Buffett fires £500m warning shot to Tesco CEO

If you’re as influential as Warren Buffett, all you need to do to raise the value of an investment is increase your stake. But it’s not enough to recoup his Tesco losses …

US billionaire Warren Buffett has swiftly raised his stake in Tesco from 3.21% to 5.08%, spending around GBP 500 million. Markets and analysts alike have chosen to see the move by one of the world’s most respected investors as a vote of confidence in the retailer. Shares in Tesco fell by 16% last week, when the UK retailer issued its first profit warning in 20 years, following porr Christmas trading. That news shaved GBP 5 billion of the retailer’s market capitalisation. But the stock rallied slightly on the revelation of Buffett’s increased commitment, edging up by 1.87 %.

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30 Ways to Say Nothing

Our seasonal guide to hiding your poor holiday trading from the press …

It’s Christmas and I don’t feel like working. Sorry, what I meant to say was: I’m experiencing some softness around blog-posting during a challenging trading period.

Given current consumer behavior/s, this particular seasonal trading period may be a key tipping point for some retailers and their suppliers. Insofar as some may tip over from being in business into not being in business anymore.

In such a case, it’s imperative to find creative ways of talking about your performance.

Our generous sponsors Delevine Media are here to help with all corporate communication. So here’s our seasonal guide to burying your poor performance in weasel words.

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Premier offloads Brookes Avana

Clock is ticking as first divestment barely diminishes Premier’s debt …

Beleaguered UK food manufacturer Premier foods has managed to sell its lossmaking chilled foods business Brookes Avana to 2 Sisters Food Group (owned by Boparan), for GBP 30 million. The maker of Hovis Bread and Mr Kipling cakes said the divestment was an important first step towards streamlining its portfolio. Brooks Avana posted a loss of GBP 13.3 million.

Comment:

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The Great Correction: How the Euro Crisis parallels our worst business models

Short-term thinking will send us all off the cliff in the long run …

Not too long ago I sat in a meeting with a company CEO, who was outlining the (let’s call it) strategy for the upcoming year. The model was this: greatly increase service fees, accepting that there would be significant attrition in the number of clients willing to bear them;  then persuade the remaining clients to pay to fund products which would then be made available for free to those who didn’t pay for them. A tough sell, you might think.

During this time, costs would be controlled by reducing the number of services offered in the areas where the company was already successful and well differentiated. Resources would also be scaled back here. This would both reduce revenue streams in the near term and possibly force an exit in the long term.

To recap: destroy or damage existing revenue streams and put all the company’s eggs in the basket least likely to bring in new money. Now, not only would that model fail but it had failed before, spectacularly. The answer to that failure, rather than to re-evaluate the model, had been to divert money from something that was working to pump into further attempts — and to keep pumping to the point at which the funding sources dried up.

As an analyst, it was my job to point out the flaws in this strategy and warn about the giant cliff looming, but the advice went unheeded on that particular occasion. Here’s why. The CEO was rewarded (richly) in the short term, not the long term. If he implemented the board’s flawed strategy he, personally, would make a lot of money now, not in a few years time. Therefore it didn’t pay him to reflect on what could happen to the business and its staff in the long term.

Now I read this article by Paul Krugman about the Euro crisis and I have to chuckle. Except it’s not funny. The notion peculiar to lenders that interest should be highest for borrowers who can least afford to pay it — on the basis that the “risk” is greater — is a masterclass in short-term thinking. Or stupidity, as I like to call it. The punitive rate more or less obliges the borderline borrower to default. They are ruined but hey, they paid so much interest on the repayments they did make that the investment is recouped, so who cares, right?

Except that if your business model is to destroy your source of revenue, eventually you will have no one to sell to and they will have no money to buy with. Let’s call that — oh, I don’t know — how about recession or global financial crisis or depression. As with finance, so with business. Killing the goose that lays the golden eggs hasn’t been a viable model since Aesop. And yet people are still getting paid fortunes to implement it. People are calling our current times “The Great Correction” : but unless the blinkered short-termism that characterises this particular incarnation of capitalism is corrected, that name will remain as vacuous as it sounds.

