30 January 2010
Reflections On Le Credit Crunch
I think I am now pretty much up to looking back on 2007 - 2009, and thinking about 2010 and forwards. Le credit crunch and le recession have been a roller coaster, like surfing a bad set of hairy, tumbling roiling waves, but it's been a truly cathartic time, that has allowed Steenbergs to be reset on a better course.
We've rejigged the way we run the business, what we're trying to do with Steenbergs and truly Steenbergs Organic is now a better business, and one both Sophie and I feel much more comfortable with.
One of the key additional themes has been Sophie's cancer, which Sophie hinted at in one of the blogs in December. It certainly makes you focus on what is important in your life, and in our case it's each other, family and friends first and foremost. We love Steenbergs as a business and it has to work for us and what we want it to be - luckily it appears we can match our interests with the market.
2008: somehow we realised really early on that banking was going to get really tight for small businesses; I would like to claim a sixth sense, but it probably was more a case of realising that they way the banks had been getting us to run Steenbergs was rubbish because we (that's the owner-directors) were not getting a penny out of the business despite our daily toil and ownership of Steenbergs, and were having to plough cash in at an alarming rate.
In any case, in one of my best ever business deals, we fixed all our development debt into 2 tranches, repayable over 15 years and 20 years at 155 basis points and 200 basis points over base rate plus an overdraft facility.
The rates on the overdraft have been unilaterally changed several times over the last two years for small businesses, but we have been in credit pretty much ever since we renegotiated our long term debt. This was not the highly clever corporate finance of the City but it was well done and very timely.
While we were on a family holiday in Bridlington in July 2007, there were loads of floods in Tewkesbury where my mother in law lives. It was like a forewarning of what was to come - in September 2007, Northern Rock collapsed and almost exactly one year later Lehman Brothers was allowed to fail in September 2008, which saw the vacuum that's at the centre of international credit and finance exposed and the global financial system start falling into that hole.
I say it's a black hole because it is based on the premise that no-one will ever ask for all their money back from the banks at the same time, so a bank can always borrow money from somewhere else to plug a financing gap; so banks tend to lend long term on borrowings that are short term, whereas most real world businesses operate the other way around.
Also, thinking about risk-reward and whether or not it is commensurate would have helped people with the credit bubble and risks in proprietary trading. Banking is really a low margin, low return staid old game, so to get higher rewards you need to take on more risk, i.e. bet bigger, to get your profits ahead of normal banking returns, but if the reward and the risk for those actions are uncoupled then too much risk will be taken on. So if I am a trader/banker and get the reward while a shareholder takes the risk (or even the tax payer) then you are likely soon to get to a situation where too much risk is being taken on for the level of return being generated. It's a bit like going down to William Hill's with someone else's cash - I would tend to bet bigger and on longer odds because where's the real downside for me.
During 2007 - 2008, we really tried to batten down the hatches. We did not replace any staff except for a few essential posts and let our staff numbers drift down from a peak of 15 to our current level of 9, without any change in sales. Some of those employees were really quite expensive and were not revenue generating. Also, we let a small 1500 square foot warehouse go, reducing our rent roll.
Simultaneously, anything that wasn't obviously revenue generating was ditched, so pretty much all advertising has been curtailed as it doesn't generate us any return on sales, because we are not in the big supermarket chains, and we have cut down on the trade shows we go to, as we have maxed out on the number of direct independent retail accounts that we are going to get (basically while it is going up still and the quality is getting better, the rate of growth of new accounts has slowed and most of the new enquiries come direct to us from our web site or word of mouth and not from trade shows).
But as unlikely as it may seem 2008 was our record year for sales since we started and we were profitable with really strong cash flow.
2009 began with the world full of gloom and doom - the worst financial crisis since 1929 and the worst recession since modern records began in the 1950s. Actually, we found 2009 a mixed picture - our internet site and sales to retailers had our best year yet with the web site growing sales by over 40%, while our sales of raw materials was down, particularly to those customers that sell directly into the supermarkets who have reduced their interest in organic and premium products despite what their marketing might actually say.
Our retail sales were up as we have done 2 new things: we have targetted specific parts of our product range direct to distributors for the health food market and fine food marketplace, with good sucess for Steenbergs Home Bakery products and our organic Fairtrade mulled wine; and we have widened the scope of the products we offer via the web site to cover more ambient products that green people might want.
