A more detailed version of my post about stress tests was published on Fair Observer. In the article, I analyze Banco Santander's situation more and discuss options for banks from around Europe.
Check it out!
http://www.fairobserver.com/article/capital-requirements-are-hurting-big-banks
Monday, December 26, 2011
Thursday, December 15, 2011
Stress Test Pain
There is substantial evidence that last week's European Banking Authority stress tests are squeezing banks' business instead of making them safer. Let's consider Spain's Banco Stantander, which has the largest reserve deficit in Europe at €15bn.
Spain just sold a chunk of its Chilean subsidiary for about €800mn. Though they still have a 67% stake, this is not a disposal of a superfluous investment, like the auto parts company that holds equity in a computer chip manufacturer. This is Santander's core businesses! And Santander Chile is one of the best parts of its business. It's a cash cow in a growing and stable foreign market. Its ROE over the last 9 months was 24%, one of the highest returns in the Chilean financial system. The sale valued the whole subsidiary at about US $10bn, down from $13bn in the summer. In summary, a distressed sale in a down market - the kind of transactions that erode shareholder value and make it harder for the bank to finance other activities.
Perhaps this is a game of high-stakes chicken. The EBA challenged banks to boost capital ratios by foregoing dividends and soliciting fresh contributions from shareholders. The banks have taken a left turn by selling assets, shooting themselves in the foot but calling into question the stress test system itself.
Spain just sold a chunk of its Chilean subsidiary for about €800mn. Though they still have a 67% stake, this is not a disposal of a superfluous investment, like the auto parts company that holds equity in a computer chip manufacturer. This is Santander's core businesses! And Santander Chile is one of the best parts of its business. It's a cash cow in a growing and stable foreign market. Its ROE over the last 9 months was 24%, one of the highest returns in the Chilean financial system. The sale valued the whole subsidiary at about US $10bn, down from $13bn in the summer. In summary, a distressed sale in a down market - the kind of transactions that erode shareholder value and make it harder for the bank to finance other activities.
Perhaps this is a game of high-stakes chicken. The EBA challenged banks to boost capital ratios by foregoing dividends and soliciting fresh contributions from shareholders. The banks have taken a left turn by selling assets, shooting themselves in the foot but calling into question the stress test system itself.
Thursday, December 1, 2011
Euro still in crisis mode
The euro is still in crisis mode despite central banks moderating borrowing rates to give the ECB easier access to forex. Germany's recent failure to sell a full allotment of 10-year notes indicates that countries are unable to issue new debt to meet cash obligations. The Eurozone has a collective $241bn funding gap between bonds issued in 2011 and payments due at the end of the year. There is no way they can simply cover that in 30 days by selling assets. A Financial Times commentator asserted several days ago that "the Eurozone really has only days to avoid collapse."
Perhaps the most unfortunate aspect is that a Germany-sponsored bailout would be best for everyone, says a UBS Investment Research report. Germany doesn't want to end up with an overvalued currency like Switzerland, so it needs the peripheral countries just as much as they need a German-led guarantee for their debt. The problem is Germany doesn't have the cash to bail everyone out, and markets are not going to tolerate the idea of a Eurobond composed in part of peripheral country contributions (a house of cards if there ever was one).
The wheels for a breakup are already being set in motion. Icap, the world’s largest electronic trading platform for foreign currency, said last Sunday that it was testing its trading mechanism for Greek drachma, just to make sure it still works. Countries are quietly unearthing old images for coins and bills. It’s anybody’s guess as to whether they will still work, since they are configured on obsolete technology. Several countries have completely deactivated their federal mints (for 17 member countries, only 11 actually print euros). The restoration of old currencies will be aided by more sophisticated automated teller machines and cash registers but it will still require a lengthy transition period.
Meanwhile, no one really knows what the rules are for the breakup. Will the weaker countries simply be kicked out of the Euro? If so, under what criteria? Will it be enough just to expel Greece or will stricter criteria have to be used to effectively limit the Euro to the northern zone? Will castaway countries fend for themselves or reorganize into another currency bloc - and, if so, will the ECB support them or will they need to create new institutions? These are just a few of the pertinent questions.
Finally, let’s not forget that there is a cost to restoring fiat rights. It was estimated that the Euro’s introduction provided a one-time 0.5% boost to GDP for each member state due to savings from not having to exchange the single currency, so we can expect the reverse for the return to national currencies. In addition, retailers in some countries will incur significant cost as rapid inflation will force them to adjust their prices.
