due to the costs of strategic change, and is assumed to be why the management decided against making an additional return of cash to shareholders in the second half of the period.


This release proves M&S is struggling to keep pace with its competitors and attempts to increase sale in its fashion department has not succeeded. This is even with M&S bringing in fashion icons such as model Alexa Chung which only temporarily increase sales and were not enough to stop the year on year decline in sales. This has forced M&S to embark on a radical reconstruction of their business plan which involves:

  • repositioning about 25% of Clothing & Home space, with costs of £50m per annum for the first three years.
  • Opening another 200 Simply Food outlets in the next three years.
  • Three sub-brands – Indigo, Collezione and North Coast – will be eliminated


Store closures in the UK will cost about £350 million. Further, the logistical costs and time needed to convert clothing stores to food stores should not be underestimated either. This restructuring is also at a time when the food market is dealing with upward price pressures from the fall in the pound and downward from the bitter price war between the big supermarkets and the discounters. This means focusing on their food business may give them more strength to fight this battle but also leaves them more vulnerable to shocks in this market as they will have a diminished portfolio of products.


M&S has also announced a series of more drastic changes to its international arm of the business, deciding to pull out of a total of nine markets, while only partially withdrawing from France. More than 50 international stores will close, including all those in China, the Netherlands, Poland, and six other countries. M&S will focus on its established joint ventures in Greece and India, working to leverage scale, infrastructure and local expertise, to minimize costs and maximize profits. CEO Steve Rowe also said M&S “intend to continue to develop our presence through our strong franchise partners”, such as in France, where there is a high demand for M&S’s quality focused products. Online shopping will be available in 21 international markets, to try and increase international growth without the high expenditure of opening and running local stores. This shows that M&S is attempting to radically change its business model in order to stem the losses and is trying to make more of a concerted effort in particular markets, which should give them increased economies of scale.


However, the closure of stores is not enough for the new CEO and in August 2016 they have announced:

  1. Cut in-store promotional events from nine to six,
  2. Slashed 28 discount events online as they reposition their pricing strategy,
  3. Cut the everyday prices on 1000 items, instead of blanket 20% sales.

This change in the strategy of promotions, although this may prove profitable in the long run, may have deterred customers in the short run, and had a negative effect of sales revenue and the drop in statutory profit.


Marc Bolland, the previous CEO, presided over 14 consecutive quarters of falling clothes sales, despite spending about £3 billion during his six-year tenure. Part of this investment was made in attempting on reviving womenswear division. In August 2016, M&S held a meeting with a group of female retail shareholders, to get their views on the retailer and provide advice about winning back their customers. The traditional M&S customer (“Mrs M&S”) was perceived to be a female who was over 50 years old. M&S collaborated with Alexa Chung in 2016. They won acclaim from younger shoppers & fashion media, but the celebrity link was criticized for being out of touch with their core customers. This has caused M&S to have year and year on declines in clothing sales as they have attempted to enter the younger age group which is already a saturated market while ignoring the need of existing customers.


Overall, M&S faces a difficult few years. Basing its turnaround on the revival of their flagging womenswear division, which has been an ill-advised strategy that has caused M&S to suffer their worst set of results since the aftermath of the 2008 financial crisis. However, the company has said the current results are a reflection of its self-help strategy, and will pay off in the long term. The decision to shift floor space from the Clothing & Home division to Simply Food stores, could signal the beginning of the end of the group’s Clothing & Home division. M&S seems determined for its food business to grow in the foreseeable future and more investment in this relatively more profitable part of the business could help revitalize the business. The cost of store closures and renovations will negatively impact cash flows for the next few years, and there is no guarantee that food will revive the company’s finances. Like several other retailers, including Tesco and Sainsbury’s, M&S might find out that increasing retail space doesn’t automatically result in higher sales meaning this may not be the silver bullet that many may believe it to be.

Card Factory: Greeting an inevitable demise?

Jemima Atkins

Card Factory Plc (CARD.L) is the UK’s leading retailer of low-value greeting cards and associated gifts. The Group has 814 stores across the UK, as well as two branded websites selling standard and personalised cards and gifts. The company is showing strong performance, with a total sales growth of 8.1% in the 11 months to 31 Dec 2015, particularly due to robust growth in non-card products.

Card Factory is the largest player in the retail greeting cards market by sales and store number, and has 17% market share by value, followed by Clintons with 15% (Mintel, 2015). According to Mintel’s 2015 Gifts and Greeting Cards report, Clintons attracts customers who value stylish cards (45%) and high quality (46%). However, 55% of people say cheapest prices are important to them, favouring Card Factory. As a result, Card Factory’s budget products mean it has much greater market share by volume; 48% people in the Mintel survey had bought a greetings card from Card Factory in the last 12 months, compared to 29% from Clintons.

