Hidden Costs of Redundancies

6 01 2009

jobcentre-plusThe number of people unemployed is rising everyday due to firms going bankrupt or businesses making some of their staff redundant as part of a “cost-cutting measure”. However, the Chartered Institute of Personnel and Development (CIPD) warned yesterday that redundancies could in fact prove to be a false economy for businesses.

It estimates that the actual cost of redundancy could reach up to £16,000 for each employee made redundant. This figure takes into account the redundancy payment and the costs involved in recruiting and training replacement staff. But, redundancies can also lead to lower staff morale because when employees see some of their colleagues being made redundant, they fear about the security of their own jobs. This leads to a drop in their productivity which in some cases would lead to the business losing its competitive edge over a period of time. The CIPD’s figures doesn’t take these factors into account.

For most businesses redundancies are the most straight forward ways of cutting down costs in the short term. Less staff means less wages to be paid each month. Although analysts and bankers and politicians cannot agree on how long it will take for the economic condition to improve, they all agree that it will improve in the near future.

When the situation does improve, a business should be in a position to meet the upsurge in demand if it wants a share of the increasing market. This does not only mean having enough number of staff, but staff that are properly trained and equipped with necessary skills to help them do their jobs to the best of their abilities and be efficient. So, when employees are made redundant, they take the skills that they have acquired at the firm’s expense with them and this is another indirect cost to the business.

When the economy is booming, there is demand for staff from businesses who want to grow. For those businesses that require staff with special skills, this could prove to be a costly affair because people with those specific skills might be hard to find. Also, if people with a particular skill are in high demand, the business would have to be prepared to pay a higher salary or offer lucrative perks or else the prospective employee might end up working for the competitor.

Most businesses have a Human Resources Department which looks at the company’s long term objectives and then works out the staffing needs like the kind of staff required, the kind of skills required, etc., to achieve these objectives. Rather than just making staff redundant, businesses looking to grow in the near future should perhaps evaluate their long term goals and view the currently unemployed people as a pool of highly skilled employees and recruit them cheaply to make the best of the up turn. To help realise the true cost of redundancy, the CIPD has created a formula for employers.

Real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P – n)

Where:
• n = number of people made redundant
• R = redundancy payments
• x = number of people subsequently hired
• H = hiring costs
• T = induction/training cost
• y = percentage quitting post redundancy
• W= average monthly staff salary
• z = percentage reduction in output per worker caused by lower morale
• P = number of people employed prior to redundancies

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High Street Blues

23 12 2008

BRITAIN-BUSINESS-RETAIL-SALESThe trading that occurs in the run up to Christmas is very crucial to retailers even in the “normal” years. It allows them to make up for the losses they might have incurred over the year and helps them prepare financially for the coming year. 2008 has been, by any standards, anything but a normal year. Huge banks have become small banks, some have been swallowed up by bigger banks, some have merged with other banks while some have disappeared altogether.

Little surprise then that the past few weeks have been really tense for the retailers. The number of shoppers visiting the shops have decreased. As a result, retailers have been forced to cut their prices to attract shoppers. According to Experian, the number of shoppers during the weekend, the last weekend before Christmas, was down by 8.7% as compared to last year. However, the number of shoppers yesterday were up 13.6% as compared to the same Monday last year.

It’s a bit unfair to compare the two corresponding Mondays because last year the Monday was Christmas Eve. The kind of shoppers who go shopping on Christmas Eve are generally those looking for food items or ingredients for their Christmas dinner, last minute shoppers or those looking for last minute bargains.

Even though the number of shoppers increased, it still remains to be seen how much revenue that translates into. The main reason why more consumers went out to shop perhaps has a lot to do with a last minute heavy discounts by retailers in desperate attempt to attract shoppers. According to the accountants Ernst & Young, the average discounts were 40%, up from 38% last year. It means that even though people had more shopping bags in their hands, the retailers wouldn’t have made a lot of money from that.

Although the high street is seeing a decline in the number of shoppers, according to Hitwise, the number of people visiting the websites of high street retailers has increased. Between Dec 18 and Dec 21, traffic to online retailers(including internet-only and high street) increased by 2.2% on average as compared to last year. Websites of high street retailers saw their traffic increase by 2.7% on Saturday and 5.9% on Sunday as compared to last year.