One thing's for sure: it will be a cold, painful winter.
Perhaps the most unfortunate aspect is that a Germany-sponsored bailout would be best for everyone, says a UBS Investment Research report. Germany doesn't want to end up with an overvalued currency like Switzerland, so it needs the peripheral countries just as much as they need a German-led guarantee for their debt. The problem is Germany doesn't have the cash to bail everyone out, and markets are not going to tolerate the idea of a Eurobond composed in part of peripheral country contributions (a house of cards if there ever was one).
The wheels for a breakup are already being set in motion. Icap, the world’s largest electronic trading platform for foreign currency, said last Sunday that it was testing its trading mechanism for Greek drachma, just to make sure it still works. Countries are quietly unearthing old images for coins and bills. It’s anybody’s guess as to whether they will still work, since they are configured on obsolete technology. Several countries have completely deactivated their federal mints (for 17 member countries, only 11 actually print euros). The restoration of old currencies will be aided by more sophisticated automated teller machines and cash registers but it will still require a lengthy transition period.
Meanwhile, no one really knows what the rules are for the breakup. Will the weaker countries simply be kicked out of the Euro? If so, under what criteria? Will it be enough just to expel Greece or will stricter criteria have to be used to effectively limit the Euro to the northern zone? Will castaway countries fend for themselves or reorganize into another currency bloc - and, if so, will the ECB support them or will they need to create new institutions? These are just a few of the pertinent questions.
Finally, let’s not forget that there is a cost to restoring fiat rights. It was estimated that the Euro’s introduction provided a one-time 0.5% boost to GDP for each member state due to savings from not having to exchange the single currency, so we can expect the reverse for the return to national currencies. In addition, retailers in some countries will incur significant cost as rapid inflation will force them to adjust their prices.
One thing's for sure: it will be a cold, painful winter.
Tuesday, November 29, 2011
Corruption to the fore
In the last few weeks, disturbing allegations of corruption have emanated from all sectors in Spain. Today, a major paper reported that directors of Caixa Penedes (which was absorbed by another bank and subsequently bailed out by the state) gave themselves pensions worth €20 million. Meanwhile, a member of the royal family is accused of siphoning public funds from a nonprofit in Palma de Mallorca, the chief-executive at construction conglomerate Sacyr was sent packing after betting against his own company, and a judge is investigating allegations of corruption among members of parliament.
Cronyism, bribery, and embezzlement has always been looked on with a sort of amusement in Spain. The classic example if the Marbella city council. One city councilwoman was ousted after using 800,000 euros of public funds to purchase champagne. This after two former mayors had accused each other of embezzlement on live TV - and both turned out to be completely correct. One went on to marry a famous singer; another later owned a football team.
Today, Spain is ranked 30th in the corruption perception index. This seems quite dire considering that the likes of the UAE and Qatar - which recently bribed its way to a World Cup - are ahead, but perhaps should be taken lightly since the United States is also ranked only 22nd.
Cronyism, bribery, and embezzlement has always been looked on with a sort of amusement in Spain. The classic example if the Marbella city council. One city councilwoman was ousted after using 800,000 euros of public funds to purchase champagne. This after two former mayors had accused each other of embezzlement on live TV - and both turned out to be completely correct. One went on to marry a famous singer; another later owned a football team.
Today, Spain is ranked 30th in the corruption perception index. This seems quite dire considering that the likes of the UAE and Qatar - which recently bribed its way to a World Cup - are ahead, but perhaps should be taken lightly since the United States is also ranked only 22nd.
Wednesday, November 23, 2011
Hope rests in reforming the pulic sector
President-elect Mariano Rajoy’s announcement on Sunday night that his first action in office would be to meet with Spain’s 17 provincial leaders could spell big news for the debt-ridden nation. Having always grumbled about the cost of decentralization, Rajoy now has the political mandate to wrest duplicative powers away from provinces, making government smaller and more efficient. Rajoy is hoping Spain can overcome its post-dictatorship fear of central government that has led to a maze of interdependent municipal, regional, and federal bureaus. Today, for instance, one has to visit an office at each level to get a national ID card (submitting paperwork and paying fees at each). The World Bank placed the nation in the 133rd spot for ease of starting a business due to the litany of legal permits required. Spanish people use the term “vuelva usted mañana” to describe the bureaucracy’s slow pace.
The outgoing socialist government cut as much around the fat as it could with hiring freezes and wage cuts but it did not advocate streamlining the levels of government. Indeed, there has never been a publically acknowledged government study on whether it makes economic sense to have different standards of primary education and unique methods of healthcare delivery in each province.