Other than WH Smith, most direct peers of Card Factory are privately owned. These include Paperchase, Schurman Retail Group (owner of Clintons) and Hallmark Cards, as well as and within the online sector. This makes it difficult to value the company on a peer comparables basis, but grocers make up 33% of the retail greeting cards market, so Card Factory’s performance can be compared to the likes of Tesco, Sainsbury and Marks & Spencer. Comparison to these peers indicates high P/E, P/BV and P/CF ratios. This suggests that investors are expecting higher earnings, book value and cash flow in the future. ROE is very close to the peer group average, and dividend yield is below the average, suggesting re-investment of earnings for further growth.

The wide availability of greetings cards mean that store location is of great importance. Card Factory’s dominance is the market is thus likely to be maintained by its ambition to open 1,200 outlets; 50 new stores were opened in 2015 and the Group remains confident of continuing this opening rate into the next year. Its high number of stores is influential in maintaining its position as the most used greeting cards retailer. Although, the online customised card retail market is expected to grow by c.10% per year for the next three years. Nevertheless, this sector only currently has a market share by value of 5%, meaning Card Factory’s market leading position (17%) is safe for at least the medium term.

But what of the market as a whole? In Mintel’s survey, 24% and 15% of adults thought they were buying fewer paper Christmas and birthday cards respectively than a year before. The market has grown weakly (4.8%) since 2010. However, it is expected to grow by 9.8% in the five years to 2019 to £1.6bn, driven by the growing UK population, creating opportunities for birthdays and other reasons to give cards.

Of course a great limitation on the market is the increasing use of electronic media and higher postage costs. Since 2009, the prices of both first and second class stamps have almost doubled, and changing habits due to increased smartphone usage provide a more convenient method for sending greetings. Ofsted (2014) finds that 21% of adults are posting fewer things than they were two years before, and more greetings are being sent via social media and text.

The ease of digital greetings may put particular pressure on higher price bracket card retailers – if it is free to send a birthday text, it is harder to justify spending large amounts on premium birthday cards. Paperchase is one high value card retailer feeling this effect; it is instead increasingly trying to cement its position as a fashion stationer by expanding its gift product range and pursuing partnerships with distributors such as ASOS.

Card Factory’s budget cards are safer in the face of digital media than Paperchase, but the trend still poses a problem for the market as a whole. Although people still show an enthusiasm for sending physical cards, it is a significant long-term risk that cannot be ignored. Card retailers should be exploring marketing avenues that remind consumers of the social value of sending a real card. Faced with the increasingly tech-obsessed consumer, the card industry should be on the defensive.

Chipotle mexican grill profile

Richard Prentice

Chipotle Mexican Grill, Inc. established in 1993 in Colorado by Steve Ells, is an international chain of ‘fast casual’ restaurants supplying a menu of burritos, tacos, salads. Chipotle has seen strong growth since its initial creation. The company’s revenues grew to $4108 million in 2014, 27.80% higher than the year previously.

Chipotle’s Business Strategy

The company’s success in recent years has been linked to the achievements of its differentiated strategy, unique brand and food philosophy. Boasting its ‘food with integrity’ mission, Chipotle has capitalized on recent consumer preferences and trends by focusing on healthy, convenient food with organic ingredients of the highest quality. This has lead to them stealing market share from industry leaders such as McDonalds and YUM.

The company incorporates a premium service across establishments and ensures that they employ top performing employees. Chipotle also uses a production line within their restaurants, allowing for speedy service even during peak hours.

In 2011 they developed their slogan ‘Cultivate a Better World’, striving to illustrate to consumers the loyalty they hold towards their suppliers and the environmental advantages that their behaviour encourages.

Chipotle has seen its share price plunge recently as an E-Coli breakout has lead to a mass loss of sales a tarnishing of their brand. In order to counteract the negative effects that the company is suffering, Chipotle’s management may need to consider various expansion strategies to ensure they keep shareholders happy. This article suggests various development strategies that Chipotle could implement, as well as the key aspects that management should contemplate when considering the implementation of each tactic.

Expansion and Development Recommendations

1) Expand operations into other developed economies

Chipotle now has a strong presence in the US, currently opening 2-3 stores a week. The company should now seek to expand into other well-established economies to grow their business, particularly in Canada and Western Europe as consumer tastes are similar in these economies and members of society generally have a reasonable amount of disposable income. Chipotle has recently opened their first store in London.