On feeding the world

“The end of food”

In February 2011, wholesale food prices jumped up 3.9%, the biggest one-month increase in 36 years, causing scare headlines about the end of cheap food to be brought out of storage, where they have been since 2008, when they were put away in favour of financial meltdown. Some suggested insects could eventually replace meat. Some quoted economists and said that grain shortages, Middle East turmoil and extreme weather in critical crop-producing regions had interceded to send food prices higher this year.

We wrote about this in September 2007 and again in April 2008. While times have moved on since then, the discussion has not. In 1996, the United Nations Food & Agriculture Organisation (FAO) estimated that the world was, in fact, already producing enough food to provide every person with 2,700 calories a day. That’s about 600 more calories than any of us really need. The world has enough to eat. The problem is – has always been – that not everybody gets to it.

Waste
Between 30% and 50% of all food produced globally is wasted. In Britain and the US, a quarter of all food from shops goes directly into the bin. The US alone threw away 43 million tonnes of food in 1997, according to figures in The Economist. Extrapolating, if all rich countries waste at the same rate, this totals around 100 million tonnes of food a year. Why? The Economist cites “law”, presumably regarding food safety and use-by dates. These laws are there to protect consumers, so the temptation is to say that nothing can be done. But it also begs the question of why food is stocked that does not sell (half of all salads in shops are thrown away). Or why consumers end up buying too much food, which they cannot consume before the law deems it spoiled or unsafe. The article suggests that, when all is said and done, food in these countries is cheap enough for consumers not to care …

In poor countries, a similar quantity of food is wasted on farms or in the early stages of the supply chain. The reasons are inadequate or inappropriate storage, lack of infrastructure and cold chain and little money to invest in such improvements.

Fuel
It is galling to write again, four years on, about the threat that governmental biofuel policies pose to food security and the effect this could have on social stability and geopolitical conflict. Even back in 2007, it didn’t take great genius to see that if you divert food crops, such as wheat or maize, for fuel production then there will be less food and prices will rise. As policymaking goes, burning your dinner so you can drive to the supermarket surely has to rank among the most short-sighted and self-defeating. And yet, targets remain: the European Union, Brazil, Japan and Indonesia have set a target of 10% of all fuel to be sourced from biofuels. The US is supposed to meet a target of 30% by 2030. Not only this, but biofuel production is tremendously greedy when it comes to raw material. If the goal really is to ensure that the world has enough to eat in 2050, then production of biofuel should stop.

Inequality
Despite the FAO figures, the argument that we could feed the world adequately with existing resources is facile. There are political, economical and biological obstacles to effective redistribution and such a utopia is unlikely to emerge. But consumer goods companies do have an economic incentive to invest in agriculture, infrastructure and supply chain in the world’s poorest countries. They also have an economic incentive to drive waste out of the supply chain and better predict demand in stores.

Meanwhile, demand for meat and grain is growing from developing nations and increased productivity, rather than fairer distribution, seems to be the only way to meet it. But as seasonal change becomes ever less predictable and extreme weather events move inexorably from anomaly to norm, crops are thrown into disarray. Arable land co-opted for biofuel production cannot produce food, further reducing supply. How to produce more, then, from  less? Some claim there is a single solution, glowing brightly in the distance: genetically modified crops (GM).

An op-ed piece in The Economist – written anonymously, as are all articles in the paper – claims that by 2050, population growth will have slowed to almost zero. The genomes of most major crops have been sequenced, the technology to improve yields exists. It is perfectly possible, the piece claims, to feed the nine billion if only countries will embrace genetically modified plant technology. The article goes on to suggest that Europe will find itself marginalised if it continues its reticence, while the BRICs will rise in economic importance and geopolitical power.

In public at least, the major suppliers of GM seeds and technology fight shy of claiming their wares are the proverbial silver bullet when it comes to meeting the demands of population growth. What is certain is that the world is already producing enough to feed itself, without GM. What get in the way are politics, uneven distribution, short-term thinking and waste at every level, from producer down to consumer.

This seems a highly inefficient way to run a planet. Could it be time for a strategic review?