Spain’s public sector predicament is also found in Italy, Greece, and Portugal. A recent analysis by German and Austrian central bank economists found that those countries’ public sectors are 20-60% larger than Germany’s as a share of the work force, without an increased tax base. It also found that they had the lowest public sector performance indicators among EU members. Combined, the two factors are a major drag on overall economic productivity.
Rajoy will begin by altering labor laws to relax hiring and firing standards, removing risk from business owners’ balance sheets. It’s a positive start but let’s hope he and his counterparts in other new governments take advantage of a unique opportunity to change how their countries’ public sector is structured.
Saturday, November 12, 2011
From the Basement to the Boardroom
The IBEX-35 is an old boys club, there’s no way around it. The companies have been around for an average of 67 years and the only recently founded companies are in relatively new industries: alternative energy (Gas Natural, SA) and business services (Indra, SA).
The US also has its industrial-age barons and behemoths, but what about Amazon, Google, E-Trade, Ebay, and Facebook, all founded after 1994? There is nothing in Spain that can remotely match that growth trajectory.
It’s probably unfair to cite all those tech examples. The Silicon Valley feeding frenzy that started with Netscape in the 1990’s has never been duplicated, anywhere in the world. Spain doesn’t have the network of programmers, seed funding, and research institutions that would help tech companies grow – much less all of those concentrated in one place like Silicon Valley.
But there are examples in other sectors. Nike, Bed Bath & Beyond, and Victoria’s Secret were all founded in the 1970’s. Capital One, the credit card company, was founded in 1988! There are 6 financial institutions in the Ibex-35 and none were founded after 1965.
There are several reasons that so few young companies are among Spain’s giants. The first is the dynamics of the local market. Due to vast regional differences, companies need multiple strategies just to conquer Spain. Mutua Madrileña, the auto insurer, is an example. In the early 2000’s they had 40% market share in Madrid and just 3% in the rest of Spain. To enter Catalunya, they had to downplay associations with Madrid by calling themselves just MM or “La Mutua.”
Then, once you conquer Spain you still haven’t really gotten anywhere in world terms. You need to expand to Europe or Latin America – again, necessitating new product and marketing strategies, in addition to long-distance logistics. In the US, by comparison, if you have a nationwide presence you reach 25% of the rich world. And if you’re selling on both coasts you already have the logistics wherewithal to expand internationally.
Finally, there is a cultural factor. John Q. Spaniard opens up a shoe store or a bookshop to earn a modest living, not to sell online or ship to Abu Dhabi. American small businesses are more likely to have multiple locations and multi-channel presence.
Again, I’m not suggesting Spanish companies are badly run. But it certainly would be interesting to model economic growth against the presence of young companies that have reached a critical mass. Let’s see if I can find an academic with some on his/her hands...
The US also has its industrial-age barons and behemoths, but what about Amazon, Google, E-Trade, Ebay, and Facebook, all founded after 1994? There is nothing in Spain that can remotely match that growth trajectory.
It’s probably unfair to cite all those tech examples. The Silicon Valley feeding frenzy that started with Netscape in the 1990’s has never been duplicated, anywhere in the world. Spain doesn’t have the network of programmers, seed funding, and research institutions that would help tech companies grow – much less all of those concentrated in one place like Silicon Valley.
But there are examples in other sectors. Nike, Bed Bath & Beyond, and Victoria’s Secret were all founded in the 1970’s. Capital One, the credit card company, was founded in 1988! There are 6 financial institutions in the Ibex-35 and none were founded after 1965.
There are several reasons that so few young companies are among Spain’s giants. The first is the dynamics of the local market. Due to vast regional differences, companies need multiple strategies just to conquer Spain. Mutua Madrileña, the auto insurer, is an example. In the early 2000’s they had 40% market share in Madrid and just 3% in the rest of Spain. To enter Catalunya, they had to downplay associations with Madrid by calling themselves just MM or “La Mutua.”
Then, once you conquer Spain you still haven’t really gotten anywhere in world terms. You need to expand to Europe or Latin America – again, necessitating new product and marketing strategies, in addition to long-distance logistics. In the US, by comparison, if you have a nationwide presence you reach 25% of the rich world. And if you’re selling on both coasts you already have the logistics wherewithal to expand internationally.
Finally, there is a cultural factor. John Q. Spaniard opens up a shoe store or a bookshop to earn a modest living, not to sell online or ship to Abu Dhabi. American small businesses are more likely to have multiple locations and multi-channel presence.