  • Ensure promotion of their brand and ethical image when entering into new markets, as this is their unique selling point
  • Confirm that organic ingredients are readily available in the geographical markets that they expand in
  • Investigate the regulation and tax implications of expanding abroad

2) Acquisitions

(A) Horizontal Integration

Chipotle acquiring smaller chains would allow them access to firms with already well-established operations and relationships with suppliers. It would also remove excess capacity and competition from the industry. Particularly when expanding abroad, acquisitions would allow for a smoother transition into new markets. For example niche Burrito bars are beginning to open up throughout the UK such as Mission Burrito and Pinto. As Chipotle currently has no debt on their balance sheet, management should consider using leverage to expand into different geographic markets via acquisitions.

(B) Vertical Integration

Chipotle’s food costs are currently 35% of sales, significantly higher than the industry average of 27%. To tackle this problem, as well as the rising commodity costs, the company could also consider backward integration, by purchasing suppliers’ operations. This could ensure that Chipotle keeps their costs as low as possible while still providing quality food, as it would reduce the mark up costs associated when suppliers sell to retailers. If no vertical integration is possible, ensure strong relationships with suppliers are kept.


(A) Understand the Market

When considering an acquisition in new markets/geographies management should consider the attractiveness of the sector by:

  • Identifying key competitors
  • Identifying entry barriers
  • Identifying technology trends
  • Investigating competition, regulation and tax laws

(B) Develop a Shortlist of Targets

Create a shortlist by looking at various criteria that fits Chipotle’s strategy such as:

  • Supplier relationships
  • Location of Operations
  • Competitive Position
  • Product Mix
  • Cultural and Management fit
  • Cost and revenue synergies potentially achieved

3) Offer breakfast

Currently Chipotle currently opens at 11am to serve lunch, a whole 5 hours after competitors such as Panera Bread who open their doors at 6am. Management should consider opening up earlier and offer breakfast to increase revenue per store and hence overall sales.


  • Ensure breakfast options are in line with the ‘healthy’ image
  • Ensure standards do not slip due to longer hours
  • Evaluate the costs associated with offering breakfast

4) Innovative start-ups

Management should consider opening US fast food restaurants with a different cuisine to Mexican. Chipotle already has established operations and supplier contacts so this could be the perfect time to delve into different areas of the market. They have recently released a new store ‘Pizzeria local’, an extra fast pizza takeaway. I would advise management to be careful when choosing which cuisines they choose to establish, as some types may tarnish their ‘healthy image’. New innovations should still focus around producing high quality and ethically produced food to ensure that it is aligned with Chipotle’s strategy.


  • Align new restaurants with current vision
  • Investigate which cuisines would receive the highest customer demand

5) Expand into supermarkets

Nandos, the well-established chicken restaurant in the UK has seen great success in releasing a range of spices and sauces that can be purchased within supermarket chains. Chipotle should consider a similar strategy by launching their own range of products with the leading supermarket stores.


  • Perform market research to determine potential popularity of this idea
  • Analyse competitive landscape of sauce market to discover if the market is oversaturated

6) Offer delivery services

Chipotle could now consider establishing a service that delivers their products straight to customers without them having to visit stores. Currently, fast food delivery service is not very popular in the market for healthier meals. Chipotle could take advantage of this and lead the way delivering fast food directly to customers.


  • Establish efficient and user-friendly technology that would make orders easy to fill e.g. Chipotle apps
  • Test delivery services in core stores in the US before expanding elsewhere
  • Possibly offer delivery services to places of work such as offices

7) Launch sit down restaurants

Currently Chipotle offers a fast and convenient service, whereby customers receive their meal quickly and can either chose a takeaway option or to sit down in store. Some customers however may be looking for a more formal 3-course meal. Chipotle could now consider opening up sit-down restaurant options, similar to the likes of Chiquito in the UK. This could create further revenue streams.


  • Assess already established Mexican restaurants and decide whether it is feasible to compete against them
  • Determine whether formal restaurants will dilute Chipotle’s image

8) Strengthen marketing campaign

Although Chipotle is well known in the US, when expanding into new markets, it is critical to use promotion to make consumers aware of what Chipotle stands for.


  • Consider heightened use of social media and apps
  • When expanding internationally, a strong initial marketing campaign would be beneficial
  • Consider advertising on TV, as Chipotle currently doesn’t
  • Consider celebrity/athlete endorsements
  • Consider Chipotle sponsored events e.g. marathons

9) Be proactive and stay ahead of the competition

Competitors such as McDonalds are beginning to adapt to the health conscious consumer market by trying to change their image and retain market share. Staying ahead of the competition is key to their success. Chipotle should reinforce their ‘economic moat’ and differentiated strategy, ensure that they don’t fall into the trap of supplying lower quality food and maintain strong relationships with suppliers and employees.


