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In this week’s Commercial Awareness update, we discuss a big week for the financial markets, Kraft Heinz bidding for Unilever, how Pepsi are gaining on Coca-Cola and is this the end of boozy City lunches? All this and more in this week's update.
1. The markets on a big week for Goldman Sachs
The global markets continued to rise last week, as the FTSE 100 finished above 7,300 points. The big winner was consumer goods company Unilever after finishing 13% higher on Friday alone, amid takeover speculation (see below). In banking, Goldman Sachs’ shares hit a ten year high on Tuesday, as the prestigious bank continues to be a top performer in 2017. Since Trump won the US Presidential election, the banking sector has enjoyed a resurgence and his deregulation plans are extremely popular with large banks - less regulation will free them up to offer a wider variety of products and make more profit. The President has chosen many former Goldman Sachs employees in his team, which many expect will lead to favourable policies for the investment bank.
It may be a bumpy road ahead though, with many commentators believing the recent ‘Trump trade’ is over-inflating markets and will lead to a crash in the coming months. The price of Gold has risen by over 2% in the last 30 days, suggesting traders are seeking safety from potentially turbulent markets. Gold is seen as a safe haven asset because it tends to hold its value, regardless of market or currency fluctuations - essentially it’s a currency which cannot be easily manipulated by inflation or interest rate policy within an individual nation.
Questions to ask yourself… What are the potential problems with deregulation in the banking sector? What could cause the FTSE 100 to start falling again?
2. Kraft Heinz bids £115 billion for Unilever
Last week, consumer goods giant Kraft Heinz tabled a £115 billion takeover bid for their rival Unilever. Despite Kraft’s offer being 18% higher than Unilever’s Thursday share price, the bid was rejected and today the former has announced it's no longer interested in a takeover. Kraft Heinz is a conglomerate jointly run by Warren Buffet’s Berkshire Hathaway and Brazilian private equity firm 3G, after Kraft Group and Heinz merged in 2015. This new merger deal had the potential to gain a huge market share within the customer good markets, and had already peaked the interest of competition and consumer protection authorities. Back in 2010, Kraft’s takeover of Cadbury’s caused controversy after they closing Cadbury’s Somerdale factory in Bristol - the handling of this led to the Takeover Panel giving more powers to target companies in September 2011.
This surprise backtrack by Kraft Heinz just two days after announcing its interest has caused turmoil in the markets for the firms involved. On Friday alone, Unilever’s stocks rose 13%, as takeover talks were expected to continue after the initial bid was rejected. After this morning’s announcement, Kraft Heinz were no longer interested, Unilever’s shares lost 7% in morning trading - many expect it will be its worst trading day in 13 years.
The weaker pound has made British owned businesses more attractive for foreign investment, making takeover bids of this sort more likely. Unilever announced they did not see the merit of the deal either financially and strategically - the strength they showed in rejecting the bid, combined with the problems Kraft Heinz would face with competition bodies is likely to have contributed to their decision to abandon the bid.
Questions to ask yourself… Has this backtrack on the merger deal damaged the reputation of any of the firms involved? Should the UK be actively discouraging foreign takeovers of UK firms?
3. Pepsi vs Coke
Last week, PepsiCo announced better than expected Q4 2016 results, with 5% year-on-year revenue growth and an annual turnover of $62.8 billion. The American food and beverage giant - that owns Pepsi, Lays and Tropicana - aimed to move towards healthier products this year and this successful transformation has been hailed as a key reason for its boosted revenues. Only 12% of Pepsico’s revenue comes from Pepsi and they’ve launched a number of healthier juice drinks in the second half of 2016, as well as changing the recipe of household carbonated soft drinks (e.g. 7up).
As the two companies in the so-called ‘Cola Wars’, it’s difficult not to draw comparisons between Coca-Cola and Pepsico. Like Pepsico, Coca-Cola is in a time of transformation and have posted solid results given the circumstance - organic revenues* increased by 3% in the last quarter of 2016, compared to the previous year. However, it’s been over the last five year PepsiCo has seen significant gains over its biggest rival. Its share price has increased by 70% in the period, while Coca-Cola is up just 20%. Coca-Cola is still heavily reliant on carbonated drinks, while PepsiCo has made more effort to diversify.
It’s not all good news for PepsiCo and the share price actually fell last week, despite announcing better than expected results. Their forecast for 2017 is underwhelming, which caused a 2% decrease in the share price.
Questions to ask yourself… Are food and beverage companies doing enough to proactively shift their offering towards healthier consumers? Should governments be increasing or introducing taxes on unhealthy food?
*Organic revenues - revenues generated solely in the firm. Revenue from mergers, acquisitions and franchises isn’t taken into account.
4. How much does bad customer service really cost?
A report by the Ombudsmen Service found bad customer service costs UK companies over £37 billion a year. The body which provides dispute solutions across a range of sectors believe 28% of people say they lose brand loyalty after receiving bad customer service, which directly affects their spending habits. It also found the number of customer complaints in the UK is on the rise, with 55 million in 2016, compared to 52 million during the previous year. The retail sector experienced the most complaints, and it’s retailers, banks and transport providers which are most likely to lose future revenue due to poor service. Complaints about rail services went up 31% to two million in 2016.
The importance of customer service was highlighted in a separate report last week, as struggling Asda were ranked the lowest of the major supermarkets. Asda experienced a sharp decrease in sales during the most recent Christmas period - how much impact did poor customer service play in this? In the survey Waitrose were revealed as the supermarket providing the best customer experience, while Iceland offered the best online delivery service.
Questions to ask yourself… What can businesses do to ensure they better meet demands of customers? Is the rise in complaints due to poorer service or customers expecting more?
5. Lloyd’s of London ban drinking
Are the days of the City’s boozy lunches coming to an end? Well, the insurance firm Lloyd’s of London has issued a new code of conduct for its 800 staff, banning the consumption of alcohol between 9am and 5pm. This ban applies to Lloyd’s staff - including accountants and regulatory experts - but not the insurance brokers and underwriters. Over the last two decades, the boozy lunch culture has declined naturally, but in insurance many relationships are forged over lunch or in a pub (these are usually between the brokers, and not the back office employees though).
It’s a strong move by Lloyd’s of London, who have gone above and beyond most of their competitors. The industry norm is to advise on alcohol consumption and only consider it a problem if it directly impacts on performance at work. However, in many sectors firms ban drinking as a standard, especially amongst engineering and technology companies. Across all sectors there has naturally been a general shift away from daytime drinking, so it could well be that the days are numbered for boozy lunches in the City.
Question to ask yourself… Should Lloyd’s of London exert this much control over their employees?