Again, I’m not suggesting Spanish companies are badly run. But it certainly would be interesting to model economic growth against the presence of young companies that have reached a critical mass. Let’s see if I can find an academic with some on his/her hands...
Sunday, November 6, 2011
Playing Politics in a Debt Crisis
With Spanish general elections on the docket for November 20, it is interesting to see how candidates from opposite ends of the political spectrum are reacting to the various policy options to reduce Spain’s government debt. First, a run through of the key players:
Jose Luis Rodriguez Zapatero
Outgoing President, Socialist Party
The outgoing President's 8-year reign has a critical influence on these elections. Lauded for a social policy that brought convergence with the rest of Europe, Zapatero will feel he was blamed unfairly for the economic crisis in Spain. However, he has proved utterly incapable of making Spain’s government more efficient, instead granting even more autonomy to regional governments.
Alfredo Perez Rubalcaba
Presidential Candidate, Socialist Party
A former pilot and chemist, Rubalcaba has been the socialist party’s utility man, first as Minister of Education under Felipe Gonzalez in the early 1990’s and then as Minister of the Interior for Zapatero. Has always served with distinction but never really become a champion of the people. He's had a hard time distancing himself from Zapatero's perceived failures.
Mariano Rajoy
Presidential Candidate, Conservative Party
Twice embarrassed by Zapatero in previous elections, Rajoy has largely kept his mouth shut and reminded voters that Rubalcaba and Zapatero are responsible for Spain’s problems. It’s been a good enough strategy to build a double-digit poll lead. He has attributed his silence on economic issues to an uncertain economic environment where promises are difficult to keep, but some suspect he is keen to avoid espousing unpopular measures.
And now, the issues...
Issue 1: Taxes
Here Rubalcaba and Rajoy break cleanly along ideological lines. Rubalcaba wants to institute a special income tax for wealthy individuals and raise sales tax for certain items. Rajoy opposes both, favoring trickle-down economics such as homebuyer tax credits and business tax breaks.
Issue 2: Privatization
Zapatero secured congressional approval to privatize Spain’s lottery and sell concessions to manage the country’s two biggest airports. These were courageous decisions meant to put overcoming the looming government debt over his political beliefs. Because both measures were unpopular, Rajoy stridently opposed them and the sales were eventually scrapped amid flimsy market conditions. It’s very probable Rajoy will do an about-face once elected.
Issue 3: Size of Government
Spain has one of Europe’s most complex bureaucracies. In a country of just 48 million people, many of the 17 provinces have full autonomy in spheres ranging from education to police forces to healthcare. There is a desperate need to trim the fat and reduce the paper pushing. But the issue is strictly political. Every time anyone speaks of reducing the size of government, the linguistic minority regions cry wolf because the memory of Francoist oppression is still relatively fresh. It’s unfortunate Zapatero did not tackle this because only a liberal leader could pull it off.
Issue 4: Healthcare
Rajoy’s conservative party quietly embraces privatization of healthcare, outsourcing management of public hospitals to the private sector in two large provinces. However, the national government does not have the right to legislate about healthcare for each province without a change to the constitution.
Jose Luis Rodriguez Zapatero
Outgoing President, Socialist Party
The outgoing President's 8-year reign has a critical influence on these elections. Lauded for a social policy that brought convergence with the rest of Europe, Zapatero will feel he was blamed unfairly for the economic crisis in Spain. However, he has proved utterly incapable of making Spain’s government more efficient, instead granting even more autonomy to regional governments.
Alfredo Perez Rubalcaba
Presidential Candidate, Socialist Party
A former pilot and chemist, Rubalcaba has been the socialist party’s utility man, first as Minister of Education under Felipe Gonzalez in the early 1990’s and then as Minister of the Interior for Zapatero. Has always served with distinction but never really become a champion of the people. He's had a hard time distancing himself from Zapatero's perceived failures.
Mariano Rajoy
Presidential Candidate, Conservative Party
Twice embarrassed by Zapatero in previous elections, Rajoy has largely kept his mouth shut and reminded voters that Rubalcaba and Zapatero are responsible for Spain’s problems. It’s been a good enough strategy to build a double-digit poll lead. He has attributed his silence on economic issues to an uncertain economic environment where promises are difficult to keep, but some suspect he is keen to avoid espousing unpopular measures.
And now, the issues...