When it comes to prices, mostly the online retailers clearly have an advantage over their high street rivals. But their biggest drawback is that the items have to ordered before a certain date to ensure that they are delivered in time for Christmas. On the other hand, the websites of high retailers allow the shoppers to book their products online and pick them up instore. It may not be cheaper than the internet-only retailers, but it certainly is more convenient. One of the put-offs of shopping on the high street before Christmas is clearly having to navigate through crowded streets and aisles holding your shopping bags. It is also very hard to compare prices across different retailers and browse the items leisurely.

The rise in the number of shoppers will definately be of some relief to retailers. But it will by no means make up for the dismal sales and revenues they have generated over the past few weeks. Woolworths and MFI have gone bankrupt and Whittard of Chelsea is said to be on the brink of administration. And it is clear that more will have the same fate in the new year, what remains to be seen is who they will be.

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Sales rise amidst the credit crunch

19 12 2008
Oxford Street, London

Oxford Street, London

According to figures released by the Office of National Statistics (ONS), the volume of sales between September and November rose by 0.5% as compared to the three months before it. This may not sound good, but compared to all the doom and gloom and the difficulty of obtaining credit, it does sound good. Also, the value of weekly sales in November were 2.9% higher than in November last year.

However, the high street retailers beg to differ with the figures. The British Retail Consortium (BRC) said that the figures released by the ONS were optimistic and painted a “rosy picture” of the current difficulties. According to BRC’s own findings, the sales value actually fell by 0.4%. Experian reported that the footfall (the amount of traffic generated by shoppers visiting the stores) in stores for the first three days of the week had decreased by 11.5% compared to last year.

It seems hard to believe that the increase in the volume in sales could have lead to a increase in the value of sales. After all, the increase in the volume of sales is largely due to a wave of heavy discounting by the high street retailers, especially after Woolworths slashed its prices to get rid of its stock. It is likely that the spectacular and well-publicised offers by retailers would have made some reluctant consumers go out and spend. It is also equally likely that many who generally would have waited for Boxing Day sales have instead done their shopping before Christmas since they feel that the discounts offer good value for money. After all, there is a limit to the amount of discounts that the retailers can offer before it starts eroding their profits. So many consumers may feel that the discounts are as good as they are going to get. If this is true, what would happen is that the average amount of sales during the Christmas period hasn’t really increased, but the shopping has been concentrated to a few weeks before Christmas.

The reason for this difference in figures, according to Reuters, is that the figures of “the ONS figures capture internet shopping more fully”. According to the ONS, the value of online sales was £220 million in November and it accounted for 3.8% of the total retail revenues. According to Experian, its company Hitwise which is an online competitive intelligence service, found that the websites of high street retailers had 22% more visits than its internet-only rivals. This could explain why the sales have increased even though the number of shoppers visiting the stores seem to have decreased.

Many shoppers percieve the prices of online retailers to be cheaper than their high street counterparts. And this has been shown to be true in most cases. After all, they do not have to worry about expensive overhead costs like rent and sales staff. However, many shops on the high street nowadays allow their customers to haggle and bag bargains, and this is not available to online shoppers.

It would be interesting to see the figures of  the overall retail sales before and after Christmas since that would allow us to see the whole picture.
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Cool to be Frugal

12 12 2008

piggy-bankAccording to Andy Bond, the Chief Executive of ASDA, its now becoming cool to be frugal and not so cool to be frivolous and wasteful. He feels that consumer’s shopping habits are changing and a new generation of shoppers who are thrifty are emerging as the credit crunch begins to bite even further.

So what does this really mean? It means that consumers will now focus more on products that offer them value for money and will aim to eliminate waste. Value for money doesn’t really mean something that is priced less or discounted. It is actually something that offers satisfaction and quality for its price. Consumers will increasingly try to differentiate their “needs” from their “wants” and think carefully if they really need something or do they just want it. For example, ASDA noted that consumers are beginning to shift from buying ready meals to buying ingredients and cooking at home. People are also beginning to mend or fix items rather than getting rid of them and buying new ones. Cobblers, for example, have seen their business increase since consumers are coming in to get their shoes mended rather than splashing out on a new pair. A quick search on Google Trends showed that visits to the comparison site moneysupermarket.com and myvouchercodes.co.uk which lists voucher codes across a variety of stores had more than doubled.

What’s really interesting is the 40% increase in the number of people who are ignoring best-before dates and consuming the product rather than throwing it in the bin once it is past its sell by date. Perhaps the increase has also something to do with the numerous reports on saving money on television featuring people who regularly consume food, as long as it looks fit, well past the best before date. Consumers are also freezing leftover food rather than wasting it and sales of bottled water and smoothies has also been said to have decreased since many are opting to fill tap water and eat fresh fruit instead.

