Outlook: Baker imposes boot camp therapy at besieged retail giant

Squandered aid
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The Independent Online

It's amazing what a bit of cost cutting in combination with lower prices and longer opening hours can do to transform a company. It's hardly rocket science, but by being clear about all three in the short three months he's been there, Richard Baker, the new chief executive at Boots, seems already to be breathing new life into the tired old high street chemist chain. Like-for-like sales growth of 4.1 per cent in the final quarter of last year was better than anyone dared hope for, and compared with the disastrous performance disclosed earlier this week from that other former doyen of the high street, Marks & Spencer, it looked positively brilliant.

Mr Baker promises more of the same over the months ahead, with more price discounting, longer opening hours and further management delayering at head office. He's started not so much running as sprinting, yet Mr Baker knows as well as any that there's a limit to what he can do, King Canute-like, in holding back the ever-encroaching tide of the big supermarket groups. There will always be a sizable market for high street chemists, but whether it can remain large enough to support Boots' 1,000-plus chain of stores is open to question. More serious still, the fat gross margins Boots has traditionally enjoyed look wholly indefensible in today's fiercely competitive, price conscious retail environment.

The outright price deflation now being experienced in most areas of retailing is just as well for the Bank of England and the Government, for the service industries seem of late to have returned to levels of inflation not seen since the 1980s. The cost of council taxes, public transport, plumbing, school fees (shortly to be joined by university fees), housing, health club subscriptions, maintaining a car, and so on and so forth, are all inflating away like there's no tomorrow, which in a period of zero growth in disposable incomes means less money for spending in the high street and more pressure still on retailers to cut prices to compete.

Back in the glory years of the bubble, it was supposed to be the internet which would transform the retailing, by stripping out the middle man and reducing prices to the lowest common denominator. In fact, the new dynamic is being provided by the supermarkets, with their awesome buying power and grand ambitions for expanding into virtually all areas of non food retailing.

Ever since I've been in journalism, and from long before, I'm sure, retailers have perennially complained of overcapacity on the high street. Yet the amount of in- and out-of-town retail space continues, relentlessly to grow. Up another 2 or 3 per cent last year, what's happening is that the supermarkets are growing faster than smaller, inefficient retailers are being put out of business. Mr Baker, a former Asda man, knows better than any that he'll have to keep sprinting if he's to catch up.

Squandered aid

Few new manufacturing facilities of any significance get built in Europe any longer without some form of government assistance. Samsung's decision to close its Teesside site and shift employment to the lower cost regions of China and eastern Europe shows that even with such assistance, it is becoming ever more difficult to attract and keep foreign investment.

Samsung isn't in truth as much of a scandal of squandered government aid as it has been portrayed. The Korean-based electronics manufacturer originally asked for £80m of regional aid, but it only ever received a little over £10m, of which about £5m will now have to be repaid. None the less, coming so soon after a much worse case of failed inward investment backed by public money, LG's television factory in south Wales, the closure has again called into question the validity of the selective assistance scheme.

The issue is given added piquancy by Nissan's recent threat to build the replacement for the Almera in France rather than Sunderland unless fully compensated for Britain's failure to join the euro with a lorry load of government aid. This would actually be the worst possible reason for doling out regional assistance, as currency instability cuts both ways. True enough, Nissan hurts in its key Continental export markets when the pound is strong against the euro, as it was a few years back, but it should be making hay now that the pound is a bit weaker.

In any case, any business plan which fails to stand on its own merits is unlikely in the long term to be much redeemed by government subsidy. Where it does make the difference, state aid tends to lead ultimately only to uneconomic, or as in Samsung's case, transitory investment. However, to abandon regional assistance entirely is easier said than done. The purpose of state aid is not so much to attract investment that wouldn't otherwise be made as to ensure that it goes to areas of high unemployment where it might help the local economy, rather than anywhere else in the country.

The other purpose is to try to stop the investment going elsewhere in Europe. The European Union has rules to prevent competitive bidding among member nations for inward investment through regional assistance, but they are not well defined and allow for plenty of wriggle room. When the decision to locate is marginal between Britain and, say, France, it tends to be determined by which country is prepared to give the most money. To abandon regional assistance entirely would thus be brave and right, but it would also be dumb and stupid.

The Government promises to reform the criteria for regional selective assistance as part of an overhaul of business support schemes to be announced in April. How substantive these changes might be remains to be seen. Most Department of Trade and Industry initiatives on business support seem to involve little more than repackaging old measures under new slogans while progressively shrinking the size of the budget.

Even so, it is to be hoped that Patricia Hewitt, Secretary of State for Trade and Industry, can find a way of better directing what Government money there is for business development towards home-grown innovation and entrepreneurialism rather than inward investment. In an open and growing economy like Britain's, with a big and stable market to tap into, most worthwhile inward investment is going to happen anyway, without need for government support.

Britain's days as a commodity producer of manufactured goods are long gone, and if there is a future for manufacturing in Britain at all, it has to lie much further up the value chain. Most inward investment into Britain is regrettably quite a long way down it, with the high value added stuff and the intellectual know-how kept for the company's country of origin.

Carlos Ghosh, chief executive of Nissan, can threaten all he likes to relocate to France, but the fact of the matter is that no big car manufacturer is building new screwdriver plants anywhere in developed Europe, France or Britain. They are all headed off to Slovakia, or anywhere else where wages are a quarter or less of what they are in Britain or France.

Britain has nothing to fear from the export of low value added jobs to the rest of the world, and everything to lose from pouring government money into uneconomic inward investment. The Centre for Economic and Business Research's claim yesterday that the likely outsourcing of 500,000 British jobs over the next five years to India and China would actually produce a net gain of 100,000 in British employment doesn't immediately look like the most thoroughly researched piece of analysis ever done, but the point is well made.

By reducing costs and raising productivity, the outsourcing will increase profits and boost investment in the jobs of the future, which can only come from innovation.