Comment: A high-flier with the skids under him at Sears
`It may be that Mr Strong has good excuses for his failure to deliver shareholder value, but when you are paid nearly pounds 500,000 a year, excuses are not what shareholders expect'
Wednesday 24 April 1996
How could things have gone so badly wrong? He started reasonably well, if slowly, and made low-profile progress for the first couple of years. Geoffrey Maitland Smith, who had been there for donkey's years, first as chief executive and then chairman, would go, he promised, and the deep problems of British Shoe Corporation would be addressed. It was not until last year that Mr Maitland Smith finally slipped away, unloved and unnoticed, and judging by the latest calamitous results, Mr Strong has never managed to get to grips with British Shoe.
Indecision, prevarification, lack of direction - this was the sort of culture for which Sears has long been known. Nothing much seemed to change after Mr Strong arrived. Executives came and went with alarming rapidity. Few of them could have had time to develop, let alone execute a strategy for the businesses they were charged with, even if they had been the right choices in the first place. The company's price continued to flounder and the share has barely moved since Mr Strong arrived, underperforming the rest of the stock market by 35 per cent.
More recently, there have been some real howlers: the write-down of old footwear stock and the attempt to sell it off cheap alongside the new lines, and the too-rapid roll-out of new formats cannibalising old ones along the way, to cite just two. In the end Mr Strong's solution was the one he could have applied right at the start - to sell the problemsome businesses entirely. When he finally bit the bullet, however, it was at knockdown prices, which have cost all last year's profits and the same again in write-downs and rationalisation expenses. To give away a large slug of your market share to Stephen Hinchliffe may or may not be an acceptable thing to do but when it is at considerable cost to the balance sheet it seems hard to justify. The expensive leases on these unwanted shops could yet revert to Sears if the Hinchliffe business founders.
The one business that seems to be doing well, Selfridges, was the one Mr Strong had originally earmarked for sale. Management never had any proper view of what the core businesses should be or what strategy should unite them. It may be that Mr Strong has good excuses for his failure to deliver shareholder value, but when you are paid nearly pounds 500,000 a year, excuses are not what shareholders expect. They expect solutions. Sir Bob Reid, the chairman, says Mr Strong has the support of the board and so far institutions seem prepared to see if the latest deck-clearing can bring about some relief. But who can believe the promise of better times ahead after the latest disappointments?
Manufacturing is not the main game
There is tremendous romance in manufacturing. Monuments like Fort Dunlop, just off the M6 at Birmingham, or the Llanwern steel works in South Wales, are evocative symbols of this country's former economic might. But manufacturing does not matter much in modern Britain. It produces less than a quarter of output and employs fewer than one in five of those with jobs.
This is not insignificant, but it highlights the danger of setting economic policy on the basis of manufacturing alone. To judge by the comments of some City pundits, the current weakness in industry is enough to set the tone for monetary policy. Yet even the CBI, no mean lobby for manufacturers, felt compelled to point out in yesterday's industrial trends survey that its corresponding surveys of retailing and financial services suggested the economy is picking up nicely.
Manufacturing is sending out distress signals at a time when services are growing quite strongly, the unemployment count is falling and financial markets are looking very buoyant indeed. Financial and business services alone account for 19 per cent of the economy. They grew at 3.9 per cent last year. The transport and communications sector, contributing more than 8 per cent of GDP, grew by an impressive 5.1 per cent. The output of the service industries as a whole grew five times as fast as manufacturing in 1995.
The fixation on the grimy glamour of manufacturing creates a deeper problem, however. It is not just a question of getting interest rates a bit wrong by focusing too much on the minority sector of the economy. It also means that Britain does not nurture its successes. The City has the money and influence to celebrate its own achievements. Outside the Square Mile, we downplay the economic importance of much British creativity and success in industries ranging from television and the music business through retailing to software and industrial design. They do not have their monuments yet, but they are three times as important to the British economy as manufacturing.
Bargain basement at Railtrack
The public response thus far to the great Railtrack share offer probably says as much about the goods on offer as Labour's dire but largely empty threats about what it would do to Bob Horton's trainset if it got into power.
The fact that 1.4 million would-be investors have registered with a share shop, allowing them to qualify for the extra goodies on offer, may sound impressive. But when you consider that Gencos 2, which was a secondary offer to boot, promising no one a fast buck, managed to elicit twice that number of registrations, it puts things into perspective.
Ah, says the fat controller in charge of flogging Railtrack to a wary public, but Gencos 2 was twice the size and we have only spent half the amount promoting it.
This kind of reasoning might be par for the course when drawing up railway timetables but it flies in the face of logic since the level of investor interest ought to be influenced as much by the returns available as the size of the offer.
In the case of Railtrack these are considerable indeed. The yield on the shares in year one makes them look like a steal not just in comparison with building society deposit accounts but also against almost any initial public offering we have seen before.
Still, even at this subdued level of interest the Railtrack offer should be comfortably subscribed, allowing the Government to claim a success of sorts and avoiding a nasty derailment in the after-market. Even so, the Railtrack flotation looks like being a Pyrrhic victory for politicians on both sides. In as much as Labour's threats have hit home, they have guaranteed that Railtrack will be knocked out at a bargain-basement price.
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