Jeremy Warner's Outlook: Sir Ken pays heavy price for botched integration

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The Independent Online

All along, there's been a big question mark over whether Wm Morrison supermarkets would be up to the management challenge of integrating Safeway, and I regret to say that the sceptics have been proved substantially correct.

All along, there's been a big question mark over whether Wm Morrison supermarkets would be up to the management challenge of integrating Safeway, and I regret to say that the sceptics have been proved substantially correct.

Sir Ken Morrison, the chairman, was putting the best possible gloss on the calamitous setback he announced yesterday, heaping as much of the blame as he decently could on past mismanagement of Safeway, yet the reality is that Sir Ken is largely the author of his own misfortune.

Stubborn Yorkshireman that he is, Sir Ken refused to accept that there is anything other than the Morrison way of doing things, and since acquiring Safeway in March, he has moved with dispatch to impose Morrison prices, products and marketing techniques on Safeway with predictably devastating consequences for profits and like-for-like sales. Sir Ken insists that he had to do this because Safeway's footfall was falling off a cliff. To stop the rot, he was forced to move much more swiftly than he would have liked, sacrificing margin and sales along the way.

But actually this is not what happened. The original idea was that the two businesses would be run in parallel until Morrison was ready to execute a big bang approach to converting Safeway to its own format and distribution system. Had Sir Ken followed this plan, I suspect that profits, and probably sales too, could have been protected.

Yet as soon as he acquired Safeway, Sir Ken moved rapidly to dispense with virtually all the old guard at Safeway, including the two senior executives who were to have stayed for two to three years to oversee the transition. He then axed the company's midweek flyer campaign, which was about the only thing that was still keeping customers coming through the door, and unilaterally imposed Morrison's much lower prices across virtually all the Safeway product range. At the same time he confused the customer by introducing Morrison own label products into unconverted Safeway stores. Bizarrely he also gave up Safeway's practice of asking for upfront supplier income in favour of his own system of back end loaded rebates, at a cost to Safeway of approximately £180m.

As a text book study on how not to do an integration, they don't come any more revealing than this one. The good news is that once converted to the Morrison format, sales in Safeway stores tend to soar, which bodes well for the future. Yet in the short term, Sir Ken is paying a heavy price for his pig headedness. I've no doubt that eventually the merger can be made to work. The potential synergies and cost cuts are vast. Unfortunately, there's plenty of scope for further disappointments before things start to get better.

Legal & General

Good news. People are living longer. Yet if like Legal & General you happen to be big in the annuities business, increased longevity is not as much of a blessing as it seems, at least in the short term. Legal & General has for some years adopted a slightly less conservative view of how long people will live after retirement than many of its peers. Yesterday it moved finally to bring itself into line with the most recent data on increased longevity. To the relief of investors, the damage was comparatively limited - an increase of less than £100m in reserves and a reduction in embedded value of 3p a share. The stock market had feared much worse and the shares surged by more than 4 per cent.

Yet the really good news in yesterday's trading update is that new business volumes surged by more than a fifth in the second quarter. After four years of famine, things have at last begun to change for the better for the beleaguered long-term savings industry. David Prosser, L&G's chief executive, detects a real change of mood, with a definitive return of consumer confidence to equity-based products. To some extent L&G is benefiting from the discomfort of its peers, most notably Standard Life, whose reputation has been well and truly trashed by the botched manner in which the FSA imposed new solvency requirements on the Edinburgh life assurer.

But as one of the industry's most financially robust and efficient players, L&G is also drawing strength from some well defined demographic trends. Greater longevity means that buying an annuity costs more with the effect that most of us are going to have to save more. Ten years ago, a pension pot of £100,000 would have bought a £13,000 per annum annuity. Today it will buy little more than half that. To be certain of a decent pension people will have to save more and work longer. It is only very recently that they have begun to wake up and smell the coffee.

So even for L&G, once the present bout of indigestion in the annuities business is overcome, greater longevity is very much something to celebrate.

Unilever governance

As shell wrestles with corporate governance and structural reform, you might have thought that the oil giant's travails would have prompted some soul searching at that other great Anglo Dutch behemoth based just across the river Thames, Unilever. Not a bit of it. The Unilever board is perfectly happy with the present dual domiciled nature of the company, and has no intention of changing it, or indeed altering by one jot the way the board is structured, functions and appoints its members.

Unilever is a little bit different from Shell in that it already has a unified board. Unlike Shell, the two publicly quoted halves of Unilever - Unilever PLC (British based) and Unilever NV (Dutch based) - also have an equal interest in the group's combined assets. Nor is there any crisis in the company's affairs that would seem to demand change. Unilever has disappointed investors with sluggish sales growth, but the shares remain relatively close to their all-time high and there are few worries about the company's long-term future.

Nonetheless, there are some peculiarities which mark the company out from the conventions of modern corporate governance codes. One of these is that the role of chairman and chief executive is combined. What's more there are two of them - Niall Fitzgerald and Anthony Burgmans, the one answerable to the British half, the other to the Dutch domiciled company. While this might seem a very effective system of corporate governance control in that the two are able to oversee each other, it can't be good for swift and decisive action. Consultation and discussion must constantly get in the way, and there is obvious potential for messy compromise, fudge or ever total paralysis.

Yet in practice, the upside seems to outweigh the downside. Swift and decisive action in business can often lead to gigantic mistakes. The partnership structure of two equally powerful executive chairmen seems to work rather well. When he became one of those chairmen seven years ago, Niall Fitzgerald promised to change the company from a supertanker into a flotilla of fast-moving frigates, so as to make it better adapted to fast-changing consumer trends. Plenty of progress has been made, but of its nature Unilever is a not the place for revolutions.

That's the trouble with leviathans. Any change beyond the incremental and evolutionary risks killing off the beast altogether. Yet Unilever is a company that has stood the test of time. At 75 years of age, Unilever is one of the oldest companies in the Fortune 500, and I think it fair to say it is better placed today than ever. Even on diet, health and social responsibility, the big food issues of our time, Unilever has largely managed to position itself on the side of the angels, which for a global foods company is quite something. That's as much a tribute to the company's peculiar corporate governance structures as anything else. If it ain't broke, why fix it?

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