  • Keep up to date with the competitive landscape
  • Perform regular market research
  • Ensure that the company’s values are clear and concise in the media and stores
  • Maintain high quality and ethical food

10) Take advantage of consumer trends

(A) Be aware of consumer discretionary spending

Chipotle charges notably high prices for a fast food store, with the average consumer spending $8.50 per visit. It is key to keep track of macroeconomic variables such as consumer discretionary spending so that management are aware of consumer price elasticity and preferences. If consumers become particularly sensitive to price changes, Chipotle may have to look into discount and loyalty schemes.

(B) Be in Tune with Millennials preferences – Focus on Community

The Millennials, making up 25% of the US population, are known for being a very demanding and diverse consumer population. One aspect that the Millennials adhere to is community. Creating a community atmosphere in Chipotle will ensure that they remain popular among this key customer population.


  • Establish friendly Facebook and Twitter Profiles
  • Consider establishing online communities relating to Chipotle, such as online chat rooms or games
  • Release Chipotle merchandise such as t-shirts and caps, to further emphasis the community atmosphere


There are a number of development strategies both domestically and abroad that Chipotle could implement. Personally, I feel that Chipotle should introduce breakfast into their stores, as this is an easy way for them to instantly increase revenue per store. Backward integration is also a viable option, as it would ensure that margins remain strong and it can also allow Chipotle to control their organic ingredients and limit potential supplier scandals. Throughout these expansion strategies, it is critical that Chipotle tries to maintain their ‘food with integrity’ and ethical image, although this will now prove difficult due to their recent in store health and safety issues.

Smartwatches are not calling time on Swiss timepieces

Jemima Atkins

Despite its launch back in April, the Apple Watch only recently started to revolutionise the smartwatch industry, with the advent of its partnership with Hermès. The elevation of the genre from tech accessory to fashion accessory has marked the beginning of a new era for the smartwatch industry, which is evolving to appeal to less tech-friendly clientele.

In response to Apple, competitors including Motorola, Samsung, LG and Sony have all started to unveil new models with more high quality finishes and a round form, to be closer to traditional watchmaking. The global market for smartwatches grew by 82% in 2014 according to the Smartwatch Group, from $711m in 2013 to $1.3bn, and could rise to $8.9bn in 2015.

High quality Swiss watch brands have in turn started to respond to the trend amidst the fear that smartwatches could move into their luxury segment. The Swiss watch industry is the largest in the world by value of exports, but has recently been hit by uncertainty of economic outlook in emerging markets, particularly a reduction in extravagant spending in China. If smartwatches win the battle for the wrists of the wealthy, the industry would be in danger.

The biggest threat is in the market for watches costing less than CHF 1,500 (£1,000). Expensive Swiss timepieces remain a means for the wealthy to distinguish themselves, but more is at risk for the brands who share a price bracket with the Apple Watch and its counterparts. For the companies that have more mass-market appeal, market share is crucial. In Deloitte’s 2015 Swiss Watch Industry Study, 25 percent of respondents were worried about the competitive threat from smartwatches, compared with 11 percent a year ago.

Concerns about smartwatches are driving innovation across the industry, with brands trying to maintain their traditional forms, whilst concealing a tech functionality. Montblanc has launched “e-Straps” for its watches, which link to smartphones. Swatch has put Visa payment technology into its trademark colourful designs. Frédérique Constant’s Horological Smartwatch has a conventional face with hands, but fitness tracker technologies hidden in the movement. TAG Heuer is developing its Carrera Wearable 01 smartwatch in partnership with Google and Intel; it will run on Android Wear and therefore compete directly with Apple, Samsung and others.

Although Swiss watches do not match the functional scope of the Apple Watch, they do have the crucial advantage in that they do not become obsolete after a few years, nor need recharging on a daily basis. And although the technology in Swiss smartwatches could succumb to these problems, they are trying to counteract it: both the Horological Smartwatch and Carrera Wearable 01 are expected to be upgradeable and allow updates to the technical components to achieve a longer product life, as well as having especially long battery lives.

The smartwatch industry may actually directly benefit traditional watchmakers: for the brands that have had smartwatches on the market since 2000, such as Swatch, Apple has created opportunities for them by boosting overall demand for the product segment. Furthermore, if smartwatches are encouraging younger people to wear devices on their wrists, the competition can only be advantageous for Swiss watchmakers.