Issue 1: Taxes
Here Rubalcaba and Rajoy break cleanly along ideological lines. Rubalcaba wants to institute a special income tax for wealthy individuals and raise sales tax for certain items. Rajoy opposes both, favoring trickle-down economics such as homebuyer tax credits and business tax breaks.
Issue 2: Privatization
Zapatero secured congressional approval to privatize Spain’s lottery and sell concessions to manage the country’s two biggest airports. These were courageous decisions meant to put overcoming the looming government debt over his political beliefs. Because both measures were unpopular, Rajoy stridently opposed them and the sales were eventually scrapped amid flimsy market conditions. It’s very probable Rajoy will do an about-face once elected.
Issue 3: Size of Government
Spain has one of Europe’s most complex bureaucracies. In a country of just 48 million people, many of the 17 provinces have full autonomy in spheres ranging from education to police forces to healthcare. There is a desperate need to trim the fat and reduce the paper pushing. But the issue is strictly political. Every time anyone speaks of reducing the size of government, the linguistic minority regions cry wolf because the memory of Francoist oppression is still relatively fresh. It’s unfortunate Zapatero did not tackle this because only a liberal leader could pull it off.
Issue 4: Healthcare
Rajoy’s conservative party quietly embraces privatization of healthcare, outsourcing management of public hospitals to the private sector in two large provinces. However, the national government does not have the right to legislate about healthcare for each province without a change to the constitution.
Saturday, October 29, 2011
MBA Career Fair Provides Cautious Optimism for Spain
Esade recently hosted an MBA career fair and it was exciting to see both Spanish companies and MNC's defiantly saying, "We are growing; we are hiring." This jives with a recent Victor Mallet assertion (Victor is the FT's Madrid Bureau Chief) that Spain doesn't have an innovation problem - it has a construction problem. There are two reasons:
1) Too many people work in construction. Construction still employs an astonishing 10% of the workforce, though that has fallen from 12% in 2008.
2) Cronyism and corruption impedes productivity in the Spanish construction industry, as the recent Sacyr scandal illustrate.
Though certain brands continue to thrive, with Zara's sales growing 8% last year and Desigual planning to add 1000 workers in Asia alone, times are tough in many sectors. As alternative energy subsidies dry up several firms announced lawsuits against the government for failing to deliver promised subsidies. Any healthcare firms stated one after the other that demand is stable (or growing) but they feel the pressure to innovate at cost.
Finally, we take a moment to remember our fallen comrades: the MNC's with significant headcount in Barcelona that were conspicuously absent from the career fair. Among them were Deloitte, Sony, HP, and Ricoh.
1) Too many people work in construction. Construction still employs an astonishing 10% of the workforce, though that has fallen from 12% in 2008.
2) Cronyism and corruption impedes productivity in the Spanish construction industry, as the recent Sacyr scandal illustrate.
Though certain brands continue to thrive, with Zara's sales growing 8% last year and Desigual planning to add 1000 workers in Asia alone, times are tough in many sectors. As alternative energy subsidies dry up several firms announced lawsuits against the government for failing to deliver promised subsidies. Any healthcare firms stated one after the other that demand is stable (or growing) but they feel the pressure to innovate at cost.
Finally, we take a moment to remember our fallen comrades: the MNC's with significant headcount in Barcelona that were conspicuously absent from the career fair. Among them were Deloitte, Sony, HP, and Ricoh.
Wednesday, October 26, 2011
The Next 10 Years
I want to take a step back from my focus on Spain to talk about a few broad innovations I expect to see in the next few years. These are big ideas and whoever can execute them will make a ton of money.
1. Medical adherence: In developed countries, chronic lifestyle diseases (diabetes, hypertension, asthma) kill more people and cost more money than cancer. The reason? People simply can't take care of themselves. Even after diagnosis, the regime of diet, exercise, and medicine is overwhelming - particularly considering the correlation between these conditions and income/education. What's needed is some kind of system - with the right monetary incentives in place - so that physicians and health coaches actively manage a patient's recovery. All the players, from big pharma to insurance payers and governments, already know this, but it's a monster to operationalize.
2. Do-it-all device: I still carry too much in my pockets. Cell phone, car keys, wallet - it's a lot to keep track of and it's heavy. How about a device that does it all? Not just a phone, but also a virtual wallet and remote car starter. It requires a broad series of industry partnerships and vastly improved security standards but the technology basically exists.
3. Stop pirates: Not in Somalia, but in Asia. Software companies like Microsoft lose 3 revenue dollars to piracy for every revenue dollar earned. No matter your opinion of software prices, it's not fair for companies to earn nothing for their R&D. Computer use increases exponentially in China each year, almost all of it on Windows, and Microsoft sales grow at a snails pace.