It is important then that retailers spot this trend and adjust their business models accordingly in order to survive the downturn. Thrifty consumers would focus on long term value and would be willing to spend a little bit extra on an item that is likely to last longer than buy something cheaper in price which would also be cheaper in quality and hence not last as long. Rather than reducing prices on cheap Christmas stocking fillers that perhaps wont even last till next Christmas, retailers should instead focus on reducing prices on items that actually are of some use to the consumers. Also, thrifty consumers are less likely to buy items on impulse which retailers greatly depend on. So, businesses should make sure that they are really operating on a low cost model which aims to eliminate waste as that would be the only way that they would be able to offer low prices and good service at the same time.

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HSBC to increase its lending

9 12 2008
HSBC

HSBC

The World’s Local Bank HSBC announced on Monday that it aimed to lend next year roughly two times the amount it lent to homeowners in 2007. For this purpose, it has set aside around £15 billion. In an environment where banks are becoming increasingly reluctant to lend money, HSBC hopes to increase its market share by lending, thereby getting a huge slice of a, albeit, small market. It is also hoping that its customers will continue to bank with it even when the climate improves, because they will remember that HSBC was there for them when all the other banks closed their doors. This will mean that when the market does get bigger, they will effectively have a huge slice of a huge pie.

So, how can HSBC afford to increase its lending when other banks have had to be injected with capital by the taxpayers. HSBC is one of the few banks thathasn’t gone to the taxpayers cap-in-hand asking for a cash injection, it is in fact well capitalised, according to its CEO Michael Geoghegan . According to its spokesperson, HSBC doesn’t have to depend on the two main sources of finance that the banks that were bailed out depended on- the money markets and UK depositors. It will instead fund it internally using its reserves. The reason why other banks are lending less money is because they don’t have enough money to lend.

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It is true that last Thursday the MPC (Monetary Policy Committee) cut the base rate by 1% to 2%-the lowest it has been for years. However, the primary source of finance for most banks is not by borrowing from the Bank of England, but from the money markets. The rate of interest in the money marketshasn’t gone down at the same rate as the base rate. Hence, the cut in the base rate is unlikely to make the cost of borrowing money any cheaper. Another source of finance for banks is their customers’ deposits. However, in recent years, the levels of savings in the UK is said to have decreased. The cut in savings rate by the banks is unlikely toentice people into put their hard earned cash into banks, except for those whom the interest paid is their income.

HSBC also announced a £1 billion fund for lending to small businesses. Small Businesses that are fundamentally sound and only experiencing cash flow problems are the kinds of businesses it is hoping to lend to. The reluctance of banks to lend to sound businesses has been it the news recently, forcing numerous businesses to cease trading just because they have a cash flow problem and not because their business model is fundamentally flawed. The increase in the number of small businesses going bankrupt no doubt puts the jobs of many people at risk and leads to fear amongst those that are in employment. Small business owners, no doubt, will welcome this announcement which will be akin to a lifeline being thrown at them when they are in dire straits.

It has stressed, however, that the lending criteria will still be strict. In other words, they are not planning to throw money at anybody who asks for it.

Even if this announcement does not completely restore confidence, any good news is welcome in these gloomy times. It is unlikely that any other major bank will come forward and increase its lending in the near future, no matter how much Brown, Darling orMandelson threaten or cajole them into doing so. In a way, one cannot blame the banks which have been bailed out for being reluctant or in their words, “careful”, of lending. On one hand, they are the subject of many a joke and their “irresponsible” lending is being blamed for all this mess, and on the other hand, they are being pushed to lend at levels of last year.The money which has been lent to the banks on behalf of the taxpayers has not come cheap, the banks have had to pay a hefty price for it.





Retailers embrace VAT cut

2 12 2008

The cut in the VAT announced last week by the Chancellor initially didn’t receive the reception that he might have been perhaps hoping for. News reports, newspapers and websites were filled with comments against the idea of the VAT cut, some being funny, and some downright ironic. Most were along the lines of “10p saving! Whoopee!”

However, over the weekend, it looks like many retailers are whole-heartedly embracing the VAT cut. Not because they like to go through the trouble of having to change the prices and labels and the IT systems. But because it gives them another reason to slash their prices, much more than the 2.5% VAT cut. But, why do they need a something like a VAT cut to give them a reason to slash prices? Surely, they can do it without that.