Strategically we have been thinking a lot about risk-reward, and come to the realisation that the reward, i.e. gross margins, from selling to the big retailers together with the working capital tied up does not equate with the relative risk that Steenbergs has/would be taking on. Allied to this, the bulge bracket retailers - Tesco, Morrisons, Sainsbury and Asda - are very much tied up with the big food manufacturers, such as McCormick for spices and British Pepper & Spice and Barts, and British Sugar and Dr Oetker for Home Baking. So its slim pickings to get the work that falls off the high table of the retailing world, which is already being aggressively fought over by Fiddes Payne, Green Cuisine and a few others.
So we could either go in and fight a price battle on low financing capacity, which for Steenbergs would be a mug's game or just rejig our business to grow in other ways. So we have decided to talk cheap and say that Steenbergs will not sell to the grocery multiples bigger in size than Waitrose - it's cheap talk because while we have done some casual marketing to them all, we are not listed in any of them including Waitrose. If they approach us, we will just have to say no, as we would want to do it on our terms (our prices and 30 days credit with any big stock up pre-financed by the retailer) and they didn't want to deal with Steenbergs even when they initially courted us - that's Sainsburys who said they were very excited about Steenbergs and led us a merry dance via 3 or 4 buyers until finally we were told "we deal with McCormick and cannot see the reason to change this". Well, luckily we had only wasted time and not been caught on the hook by investing money - wiser but not poorer. The truth is that working in partnership with the big retailers means working for the big retailers to fulfil their strategic aims and their margin requirements, one is a bit like a lamprey on shark.
2009 has been a gentle year of managing cash and costs, keeping the ship steady. Also, Sophie and I have started a process of redesigning key parts of our business.
This began with the complete overhaul of the web site - originally it was conceived as paid for marketing to supplement the development of Steenbergs as a brand for shops, but we now want retailing to be at the centre of what we do. So the site is now bright, colourful, eccentric and full of rich content that we will carry on adding to and developing as a resource. The web site also had a massive back end rewrite to make it easier to work with and interlinks now directly into our accounts system. As a result, we are getting more than twice as many visitors each day and much more stickiness onto the site - we are very, very pleased with the way this has worked. We just need to work a bit more on speed and navigation.
We have started refreshing our products. So far, we have redesigned our spice tin and tea tin, with the spice tin relaunched and the tea tin imminent (it's being made at the moment). Allied to this, we have redesigned our tea labels and labels for a small range of specialist spice blends in our new spice tins. We love these as they are bright, fun and happy new products that fit with our personality and web site, rather than being overly serious. They will be fully relaunched by Q2 2010.
We focused a lot on Home Baking and launched a compact range of 5 high quality extracts that are distributed by a wide array of UK distributors. To complement this, we redesigned the flavoured sugars, baking powder and bicarbonate of soda (baking soda) labels and launched them in August 2009.
What we are doing is simple, we are pulling out groups of lines within the vast Steenbergs portfolio of blends and creating distinctive designs that still fall within the whole Steenbergs brand features. They will be bright, fun and have great shelf presence. This process will continue through 2010 & 2011.
So what do I think about 2010? I feel it will be tougher than 2009. 2009 was characterised by a very loose financial regime of the government propping up the banks, pumping cash into the larger corporates and printing money, while keeping VAT down temporarily and running a scrappage scheme. For those still in work, it was an easy year of low taxes, low inflation and very low mortgage payments. But the ballooning budget deficit will need to be repaid, so the next few years will become (after the impending election) years of abstinence and frugality.
For small businesses, we will be hit by continued tight credit conditions, the uplift in VAT (which Steenbergs has absorbed into our operating margins), the business rates review this year (we are expecting a 20 - 30% increase in costs there) plus a rent review and a complete lack of help from the government, of whatever hue. We asked for help with some capital investment in Q4 2009 and were told by Yorkshire Forward that we were too small and by BusinessLink that there was no money in the kitty and so while we had a visit by a very nice gentleman last year, nothing came of it. The answer is simple as always ignore the politicians who know nothing and just get on with doing what you do best and make some money.
I am actually looking forward to the next few years. The Steenbergs ship is perhaps a bit less ambitious but going in the right direction - and one Sophie and I are very pleased with - and there's plenty to go for out there that no-one else is targetting well.
It's back to what we started the business to do - great spices and ingredients in sensible packaging done in a fair and reasonable way. I will try and explain some of ethics and how we are trying to develop the sourcing and marketing side to get the excitement of the spice trade of old.