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David Roth CEO The Store WPP, EMEA and Asia [email protected] This Presentation Is Dedicated To The Memory Of Michael Rosen. From The Inside Looking Out. May You Live In Interesting Times. If Anyone Tells You They Know What’s Going To Happen Next…. They Are Wrong. A Macro View.

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David Roth

CEO The Store WPP, EMEA and Asia

[email protected]







A Macro View Next…



… Success Breeds Excess… Next…… Excess Breads Collapse


From…invest in anything even with the most minimum yield Next…To…investing in nothing but the safest government paper


Result of three factors
Result Of Three Factors Next…

  • Low interest rates

  • Quarter of a century of low inflation and stability…

  • Belief business cycle had gone and risk disappeared


Globalisation and convergence catch up
Globalisation And Convergence Catch Up Next…

  • Emerging markets growing 3x the developed world c 2001

  • Resource intensive industrialising period

  • The first fridges, tv’s cars, air conditioning

  • Rapid growth will continue pressure on commodity prices


What does it mean
What does it mean? Next…

  • Low interest rates

  • Long term dollar bear market

  • Structurally rising inflation

  • Unwinding of excesses

  • Paying down debt, higher savings, weaker demand

  • Slower growth emerging markets as decoupling impossible

    • Accepted and welcomed


End Of US Consumer Being The Borrower And Spender Of Last Resort Of The Global Economic System


And now the perfect storm
…And Now…The Perfect Storm Resort Of The Global Economic System

  • Energy prices have quadrupled in past 4 years

  • Oil prices highest level in real terms post war

  • Commodity prices spiralling

  • Turmoil and dislocation of the capital markets


Times successful business show their metal
Times successful business show their metal Resort Of The Global Economic System


The credit crunch
The Credit Crunch Resort Of The Global Economic System

  • Loan to value ratio step changes

    • Cautious lending

    • Requires capital of banks building up

    • Viability of institutions business plan

  • Can households service mortgages?

    • Upside: In the 80’s interest rates doubled, unemployment increased significantly

    • Downside: 00’ Loans X7 income


Don t look to the bank of england to stimulate the economy
Don’t Look To The Bank Of England To Stimulate The Economy Resort Of The Global Economic System

  • The NICE decade has ended

  • The Bank of England Is focused on one measure only - Inflation

  • Bank action to brings inflation on target (2%). Currently 3.8%. Bank rate at 5%

  • Squeeze on take home pay and real incomes

  • Upside risk for inflation and downside risk to growth

    • More on the upside


Don t look to the bank of england to stimulate the economy1
Don’t Look To The Bank Of England To Stimulate The Economy Resort Of The Global Economic System

  • Inflation high and output flat - not a sever downturn

  • Negative quarters highly likely

  • Cost shock from world economy impossible to absorb

  • Government planning fiscal stimulus not a Central Bank initiative but a political one

  • Predicting inflation will come out on target

  • http://www.bankofengland.co.uk/publications/inflationreport/2008.htm


And if that wasn t enough
And If That Wasn’t Enough… Resort Of The Global Economic System

  • Devaluation of sterling

  • Impact the receipts of government

  • Home owners reducing equity cushion

  • CBI survey worst month in 25 years, firs half of August 2008

  • Consumer confidence 32 points lower than August 2007 (gfk)

  • Summer that retailer would like to forget


A Macro View From Inside The Retailer Resort Of The Global Economic System


Market punishing retail stocks
Market Punishing Retail Stocks Resort Of The Global Economic System

  • Retail stocks down 50% since August 2007

  • Market nervous and looking for any signals

  • Slight rumours send stocks sky high or crashing

  • Quarterly reporting signposts


Not as protected in vc held businesses either
Not As Protected In VC Held Businesses Either… Resort Of The Global Economic System

  • Many retailers financed by VC

  • Depends on the strength of fund

  • Generally saddled with large debt funding

  • Require cash to repay debt

  • VC will continue to back retailers who generate cash sales

  • Exit timescales being pushed back

  • Sovereign Wealth Fund opportunities

    • China, Singapore, Middle East


Falling sterling value will increase costs
Falling Sterling Value Will Increase Costs Resort Of The Global Economic System

  • Previous upside of Pound:Dollar rate ending

  • Export markets ‘pegged’ to US dollar

  • Downside of Pound:Euro

  • Cost increases

  • Particularly hit non food retailers


Volume to mass market retailers is critical
Volume To Mass Market Retailers Is Critical Resort Of The Global Economic System

  • Economics built on volume and growing volume

  • Building Fixed Costs Into Business…increases productivity with increasing volumes…puts pressure on costs when volume falls

  • Slight reductions in volume puts strain on balance sheet

    • Fixed cost creep, depreciation of historic capital spending


Cost side inflation
Cost Side Inflation Resort Of The Global Economic System

  • Situation changed considerably

  • Yesterday: Service inflation offset by commodity price deflation

  • Today: Service inflation and commodity price inflation


Reduction in time horizons
Reduction in Time Horizons Resort Of The Global Economic System

  • If there is no short term, there is no long term

  • Long term...next week

  • Trading patterns difficult to read

  • Decisions will be made late…

  • Once made : implementation immediate…

  • Look at activity in relation to quarterly reporting timelines


Back to basics
Back to Basics Resort Of The Global Economic System

  • Natural instincts going back to doing what they do best..


