What can we learn from companies shutting down online stores?

Starbucks has recently shut down its online stores. As a pioneer in sales and marketing strategy, Starbucks may be telling us something about the way businesses will have to operate soon. Since jumping onto the Central Perk culture from hit TV-series – Friends, they have revolutionized food and beverage in the last few years by making customers pay and pre-order using their smartphones. Their culture of fast coffee purchases using smartphones was influential enough to inspire credit card companies to produce cards the contactless cards we all have today. Starbucks are always ahead of the game.

 

Starbucks has been a innovator of trends for the last decade
Starbucks has been a innovator of trends for the last decade

 

In the last few years, companies have shifted from high-street retailers to online websites, selling their goods using only their web-client as a means to interact. It is easier for the client, it is cheaper for the company, and it means that people have better access to goods and services. So why have Starbucks shut down their site and discontinued online selling?

Starbucks’ new campaign strives to get people to leave their houses and come into their stores as opposed to surfing their products at home. Their CEO stated that he wants Starbucks to be an “experiential destination.” Customers can surf the net and check out their products using the app, but cannot buy anything without entering a store. This means you can order a coffee on the app and pop in and grab it, but you cannot have anything sent to your house. There must always be some physical interaction with the brand.

This is an interesting move. Why is it that we are seeing this shift back to high street retailers? What is it that companies value in such strategic shifts? Firstly, it allows companies to compete with giants like Amazon, who have a large market share, and sell the products of others. When we think about it, Starbucks would be extinct if Amazon found a way to sell their coffee online. This revolution would hit Amazon hard if Starbucks managed to make a trend of “experiential destinations,” as Amazon do not have a place where customers can come in. If this becomes a trend, it will make companies with a physical presence shine.

Secondly, it makes their product more valuable. Nike and other fashion companies have saturated the market with their goods, they are no longer seen as special. The consumer engagement is lower and people care less and less about high-quality Nike products. They are also available on Amazon. It is more than likely that Nike will swiftly follow suit, and emulate the synthesis of internet marketing and in-store experience. This could be the future for all big companies that sell goods online.

If successful, this business model will have a significant impact any company whose business model is focused in online sales. It will give power back to retailers, and will hinder “middle men” like Amazon. But before all this, they are going to have to convince the world that experiential destinations are successful.

 

 

Starbucks is a place we can work in or relax
Starbucks is a place we can work in or relax

(Please note: James O’Leary does not currently hold a position in: Amazon, Nike, or Starbucks. Henry James International does not currently own a position in: Amazon, Nike, or Starbucks)

 

Post-Election Economic Activity

The results of the UK general election on June 8th have left many factors in a state of uncertainty in Britain. The country has been left with a hung parliament, with the Conservatives only securing 318 seats of the 326 they needed to win a majority. This political result has had effects, both positive and negative, on areas of the economy and investment markets.

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Previous trends have shown that, when there is anticipated disturbance in the political sector, investments in commodities such as gold increase as people try to hedge their bets against economic losses. In the run up to the election, there was increase of 64% in people investing in gold for the first time, while numbers of financial professionals buying physical gold were up 49% in the week leading up to the vote.

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Following the announcement of a narrow Conservative win the sterling experienced a sudden drop of 2% in value against the dollar to $1.2683, its lowest level in two months though it regained a little ground back up to $1.27 on Friday the 9th. It is predicted that sterling will continue to experience some level of volatility in the short term.

While the election results have hit some areas of the economy negatively, others are thriving after the news. The FTSE 100 ended on the 8th of June up 1%, while the Stoxx Europe 600 experienced an increase of 0.3%. Global businesses, such as Diageo, Reckitt Benkiser, and Unilever also observed upward movement, all trading at around 1.5% higher by the 9th. Increased value of shares of exporting companies, which make up three quarters of the FTSE 100, are expected to do better as the weakened currency is likely to rise income earned abroad.

The narrowness of the Conservative win will have an impact on how the upcoming Brexit negotiations are carried out as well. Theresa May gambled the Conservative status as the ruling party in the hope of gaining an even stronger position in the negotiations however, this has backfired with no party having an overall majority in the UK parliament. The weakened Conservative position means that a more lenient Brexit deal may be agreed on as opposed to the “hard” Brexit that May hoped for, with no trade deal.

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As the Conservative party enters into discussions with the Democratic Unionist Party (DUP) about a possible coalition, economic uncertainty may continue. This coalition would see the DUP adding their 10 parliamentary seats to the Conservative seats, giving the party the majority it needs to pass legislation, and gain a stronger hold over the Brexit negotiations.

The International Equity Portfolio

The big story in the news this week was the extraordinary loss reported by BHP Billiton. The Anglo-Australian mining giant recorded the worst loss in its history to the tune of around $6.4 billion annually. Along with an unavoidable dam collapse in Brazil, the company has suffered due to the continued slump in commodities prices.

