Tuesday, 23 August 2011

The Hann Perspective: The Inconvenient Truth

How are public companies meant to explain their performances when they are mocked for telling the truth?

So I reflected as I read the gibes directed at local hero Greggs in some quarters of the media for daring to mention, before and after the event, that their recent interim profits would have been £2 million higher if there had not been two more bank holidays in the first half of 2011 than in the equivalent period last year.

How could two days out of 365 possibly have such a disproportionate effect, the cynics enquired? And aren’t bank holidays – like the weather – regular events that good managements should be able to take in their stride?

In fact, Greggs has always been a model of honest and transparent reporting. For them, bank holidays mean reduced sales because some shops are closed, and higher costs as those that are open pay premium holiday wage rates. It is a simple fact of life.

The difficulty that some commentators have in grasping this is no doubt increased by the fact that there are no other quoted companies with a similar business model.

Ironically, in many ways, the best point of comparison for a retailer of sandwiches, savouries and drinks is a newspaper publisher. Because if, say, the weather is so appalling that regular readers do not make it to the newsagent to buy their daily paper, they do not compensate by buying two copies next day. The sale is lost forever. The same applies to lunch.

Every retail business I have ever encountered has been sensitive to the weather, yet the media and investor mantra that “only bad retailers blame the weather” has become so pervasive that most will bend over backwards to avoid mentioning it at all.

And it is pleasant, no doubt, for a pub company that has benefited from a long, hot summer and a successful England World Cup run (a pretty unlikely eventuality, I will grant you), to put the surge in sales down to their incisive strategy and brilliant management. But it is also less than honest. And it creates something of a problem in explaining the entirely predictable slump in the face of tough comparatives next year. Though if fortune is smiling the management will simply have collected their long term incentives and cleared off to sip pina coladas on the beach, leaving that little difficulty for someone else.

It does not take a genius to spot that customers may not be rushing to garden centres in their usual numbers in an August when it chucks it down pretty much every day. Though on the flip side, more people than usual will no doubt be seeking shelter by browsing sofas and other large ticket purchases in nice, dry, out-of-town retail sheds.

Wet summers are bad for vendors of ice cream, but good for those selling umbrellas. When I started work in the City, the traditional business school response was to recommend diversification, to ensure a smoother profit progression. But then conglomerates became a dirty word and had to be broken up in the name of the new mania for “focus”.

Which leaves us with the problem of how to explain variations in performance that are genuinely outside management’s control. In less news-packed Augusts than this, at least one national newspaper usually runs a filler column mocking the most ludicrous excuses put forward by companies in their results announcements, from frozen cockle beds in the Zuider Zee to a shortage of furniture buyers on the weekends of Princess Diana’s death and funeral.

The strange thing is that, however laughable they may sound, on closer inspection these claims all turn out to be true. If you are in the cockle fishing business (and there is certainly room for debate on the wisdom of that) you won’t sell a lot of them if freak weather means that you are unable to harvest any for weeks.

So what is the answer? Make up stories that aren’t actually true, but will have a more pleasing ring to uninformed commentators? Or simply “never apologise, never explain” and take the undeserved brickbats when your weather-sensitive business underperforms one year, hoping that you can bask in equally unmerited praise when the pendulum swings back? (A high risk strategy, given the way that the British weather has been going of late.)

Sadly, there is another answer. Take your business private so that you can run it for the long term, never again needing to bother about how the teenage scribblers will react to a temporary profit blip. Management rewards will receive much less scrutiny, too. But that deprives the rest of us of the opportunity to invest in good companies that will reward us well. So perhaps what we need is a touch less cynicism and rather more understanding that some managements actually tell the truth.

Keith Hann is a PR consultant who believes in telling it like it is – www.keithhann.com

Originally published in nebusiness magazine, The Journal, Newcastle upon Tyne.

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