Tesco: That David Moyes feeling...

Manchester United's ten month disastrous flirtation with David Moyes is over. To many, he had been "dead man walking" for months. Despite long-terms critics like myself incessantly calling for his head even before he was appointed, the prevailing mood among the faithful had been to tough it out. 


Moyes was Sir Alex Ferguson's pick and who could argue with that? I never understood the call to give him more time.  After all, why would you give a failing arsonist this luxury? Out of all competitions and no European football for the first time in two decades, time finally ran out for Moyes.

There are some striking parallels between Manchester United and Tesco - organisationally and managerially. Organisationally both have been at the top of their game for the past twenty years. 

Both had  leaders, peerless in their domestic arena who anointed their successors and both business models have been changing profoundly with the influx of massively funded competitors arriving seemingly from nowhere.

For United, the arrival of Abramovitch at Chelsea brought the first high profile billionaire in to the public glare but it is Sheikh Mansoor's arrival at Manchester City and his impending purchase of a new NYC MLS franchise that changed the game. At the same time the Qatari's bought Paris Saint Germain in France and spent $145m on new players last season. United, in transition, have been caught flat-footed.

In mass retail, Tesco are being outplayed by international competitors. Aldi and Lidl from continental Europe, Walmart in USA and UK. But it's the new, next generation giants Amazon and Alibaba that threaten to overwhelm mass retail globally. Tesco have plenty of ideas; possibly too many, without the bandwidth to deliver. Last week's announcement of the decision to open seven F&F Franchise stores in Boston was dwarfed by Uniqlo's declared intention for global fashion domination.

When Philip Clarke recently noted "bigger is no longer better", he was hinting at a problem Manchester United are also facing. Patchi prove how small focused retail businesses can deliver outstanding concepts - way better than anything a mass provider can execute. This is fine for niche, but neither Tesco or United are niche propositions. It's not “big isn't better”; it's more "the new big is bigger" - and for both soccer and mass retail, to play in the “new big world”, you need to have a deep reservoir of international cash to compete.

Asda (Walmart), Boots (Alliance-Walgreens), Aldi (Albrecht family), Lidl (Schwarz family), Sainsburys (25.99% owned by PSG's Qatari Sovereign Wealth Fund) and Superdrug (AS Watsons) appear to have the ownership structure to provide access to external capital. 

Tesco, big in local terms, may need a stronger, internationalised financial backer to secure their long term competitive future. Of concern, Berkshire Hathaway, one of Tesco’s two main institutional shareholders have been reducing their exposure. Similarly, United need to find investment minded billionaire owners to underpin their future.

In the ultimate paradox, United who have fallen furthest will turn around fastest.  United will hire a globally recognised football giant, who in turn will be given $150m and eighteen months to rebuild. Tesco, by contrast, retain their UK's #1 position, but their grip on share is slipping with challenges across their business model. None of this disappears whoever is in charge

Despite a torrid season and all the popular commentary calling for Moyes' exit, once the narrative became front and back page news, his position was untenable. 

Tesco has similar problems. Last weekend's heavyweight papers were filled with negative critique. Journalists are talking with fund managers: they speak of leadership replacements. The narrative is who and when, not if.  Interestingly, former Tesco executive Tim Mason, fancied by some as Clarke's replacement, broke his fifteen month twitter silence last week, referencing two damning articles on Clarke's reign. The jockeying is well and truly under way.

It was never going to be easy filling their respective predecessors' shoes. Both Moyes and Clarke inherited organisations that had over-traded their pasts whilst competitors were investing for new tomorrows. If Philip Clarke reads today's papers he might be forgiven for feeling he has been visited by the ghost of Christmas future. It's that David Moyes feeling...

On-line shopping? Game On!

Mobile communications have come a long way since the early 1990s. And it sort of feels we are on a similar jouney - this time in relation to redefining the on-line shopping experience. 

Following  my blog, "Shopping? It's childsplay" www.retailiation.com March 12th) and before the announcement Facebook's $2bn+ acquisition of Oculus Rift, I had the opportunity to experience the phenomenon first hand. 

And whilst visually impressive, it did feel a bit claustrophobic - like being trapped in a diving bell. But, it is all about direction of travel - no one carries those old brick phones any more. 

Which makes me wonder whether Sergey Brin hasn't trumped Mark Zuckerberg?..With the ink still drying on the Facebook / Oculus Rift deal, Luxottica (Rayban and Oakley) announced a strategic partnership with Google to commercialise smart glasses.

In a world of technological convergence, on-line shopping will meld seamlessly into gaming and the battle for hegemony has begun. Like VHS vs Betamax, it's deja vu all over again.

The future of online shopping took serious steps forward last week. Facebook and Google threw their hats in the ring, it just leaves Apple and Samsung to make their intentions clear and who knows what Amazon and Alibaba might do. Game on!

Alibaba: They came from the east

The West in general and the UK in particular seem to believe that our Imperial pasts provide an eternal right to global leadership. Call it our collective colonialist conscience. So when Western retailers decided to retrace the journeys of our ancestors, we naturally expected them to always succeed. Perhaps.