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Also in the news, further stories keep trickling in detailing post-Brexit fall-out. Although the UK economy appears to be dealing with the situation far better than had been predicted by some, many sectors – such as IT, Finance, and Corporate Property – have been feeling the heat, with the pound still on shaky ground, international deals being pulled out of, and jobs being cut.

 

Last week, RBS announced that a large IT project originally due to be undertaken by Indian tech firm Infosys would no longer be going ahead triggering an “orderly ramp-down” of around 3000 employees. Banks and Finance firms are creating significantly fewer jobs too, moving roles to outside of the UK, according to recruiters Morgan McKinley.

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Despite this, our International Equity Portfolio performed reasonably well last quarter, returning 1.43% (pure gross) and 1.20% (net) versus 0.05% for the benchmark. For one year the portfolio returned -6.29% (pure gross) and -7.28 (net) versus -9.72% for the MSCI-EAFE Index. Although stock selection and country weightings in India and Australia hindered performance, weightings in Spain, Germany and Japan boosted it, as well as selections in the communications, health technology and consumer durables sectors.

 

The Henry James International Portfolio is a large capitalization international portfolio; it takes advantage of the international economy while seeking long-term capital appreciation. As with all our Emerging Markets Portfolio  The investment process is an objective, bottom-up, quantitative screening process designed to identify and select inefficiently-priced international stocks with superior return-versus-risk characteristics. This is combined with quarterly, top-down risk-mitigating country allocation system rebalancing, in which the management team over weights highly-ranked countries and under weights lower-ranked countries. Typically, the portfolio invests in 50 to 70 stocks that pass our disciplined fundamental and quantitative criteria. The primary performance benchmark is the MSCI-EAFE.

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To learn more about this, or any of our portfolios, please get in touch via email at info@hj-intl.com, by telephone on 917-951-5170 or by heading to our website.

 

(Please note: Henry James International does not currently holds a position in RBS.  Henry James International does currently own BHP and INFY for client portfolios).

Brexit – UK in Limbo, Part 2

Just over three weeks since the Brexit results and the UK remains in a political limbo. Financially-speaking, however, things are beginning to calm down. After the initial shock, the markets have quietened, with the FTSE100 even moving ahead of where it was before the referendum. It looks like Europe has survived the immediate, violent reaction and the focus now shifts to what continued uncertainty, and a withdrawal from the EU, will mean for the UK, and the rest of the world.

Biggest question next – EU budget

The next big economic issue surrounding Brexit is the question of the EU budget. The EU’s current budget stands at €960bn for the years 2016-2020. £47.5bn should come from the UK up until 2020, but since spending that money on UK institutions such as the NHS played a central role in the Leave campaign’s argument, it is unlikely that the next Prime Minister will agree to honour that commitment for another 3 years.

The UK certainly will not stop paying until the withdrawal agreements have all been discussed and decided, but sooner or later the UK will stop contributing, and then the question will be what can be done to fill that gap. One possibility is that the EU will expand its revenue sources, past the current sugar tax and customs duties, the other is that net contributors will agree to pay more and net receivers will agree to accept less. Either way, this decision will undoubtedly have an effect on the economies of the remaining member states.

Brexit – The Aftermath

Thursday, June 23, 2016, at the market close everyone felt safe.  The Brexit vote had been completed and everyone was looking forward to the weekend after one more piece of the wall of worry was removed.  As we all know, people generally vote for what is in their own self-interest.  For a citizen of the United Kingdom it was obvious with 40 years of peaceful growth, a rise in the standard of living, and the ability for freedom of movement amongst countries for work and living (it is better to retire in the sun of Spain than experience a cold, rainy summer in the UK).

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Contentment from people that either never experienced or had forgotten the hardships in the United Kingdom in the 1950’s, 60’s, and 70’s resulted in a group of people voting against their self-interest.

What was to be a great summer weekend instead became a volatile financial mess.  The pound fell over 10%, European markets by over 10%, and a general gloom fell over the globe.

Then people realized that it is not binding; Parliament has to approve the vote.  While European leaders showed their anger at Great Britain, cooler heads surfaced.  The Spanish who went to the polls over the weekend went with the status quo.  They have seen the consequences of a severe recession; their unemployment rate, while at a 4-year low, is still over 20%.

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Analysts sat back and asked, “If there is a recession in Great Britain how will it affect China, Japan, India, the United States, and Latin America?”  And the answer is: very little. 

How many fewer cups of coffee will Starbucks sell in the United Kingdom over the next year?  Maybe 5% or less.  And if it is 5% less, what impact would that have on Starbucks total sales?  It is not very much, probably less than five-tenths of one percent.  Growth in China, India, and Brazil could make up for that very quickly.  In fact, emerging markets were down less than half of what the European markets were down.  MSCI Europe two-day return for June 24 and June 27 was –13.41% and MSCI Emerging Market two-day return for June 24 and June 27 was –4.75%.

The event will cause global volatility over the summer, and then over the next few years our estimate is that eventually both the United Kingdom and Europe will do what is best for their own long-term self-interests, which are generally tied to one’s own long-term economic interests.