4. Selling solar: Today, wind energy is far ahead of solar in market share due to its cost effeciency. Solar gets installed basically only when governments offer large subsidies or feed-in tariffs. But solar energy is far more available and reliable than wind, and easier to incorporate into urban design (you can put solar panels on top of any building; not so with windmills). So it's just a question of finding radically cheaper ways to produce the components in solar panels, and also continuing to increase the energy storage capacity of the panels.
More to come...
1. Medical adherence: In developed countries, chronic lifestyle diseases (diabetes, hypertension, asthma) kill more people and cost more money than cancer. The reason? People simply can't take care of themselves. Even after diagnosis, the regime of diet, exercise, and medicine is overwhelming - particularly considering the correlation between these conditions and income/education. What's needed is some kind of system - with the right monetary incentives in place - so that physicians and health coaches actively manage a patient's recovery. All the players, from big pharma to insurance payers and governments, already know this, but it's a monster to operationalize.
2. Do-it-all device: I still carry too much in my pockets. Cell phone, car keys, wallet - it's a lot to keep track of and it's heavy. How about a device that does it all? Not just a phone, but also a virtual wallet and remote car starter. It requires a broad series of industry partnerships and vastly improved security standards but the technology basically exists.
3. Stop pirates: Not in Somalia, but in Asia. Software companies like Microsoft lose 3 revenue dollars to piracy for every revenue dollar earned. No matter your opinion of software prices, it's not fair for companies to earn nothing for their R&D. Computer use increases exponentially in China each year, almost all of it on Windows, and Microsoft sales grow at a snails pace.
4. Selling solar: Today, wind energy is far ahead of solar in market share due to its cost effeciency. Solar gets installed basically only when governments offer large subsidies or feed-in tariffs. But solar energy is far more available and reliable than wind, and easier to incorporate into urban design (you can put solar panels on top of any building; not so with windmills). So it's just a question of finding radically cheaper ways to produce the components in solar panels, and also continuing to increase the energy storage capacity of the panels.
More to come...
Saturday, October 22, 2011
Export Friction
Yesterday the third leading Spanish export insurer announced it would no longer insure exports destined for Italy, Greece, and Portugal. This was not a front page item but is nonetheless an important one as policymakers try to curb contagion resulting from the EU sovereign debt crisis.
The news makes it more difficult for exporters to protect against accidents, spoilage, and non-payment. Contracts typically specify that ownership of goods is not transferred until they reach their shipping destination. Exporters can pass along 50% of the potential liability to an insurer.
One could see this development driving up prices for insurance - and hence the prices for goods - and forcing companies to cut back on exports. Goods with high spoilage rates could be particularly affected, which is is relevant for Spain as the EU's leading exporter of fruits and also a significant exporter of dairy products.
The magnitude of the news is not excessive. Coface is responsible for only 10% of the Spanish export insurance market and the three countries account for 16.6% of Spanish exports. Furthermore, contract terms vary so not all exports are affected. Still, this is yet another example of the kid of corporate contagion governments are keen to prevent at such a critical juncture in the Euro's survival.
The news makes it more difficult for exporters to protect against accidents, spoilage, and non-payment. Contracts typically specify that ownership of goods is not transferred until they reach their shipping destination. Exporters can pass along 50% of the potential liability to an insurer.
One could see this development driving up prices for insurance - and hence the prices for goods - and forcing companies to cut back on exports. Goods with high spoilage rates could be particularly affected, which is is relevant for Spain as the EU's leading exporter of fruits and also a significant exporter of dairy products.
The magnitude of the news is not excessive. Coface is responsible for only 10% of the Spanish export insurance market and the three countries account for 16.6% of Spanish exports. Furthermore, contract terms vary so not all exports are affected. Still, this is yet another example of the kid of corporate contagion governments are keen to prevent at such a critical juncture in the Euro's survival.
Friday, October 21, 2011
Death of the Taller
One of the most common sights these days around the streets of Barcelona are storefront signs reading, "Liquidación de stock." Another taller, or small independent retailer, going out of business.
Maybe the surprise shouldn't be that they're going under but that they weathered the assault from big box retailers, national chains, and e-commerce for so long. This can be attributed to two factors:
1. Big-box sellers and chains (lumping together such diverse companies as El Corte Inglés, FNAC, Decathlon, Zara, etc.) are a relatively recent phenomenon. And Spain still requires national chains to close on Sunday and some Saturdays to protect the little guys. El Corte Inglés grew mainly from 1995-2005. Compare that to Wal-Mart, whose explosive growth period was 15 years earlier.
