Companies can rise faster now than ever before: think of Facebook, just 10 years old, or Google founded 16 years ago. But they can also fall faster.
Last week, Microsoft announced that it would drop the name of Nokia from its Lumia mobile phones, just six months after completing the purchase of the business from Nokia in April. That is an astounding reversal for a firm that five years ago had 40 per cent of the global smartphone market, though the company does continue as a network equipment maker.
But the decline that touches us most directly in Britain is that of Tesco. In 2007 it was ranked by Fortune magazine as the world’s most admired food retailer, as well as the most admired British company. In Deloitte’s Global Powers of Retailing this year it was the second largest retailer in the world, well behind Wal-Mart but ahead of Costco and Carrefour. This was something we were supposed to be good at: not just a nation of shopkeepers, but shopkeepers who were benefiting from being based in the fastest-growing G7 economy.
And now? Well, the past few months have been something of car crash caught in slow-motion: profits warnings, mis-stated accounts, the loss of the finance director, later the chief executive and, just last week, the chairman. The share price, which a year ago was more than 370p, was below 170p on Friday. This is not as bad as the collapse of the banks: the company is still worth more than 40 per cent of its value a year ago and it still seems to be making a profit, albeit a tiny one. But it is shocking none the less. Companies don’t suddenly implode. True, the picture of the chairman in the latest annual report is distinctly less cheerful than the one in the report of 2013, the thin smile replaced by a poker face. But there was no inkling of the disasters to come.
So, what should we think? We are still in the middle of the story and I expect there will be further horrors ahead. But it is not too early to try to pick out what we can learn. The obvious first.
The most obvious of all is that company accounts should accurately reflect what has happened rather than convey a rose-tinted, fingers-crossed, shall we say massaged view of a company’s business. There is no excuse for that.
But whatever the pressures to perform, it seems to be that whenever a highly successful charismatic leader leaves a business, their successors are likely to struggle. There is a mantra that retail is detail but it is also intuition, and Sir Terry Leahy, Tesco chief executive from 1997 to 2011, combined those two very different characteristics. There have been other similar retail geniuses, such as Sir John Sainsbury or indeed Tesco’s founder Sir Jack Cohen, and the same pattern occurred when they retired. But I think there is something of this in other businesses too: look at what happened to BP after Lord John Browne stepped down, or less catastrophically, when Jack Welch left General Electric in the United States in 2001.
Almost as obvious is that it is very hard to manage any dominant company through a period when tastes or market conditions shift. It is hard to stay huge. Look what happened to the US automotive giants when the Japanese companies produced more reliable and more fuel-efficient cars than they did, or now how the once-dominant Japanese electronic goods manufacturers are squeezed between cheaper basic producers in China and more sophisticated US-designed products from Apple. Retailing here, and elsewhere, faces two shifts: away from the mass middle-market to low-cost discounters and upmarket specialists; and from physical stores to online. It can be done, but it is hard to shift course for a super-tanker.
Maybe we just have to accept that it takes new companies to develop a new market and that any firm that can find a winning formula will find investors beating a path to its door. Amazon’s market capitalisation is around £80bn; that of Aldi, the German discounter, £150bn; Tesco’s on Friday was below £14bn. There is a brutality to capitalism in the way that it hands out the rewards to the winners and kicks the losers when they are down.
All this has been noted. Much less attention, however, has been drawn to the way in which retailing has been disrupted not just by on-line and discounting but by deflation.
A world where prices generally go up is different from a world where they generally go down, as many of us have experienced when we have tried to sell or buy a house. Deflation hands power to the buyer, not the seller. Retailers in general have not experienced falling prices. Yes, they have dipped from time to time and the price of particular goods, including clothing and many consumer durables, has tended to fall in recent years. But food hasn’t and anyway food is a constant purchase, not a lumpy one, so supermarkets were insulated.
We now seem to be moving into a period in which people are as likely to get an increase in their standard of living from lower prices as from higher wages. We cannot know how long this will continue but consumers in Japan have had that experience for 20 years. Printing money and ultra-low interest rates increase asset prices but they don’t seem to increase current prices. If this low-inflation world continues, then this pressure on conventional retailers, such as Tesco, has a long way to run.