Jeremy Warner's Outlook: Retailers feel the winds of recession but the Bank is not yet in interest rate cutting mood

<preform>Tunnel may join 21st century </br> Quorn on the cob for Premier Foods</br></preform>
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The Independent Online

It's interest rate decision time again this week, and the "downside risk" to which Mervyn King, Governor of the Bank of England, referred at the time of the last Inflation Report seems, if anything, to have worsened markedly. Despite this, hardly anyone expects there yet to be an interest rate cut quite yet. According to the British Retail Consortium, high street sales for the second month in succession in May on a like-for-like basis.

It's interest rate decision time again this week, and the "downside risk" to which Mervyn King, Governor of the Bank of England, referred at the time of the last Inflation Report seems, if anything, to have worsened markedly. Despite this, hardly anyone expects there yet to be an interest rate cut quite yet. According to the British Retail Consortium, high street sales for the second month in succession in May on a like-for-like basis.

New car sales were down 3.4 per cent on the same month last year. With the economy apparently sliding, has not the time arrived for a confidence boosting cut? Leave it much later, and the economy may already be in a self-perpetuating downward spiral. It's easy for the retail sector to cut jobs. Many on the high street are already doing so, which means even less money for consumption.

For the time being, however, the Bank's Monetary Policy Committee is right to ignore the siren calls of the retailers. Retail sales were down on a like-for-like basis last month, but taking account of extra space they were higher. Nor does what's happening on the high street give a reliable guide to consumption as a whole. In the first quarter consumption was still rising. There's no reason to believe that has not continued into the second quarter.

Still, things are plainly bad enough. Consumption is two-thirds of GDP, and if consumption is not growing by much, the economy as a whole will likely be stagnating too. There's little sign of the corporate sector taking up the baton of growth. To the contrary, some companies are already in retrenchment mode once more. The only area of economic activity still indisputably growing is the public sector, which given that it has to be paid for by the private sector hardly gives reason for encouragement.

On the other hand, inflation is still rising, and despite reports of mass lay-offs on the high street, the labour market remains as tight as tight can be. The general trend in earnings is as a consequence a little bit higher than the level the Bank thinks will trigger price pressures. The markets expect the Bank to start cutting rates from the autumn onwards. I suspect we'll know rather earlier than that what's needed. The Bank still suspects we are going through a temporary hiatus in consumption. It may still be right.

Tunnel may join 21st century

Well there's a thing. After all these years of battling against growing low-cost airline competition, Eurotunnel has finally realised they may be on to something after all and resolved to copy their yield management pricing systems.

When these were first introduced, they turned airline pricing on its head. The previous convention had been that prices were steadily discounted as the departure date approached, so that the airline filled as much of its capacity as possible. Some attempted to charge a flat rate price throughout and would rather fly half empty than allow one set of passengers to pay less than another.

A low-cost operator works on the contrary principle that the price starts cheap and then rises according to scarcity. The passenger that buys the last seat on the flight is likely to pay top dollar.

Eurotunnel has so far stuck broadly to the conventional model, which is also the one applied by the ferry operators. Price variation is determined by season, length of stay, timing of departure and so on, not by the actual level of demand. Jacques Gounon, the latest chairman to step up to the plate at Eurotunnel, has determined to change to the low way. By doing so, he reckons he can reduce the number of shuttle journeys by a third, thereby achieving a corresponding reduction in operating costs. He also expects the move to halt and eventually reverse the decline in car-carrying traffic the tunnel has experienced in recent years.

If it's really that easy, why didn't someone do it earlier? Though privately financed, Eurotunnel was set up as a transport infrastructure project, rather in the manner of a road. The intention was to provide an always-on service for crossing the Channel. Crippling losses has finally forced Eurotunnel to free itself of this debilitating mind set. By applying the yield management model, the tunnel will in effect be cutting capacity thus allowing itself to become more economically viable. This will also help ease the plight of the ferry operators too.

However, of itself it cannot hope to put Eurotunnel back on a commercial footing. For this to happen, a substantial part of Eurotunnel's £6.4bn of debt needs to be written off or converted into equity. Creditors have said they would rather put the company into receivership than accept M. Gounon's "invitation" to write off two-thirds of their loans. His position is "completely bonkers", says one. "We hold all the cards."

Well, perhaps not quite that bonkers. M. Gounon was elected by French, private shareholders, not the debt holders, and if he were to try to rail road his backers into a hugely dilutive debt for equity swap, he'd follow his predecessors straight to the guillotine. He cannot be seen to do anything that might harm this motley crew.

What happens after he's re-elected at the annual meeting later this month is another matter. Compromise might indeed then be possible. M. Gounon sounds like the best news Eurotunnel has had in quite a while. For the first time in ages, the Eurotunnel management is thinking positively and adventurously. Don't hold your breath, but maybe, just maybe, M. Gounon is the one to sort out the mess.

Quorn on the cob for Premier Foods

Premier Foods has so far managed to make a pretty good living out of its quintessentially British collection of food brands. The trend among big multinationals to dispose of nationally orientated brands so as to concentrate their marketing efforts on a smaller number of global products, has played straight into Premier's hands. Unwanted and unloved by others, many of them in seemingly terminal decline, Premier has picked them up and given them new life.

With better promotion and route to market, Robert Schofield,the chief executive, has made them grow again. There's little on the face of it that links Branston Pickle, Typhoo tea and Smash instant potato yet, unlikely though it may seem, the formula works.

Quorn on the other hand is a rather different type of acquisition. More of a product than a brand (though Mr Schofield doesn't recognise the distinction), the venture capitalists have already had five times their money out it in little more than two years. At more than two times sales, Premier seems to be paying through the nose for the privilege of owning this fungus-based, meat substitute, originally developed by the chemicals group ICI. As a brand, it's already bigger than Heinz Tomato Ketchup, or Kellog's Corn Flakes.

Mr Schofield is confident he can grow the product beyond its traditional "Veggie" appeal to a wider health conscious market. Recent sales growth is impressive - some 7 per cent a year for the past five years - yet despite the delight with which the stock market received the news yesterday, with the shares up nearly 8 per cent, I'm personally sceptical.

Like Unilever's SlimFast, whose sales were poleaxed by the Atkins' diet, Quorn would seem quite highly vulnerable to changes in fashion or diet. Vegetarianism is actually in decline in Britain, and for anyone who eats meat, it's hard to see the point of Quorn as an alternative. If you fancy something else, what's wrong with vegetables or fish? Why have something manufactured at all?

Still, Mr Schofield is confident of his ground, and with the shares some 50 per cent higher than when they were floated a year ago, the City is plainly backing his judgement. Premier promises more acquisitions of unwanted brands over the years ahead. The company ought perhaps to let this one bed in first.

j.warner@independent.co.uk

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