Compare Tesco's £85m Indian JV announcement with Alibaba's $200bn IPO. The numbers are incomparable. Alibaba's scale is staggering, the cash raised massive. Makes you wonder why Tesco are even bothering. Remembering the $57bn P&G paid for Gillette, expect the next deals in retail to be in the billions and that puts virtually every listed retailer (with the possible exception of Walmart) in play. 

The tide is turning and expect a surge of Asian finance making in roads into Western retail markets. There is only one sure fire outcome. The retailers that dominate shopping in 10 years from now, will be different names than we recognise today. Call it regime change because it is as revolutionary as anything we have seen on our TV screens.The internet has brought down governments, what's a few retailers here and there? Open Sesame...

Some pointers on Alibaba courtesy of  http://www.businessinsider.com/alibaba-ipo-facts-2014-3#ixzz2wrjxjUo2

• 24,000 people work for Alibaba. That's more than Yahoo and Facebook have combined.
• Yahoo's entire market value is tied to Alibaba. Yahoo currently owns 24% of Alibaba (though it's predicted to sell back 10% of that stock when the company IPO's.) Yahoo's stake in Alibaba is worth $37 billion. Yahoo's market cap is $39.5 billion. 
• In 2012, two of Alibaba’s websites handled $170 billion in sales. That's more than competitors eBay and Amazon.com combined.
• Yahoo only gets a small slice of the total sales, but even a small slice is a lot of money. In January, Yahoo reported (.PDF) that Alibaba's revenue was ~$1.8 billion for the September quarter, a 51% year-over-year increase. Net income was $792 million, up from a loss of $246 million the year before.
• During the Chinese equivalent of Black Friday, Alibaba processed more than $5.75 billion in sales. That's 3X more sales in just one day than America saw on Black Friday — on just one company's websites.
• Alibaba's sites account for over 60% of the packages delivered in China.
• Alibaba has millions of registers users. In 2012, Alibaba clocked in at 36.7 million registered users from more than 240 countries. It also has more than 2.8 million supplier online storefronts and more than 5,900 product categories.
• Alibaba's IPO could be even bigger than Facebook's. Facebook’s IPO valued the company at $104 billion, but Bloomberg says Alibaba is valued between $153 billion and $200 billion.
• Alibaba is on track to become the world’s first e-commerce firm to handle $1 trillion a year in transactions.
• Alibaba's Taobao is one of the 20 most-visited websites globally. Taobao lets users sell goods to one another (like on eBay) and it features nearly a billion products.
• Alibaba has a mind-bogglingly huge frontier for growth. Analysts predict that China’s e-commerce market will be bigger than the existing markets in America, Britain, Japan, Germany and France combined by 2020.
• There are two secrets to Alibaba's $100 billion success in its home country. It blocks China's search engine from searching inside two of its most popular web stores, Taobao and Tmall. (To understand that contrast from the norm, Google search "buy ___," and you'll see that Google will pull up product listings from sites like Amazon and Ebay. You can't do that with a Chinese search engine.)
• By not allowing search engines to display Taobao or Tmall items in search, Alibaba makes consumers start all their searches within each virtual store. It can then rake in cash by selling search ads on Taobao and Tmall – acting more like Google in how it makes money than eBay or Amazon.
• The company uses a unique payments system. It has Alipay, a novel online-payments system that relies on escrow. It releases money to sellers only once their buyers are happy with the goods received.
• There’s a annual employee talent show, that's so big that it's held at a local stadium. Employees will rehearse for weeks, and Alibaba's office is filled with photos from past events.
• The company's name really is a reference to an old folk tale. Founder Jack Ma said in an interview that he chose the name because people all over the world have heard the story of Alibaba and the forty thieves. "We also registered the name Alimama, in case someone wants to marry us!"
• Alibaba has also dipped its toes in the loan business. For three years, Alibaba been making small loans (average size $8,000) to merchants using its sites. This practice has given it boatloads of data that it can use to help decide the company's business strategy. Its processed $600m in loans in 2012 and predicted that it would reach $2 billion by the end of 2013, with the non-performing-loan ratio below 2%.
• Jack Ma, Alibaba's founder, has a net worth of $10 billion. That makes him the eighth richest person in China.

The New Alchemists

Alchemy: Magic and gold: we all love it, always have, always will. Investors are no different - in fact, they are the worst: they back their dreams with cash (often other people's).

The dotcom bubble of the 1990s was fuelled by the wizardry of high tech Harry Potter's punctured only when commercial reality, dressed like the little boy in the Emperor's New Clothes shouting "you've got nothing on", burst through.

As much as investors love alchemy, they are nonchalant of reality. History is irrelevant, tomorrow is everything. This is why Amazon has a market capitalisation of $165.6bn and trades on a P/E ratio of 1307; whilst Walmart's market captilisation of $246.6bn is a paltry P/E of 14.6

Valuing a company on a forecast of a millenium of earnings seems like the hubris of the Third Reich declaring it will last a thousand years. One thing is certain: new players will arise, innovate and encroach. Just ask Nokia and Kodak.

The market is addicted to alchemy and when Alibaba floats, the markets will scream "Open Sesame" and likely place a valuation of between $150bn - $250bn on the business

The message is simple - alchemists spin enticing visions of future riches...but at some point, reality will catch up and tomorrow's businesses become today's stalwarts and markets fall out of love. The correction in value will be devastating.

We hope you enjoyed the show, magical wasn't it?