Doing fewer things but doing them better
Doing Fewer Things… But Doing Them Better Resort Of The Global Economic System

  • Only do things that grow sales and are core

  • Do it with less resource

  • Cancelling projects


Aggressively Drive Costs Out Of The Business Resort Of The Global Economic System


Reduce borrowings
Reduce Borrowings Resort Of The Global Economic System

  • Sale and lease back

  • Dispose of non core assets

  • Exit marginal and non strategic business


Reduce capital spending
Reduce Capital Spending Resort Of The Global Economic System

  • Capital spending impact on balance sheet and depreciation

  • In capital constrained environment delay:

    • New store openings

    • Buying new sites

    • Store re-fits

    • Marginal range reviews

    • Infrastructure and IT projects


Improve cash flow
Improve Cash Flow Resort Of The Global Economic System

  • Change supplier payment terms

  • Rent payments

  • Consignment stock

  • Reduce number of suppliers

  • Decrease stock holdings

  • Cancellation of orders at short notice


Pass the hurt on the suppliers
Pass The Hurt On…The Suppliers Resort Of The Global Economic System

  • Better buying terms

  • Re-negotiations

    • Global re negotiations, consolidating volumes

    • Volume rebate

    • New store opening contributions

  • Promotional support

  • Delisting

  • Squeezing every last drop out of the supply base


Can t ride the market need to steal market share
Can’t Ride The Market, Need To Steal Market Share Resort Of The Global Economic System

  • Riding market growth has ended

  • Growth strategies need to focus on taking market share

  • Aggressive competitive activity


Value is king
Value Is King Resort Of The Global Economic System

  • Flight to value

  • Must own the value proposition

  • Discounters in all sectors seen as threat

  • Sub value lines to compete with discounters

  • Tesco launching 1,000 new range of products below their value lines to take Aldi and Neto head on

  • Price comparisons more common

  • Promotional activity on KVI and value lines

  • Brands for less…


Three in one
Three In One Resort Of The Global Economic System

Success = Building Customer Proposition + The Brand + Generating immediate Sales

In 2008 It’s Not Either Or


Increasing atv
Increasing ATV Resort Of The Global Economic System

  • Turning shoppers in buyers

  • Using the footfall to buy an extra item


Sales Are Vanity - Profits Are Sanity Resort Of The Global Economic System


Managing sales v margin balance simple yet complex
Managing Sales V Margin Balance-Simple Yet Complex Resort Of The Global Economic System

  • Strategic decisions resulting in different tactics

  • Generate sales through cutting prices and reducing margins

    • Profit implications if not matched by increasing sales and cost reductions

  • Maintain margin and reduce sales

    • Sales and LFL, market share implications

  • Reduction in profits

    • Share price, ROCE ,cost of capital implications

  • Need to do both on different occasions


Innovation more important than ever
Innovation More Important Than Ever Resort Of The Global Economic System

  • Why customers should buy

  • Ranges

  • Promotions

  • Displays

  • Shopper marketing


Need better consumer insight
Need Better Consumer Insight Resort Of The Global Economic System

  • Getting closer to customers increases competitive advantage

  • But needs to be:

    • Quicker, more decision orientated for better buying decisions and margin management

  • What others are doing, worldwide that is working


Christmas planning
Christmas Planning Resort Of The Global Economic System

  • Make or break for the year for many

  • Buy is made and committed..

  • ..its now about execution…turn into cash

  • Cash v margin

  • Not if… but when will discounting begin

  • A game of russian roulette

  • Whoever goes early will bring the others with them

  • The consumer will win


Looking for growth in other markets
Looking For Growth In Other Markets Resort Of The Global Economic System

  • Developing markets looking more attractive for some

  • Requires significant investment…

  • Growing interest in franchising and partnerships to reduce the risk


Consolidate or be consolidated
Consolidate or Be Consolidated Resort Of The Global Economic System

  • Survival of the fittest

  • Mergers and consolidations in all sectors

  • Grocery sector Sainsbury's most likely to get squeezed

    • Discounters, Resurgent Morrisons, Price fighting Tecso, Deep pocketed Asda (Wal*Mart)

  • Well know high street names will disappear


Growth
Growth Resort Of The Global Economic System

  • Challenging times provide opportunities

  • This is cyclical so there will be an upside

  • Will be winners who will come out stronger


Prying open tight wallets
Prying Open Tight Wallets Resort Of The Global Economic System

  • Woo reluctant shoppers

  • Innovate, innovate, innovate

  • Innovative partnerships

  • Play up strengths

  • Video catalogues

  • Service

  • Multi channel

  • Demonstrate exceptional value

  • Loving customers

  • Become part of your customers lives


Opportunities to come out stronger and fitter

The Winners Resort Of The Global Economic System

Strong Brands

Play to strengths

Innovate

Keep a dialogue going

Offer exceptional value

Aggressive promotions in targeted areas

Sales + build brand

Move fast

Relentless focus on costs

Customer focused proposition

Superior business model

Multiformat strategy

Manage/margin volume mix

The Loosers

Play dead

Not well capitalised

Cut customer service

Tired propositions

Generic promotions

Formats that have ridden the upside hard

Burn margin

Opportunities To Come Out Stronger And Fitter



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