2. Spain has not been quick to adopt e-commerce. A recent white paper from Oracle says Spanish consumers (along with French) exhibit very low satisfaction levels with e-commerce compared to German, UK, and Benelux consumers. Hence e-commerce's share of total retail in Spain is a paltry 0.06% of total retail sales - 1/6 that of the UK, for instance - and data suggests it is almost exclusively airfare purchases. It's difficult for e-retailers to overcome the importance of habit and relationships in Spanish buying patterns.
The economic crisis has turned the tide. The Spanish statistics office reports a decrease of 3% per year since 2008 in the number of registered small businesses (or PYMES). In particular, sole-proprietor businesses have reverted to 2001 levels - wiping out a decade of Euro-fueled growth. Talleres are not tracked specifically but we can at least assume that the sole-proprietor trend is not simply a reflection of the faltering construction sector, since those companies are unlikely to be sole-proprietor.
Similarly, sales volume is shifting towards large chains. The statistics of sales growth (2010, YOY) by store size are perhaps most telling:
- Single store retailers: -0.9%
- Small chains: -2.1%
- Large chains: 2.3%
- Department stores: -0.1%.
What can we expect looking ahead? More of the same. Shrinking disposable income and poor credit conditions favor the behemoths, particularly value players like Decathlon (see case study below) over premium sellers like El Corte Ingles.
Meanwhile, Amazon Spain's recent launch implies an all-out assault on one of the last remaining Taller powerhouses, the corner bookstore. It's a sink or swim situation. Surely there will be stores that transform into online vendors leveraging the Amazon platform, but it's hard to imagine older, less savvy owners following this path.
Maybe the surprise shouldn't be that they're going under but that they weathered the assault from big box retailers, national chains, and e-commerce for so long. This can be attributed to two factors:
1. Big-box sellers and chains (lumping together such diverse companies as El Corte Inglés, FNAC, Decathlon, Zara, etc.) are a relatively recent phenomenon. And Spain still requires national chains to close on Sunday and some Saturdays to protect the little guys. El Corte Inglés grew mainly from 1995-2005. Compare that to Wal-Mart, whose explosive growth period was 15 years earlier.
2. Spain has not been quick to adopt e-commerce. A recent white paper from Oracle says Spanish consumers (along with French) exhibit very low satisfaction levels with e-commerce compared to German, UK, and Benelux consumers. Hence e-commerce's share of total retail in Spain is a paltry 0.06% of total retail sales - 1/6 that of the UK, for instance - and data suggests it is almost exclusively airfare purchases. It's difficult for e-retailers to overcome the importance of habit and relationships in Spanish buying patterns.
The economic crisis has turned the tide. The Spanish statistics office reports a decrease of 3% per year since 2008 in the number of registered small businesses (or PYMES). In particular, sole-proprietor businesses have reverted to 2001 levels - wiping out a decade of Euro-fueled growth. Talleres are not tracked specifically but we can at least assume that the sole-proprietor trend is not simply a reflection of the faltering construction sector, since those companies are unlikely to be sole-proprietor.
Similarly, sales volume is shifting towards large chains. The statistics of sales growth (2010, YOY) by store size are perhaps most telling:
- Single store retailers: -0.9%
- Small chains: -2.1%
- Large chains: 2.3%
- Department stores: -0.1%.
What can we expect looking ahead? More of the same. Shrinking disposable income and poor credit conditions favor the behemoths, particularly value players like Decathlon (see case study below) over premium sellers like El Corte Ingles.
Meanwhile, Amazon Spain's recent launch implies an all-out assault on one of the last remaining Taller powerhouses, the corner bookstore. It's a sink or swim situation. Surely there will be stores that transform into online vendors leveraging the Amazon platform, but it's hard to imagine older, less savvy owners following this path.
Case Study: Decathlon
In Spain, sporting goods has become synonymous with Decathlon. Guided by a mission to bring sporting goods to the masses, the French company sells everything from dry-fit apparel and footwear to camping gear, surf boards, and scuba equipment. Stores are in every major city (with 75 stores, Spain is Decathlon’s largest foreign market).
Decathlon’s competitive advantage is its private label branding. There is a separate brand for every segment. For instance, there’s the Quechua brand for hiking and camping gear, capitalizing on outdoorsy associations with the Andean region (where Quechua is spoken). There are also brands for track and field, tennis, water sports, and so on.
