Why some shares disappoint

Share Prices

The world economy is growing at a sustainable moderate pace, with all the main economies contributing. More people are getting jobs and better paid jobs worldwide, thanks to the faster development rates of some of the leading emerging economies and to substantial migration to richer countries generating more employment. This is a favourable background for share investing, with plenty of opportunities for businesses to sell more to more customers. 

Over the last week some investors have had a painful reminder of how things can go wrong for individual companies, despite this generally benign background. Anyone holding Provident Financial, a share in the UK FTSE 100 index of larger companies, has seen a collapse in the value of their holding. Investors in WPP, a leading advertising company, have seen share price falls on disappointing figures. Dixons Carphone has also experienced a share price upset on worries that people will buy fewer new smart phones as that market matures and as some disillusion sets in with the pace of improvement in the product. There are various issues that underlie these problems. One of the biggest is how companies respond to the rapid pace of change in technology, which throws up opportunities for the innovators and pioneers of the tech sector, sometimes at the expense of the traditional business models of older companies.

In the same week as the disappointments, Amazon pressed on with its wish to buy Whole Foods. The US technology giants are making big inroads into the retail sector with their way of selling to the public through websites with home delivery. On both sides of the Atlantic food retailers and general retailers struggle with the costs of conventional selling through physical stores now they face intense price competition from internet-based businesses without the same presence on the High Street. At advertising agencies they have to allow their clients to switch more of their budgets from print media and mainstream TV ads to social media. This can entail moving from higher rates and margins to lower rates and margins, with consequences for the media intermediaries. People running Agency businesses operating through face-to-face meetings have to spend more on internet services to match the service levels of cheaper internet-based competition, whilst handling their higher cost base.

At Provident Financial the management decided on too sharp a change in their business model. Part of the reason for the change was to cut the employee costs, recruiting 2,500 directly-employed Customer Experience Managers to replace 4500 self-employed part-time agents. The new managers were equipped with what was meant to be better technology to make their tasks easier and cheaper. Part of the reason for the change was to avoid regulatory challenge to their old business model, where the self-employed agents were incentivised to sell more credit to people on low incomes. The result was disastrous for the company. Collection rates on outstanding loans plunged downwards, and new loan sales contracted. The technology did not make up for the loss of the personal relationships the good agents had built up by plenty of face-to-face contact.

Meanwhile, at WPP, the management reported slower revenue growth with all regions apart from the UK, Latin America and Central and Eastern Europe disappointing. The response of the management is to say their focus now will be “Stronger than competitor revenue and net sales growth due to leading position in both faster growing geographical markets and digital, premier parent company creative position, new business, horizontality, and strategically targeted acquisitions”. This is not the elegant description of business aims you might expect from a company that makes a living out of helping other businesses explain themselves and their products to the wider world. It does seem to acknowledge that the future is more digital. An agency has to find ways to add value in that new world for clients in a way which also lets it grow its revenues. More understandable is the focus on improving the “staff costs to net sales ratio”. One way to make a start on that aim would of course be for the chief executive to have a more normal level of top pay instead of the multi-millions he is used to.

One of the other messages from the social media age is any company can suffer a hit to its reputation if it annoys customers or employees and they take to social media to record and share what has happened. The retribution can be immediate and the damage difficult to erase. Any business model or practice which attracts public dislike can prove to be very expensive for shareholders.


The above article  was first published by Charles Stanley on 11th August 2017