Yes they can. And many, like M&S and Debenhams, did a fortnight ago when they had a one-day only “spectacular” sale. Having yet another “spectacular” sale nearly three weeks before Christmas would give the impression that they have a lot of left over stock which they are desperate to sell. Although many shoppers would flock the stores to bag the bargains, which many have been doing due to the ongoing sales, many would stand back and wait for the prices to drop even further – a clear sign of deflation.

Hence, the cut in VAT, although not significant on its own, has provided the retailers with a timely reason to slash their prices further, using the VAT cut as a “mask” for doing so. Some companies, however, like BT and Virgin Media have decided to pass only the 2.5% cut to their customers.

But, how do single price retailers like Poundland, 99p Stores, or numerous other independent single price retailers pass on the VAT cut to their customers? After the VAT cut, an item costing £1 would then cost:
117.5% = 100p (The VAT is already added to the final selling price)
1% = 0.85p
115% = 97.87p (new price)
Poundland wouldn’t be able to rename itself as 97pLand for a period of 13 months, and the slogan “Everything’s £1” would then be deemed misleading. The only other option is for such businesses to increase their profit margins, which is not a bad thing, but they cannot take the advantage of being able to advertise the fact that they are passing on the VAT cut to their customers. Or, they could sell products that they wouldn’t have been able to in the past, as it would’ve been priced above £1, but can now since the cut in VAT allows the price to be £1.





Woolworths goes into administration

28 11 2008
woolworthsThe high street retailer Woolworths, fondly known as Woolies, has been forced to go into administration after it failed to find a buyer to snap it up for a nominal £1. So, why didn’t anybody buy it, surely £1 for a whole company seems like a bargain? That’s because the buyer would have not only acquired Woolworth’s assets (things it owns), but also its huge liabilities (money it owes), £385 million to be exact.

So, what is administration and when does a business go into administration? With regards to business, it is when a business doesn’t have enough funds to trade, also known a cash flow crisis. Cash flow is not the same as profitability of a business, but refers to the cash flowing into and out of the business. If cash coming in is less than the cash going out, then the cash flow is negative and it means that the business does not have enough funds to meet the current liabilities, like creditors and suppliers.

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However, going into administration isn’t still the end of the story for Woolworths. In fact, administrators, in this case the accountancy firm Deloitte, protect the company from creditors seizing stock to pay off the money that is owed to them. The administrators are trying to find a buyer for Woolworths, failing which it will be forced to go into liquidation. This is where the administrators try to sell off the assets to recover any money they can to pay off the debts. Woolworths competitors are dreading this because although it will mean less competition in the long term, since there is one less player in the market, in the short term, it will mean a price war during Christmas as the administrators will slash prices to sell off all the stock.

So, is the reason for Woolworth’s difficulties due to the credit crunch? Well, the increase in household bills has meant that consumers are spending less. This is evident from the fact that Woolworth’s like-for-like sales have decreased whereas their costs have increased leading to increased losses. Many analysts say that Woolworth’s difficulties should come as no surprise, as Woolworths didn’t have a clear brand image, what its brand stood for, and its purpose in the market. Additionally, suppliers of Woolworths found it expensive to insure themselves against the risk that it wouldn’t be able to pay them and hence, Woolworths had to pay upfront for the supplies, unable to take advantage of buying on credit that some of its competitors enjoy.

Woolworths has around 815 stores and employs around 30,000 employees. If the business does go into liquidation, all these employees stand to lose their jobs. Also, the businesses that supply to Woolworths will also suffer losses. The question many people are asking is why isn’t the Government bailing Woolworths out, after all, it did bail out the banks. Well, the Government can’t bailout every business in difficulty; it’s a natural business process where the one with the weakest business model fails hence making the others stronger due to decreased competition.

Other than its retail business, Woolworths Plc. also owns Entertainment UK and 2Entertain. Entertainment UK specialises in the supply of CDs and DVDs to retailers such as Tesco, Zavvi, W H Smith, Asda, Sainsbury’s, Morrisons and of course Woolworths itself. EUK is said to be a profitable business and the administrators are looking for a buyer for it as well. If EUK is shut down, it will no doubt affect the retailers it supplies, especially during the crucial trading period of Christmas. BBC Worldwide and Woolworths Plc., on the other hand jointly own 2Entertain, and there are talks of BBC Worldwide buying Woolworth’s share of the business.
It has also been reported that MFI is also going into administration, and it looks like a few more will follow, certainly after Christmas. If you want to see Woolworth’s Interim report for 2008, click here.