Store-branded products are manufactured in China and Taiwan and sourced through a distribution facility in Aragon. Decathlon also stocks premium brands but they only account for about 5% of stocks and 10-15% of revenue. Competitors such as Intersport report the exact inverse ratio of premium brand to store brand sales. It’s like Wal-Mart on steroids, and it’s permitted Decathlon to realize double digit year-over-year sales growth for the last 5 years.
In fact, Decathlon isn’t just growing its own sales – it’s expanding the size of the pie for everyone. It’s easy to see why. A camping tent that was once impossible to find for less than 300 € now costs 100 € at Decathlon. Or, say you’d like to start running regularly. Compare a 7 € dry-fit Kalenji (Decathlon) tank top to an ostensibly identical product from Nike or Underarmor which costs 25 €.
Here are a couple other strategic and operational hurdles Decathlon has passed on its way to capturing 60% of the Spanish sporting goods market:
Quality Matters
Many value brands forget that budget consumers still expect a minimum level of quality. All the products I have tried from Decathlon brands meet expectations. That includes running shoes, dry-fit shirts, hiking shoes, and running accessories.
The running shoes probably illustrate best the minimum quality principle. They cost 35 € and I wore them out over 6 weeks of intense use. Though perhaps they lasted less than branded options, I put a lot of miles on them and found no fault in their comfort or performance. For me, they met my mimimum quality standard – and I was confident enough to wear them in a 10k run, where a defect in the footwear would have had serious implications. Compare that to Nike shoes at 120 € apiece and it’s easy to see the writing in the sand. Decathlon even offers an ultra-cheap 15 € running shoe, though frankly I wasn’t willing to take the risk.
Inform & Educate
Many of the new consumers Decathlon brings into the sporting market are not familiar with product features so it becomes the store’s job to educate them. In footwear, for example, display placards indicate which shoe is right for different sporting situations. As someone that had never hiked before, I found this information helpful in choosing the right pair of shoes for the Camino de Santiago. The practice also funnels traffic to the store brands since the premium brands sit off to the side without any fanfare.
Decathlon’s competitive advantage is its private label branding. There is a separate brand for every segment. For instance, there’s the Quechua brand for hiking and camping gear, capitalizing on outdoorsy associations with the Andean region (where Quechua is spoken). There are also brands for track and field, tennis, water sports, and so on.
Store-branded products are manufactured in China and Taiwan and sourced through a distribution facility in Aragon. Decathlon also stocks premium brands but they only account for about 5% of stocks and 10-15% of revenue. Competitors such as Intersport report the exact inverse ratio of premium brand to store brand sales. It’s like Wal-Mart on steroids, and it’s permitted Decathlon to realize double digit year-over-year sales growth for the last 5 years.
In fact, Decathlon isn’t just growing its own sales – it’s expanding the size of the pie for everyone. It’s easy to see why. A camping tent that was once impossible to find for less than 300 € now costs 100 € at Decathlon. Or, say you’d like to start running regularly. Compare a 7 € dry-fit Kalenji (Decathlon) tank top to an ostensibly identical product from Nike or Underarmor which costs 25 €.
Here are a couple other strategic and operational hurdles Decathlon has passed on its way to capturing 60% of the Spanish sporting goods market:
Quality Matters
Many value brands forget that budget consumers still expect a minimum level of quality. All the products I have tried from Decathlon brands meet expectations. That includes running shoes, dry-fit shirts, hiking shoes, and running accessories.
The running shoes probably illustrate best the minimum quality principle. They cost 35 € and I wore them out over 6 weeks of intense use. Though perhaps they lasted less than branded options, I put a lot of miles on them and found no fault in their comfort or performance. For me, they met my mimimum quality standard – and I was confident enough to wear them in a 10k run, where a defect in the footwear would have had serious implications. Compare that to Nike shoes at 120 € apiece and it’s easy to see the writing in the sand. Decathlon even offers an ultra-cheap 15 € running shoe, though frankly I wasn’t willing to take the risk.
Inform & Educate
Many of the new consumers Decathlon brings into the sporting market are not familiar with product features so it becomes the store’s job to educate them. In footwear, for example, display placards indicate which shoe is right for different sporting situations. As someone that had never hiked before, I found this information helpful in choosing the right pair of shoes for the Camino de Santiago. The practice also funnels traffic to the store brands since the premium brands sit off to the side without any fanfare.
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