Self-fulfilling prophecies

Certain things in life are inevitable. Death and taxes, of course, but in a recession, the headlines that any recovery has been delayed are almost as inevitable.

Today we read that the Global recovery is 'getting weaker' (speech marks not mine). Well it will won't it, if the headlines say that it's the case.

A vast amount of the state of an economy is determined by confidence. If consumers and businesses are confident about the future then consumption and investment are high. Also, recruitment and new jobs are high, resulting in more employee (consumer) confidence and a virtuous cycle.
The other way works too.
The best thing for our economy then, is for headlines about how bad it all is to be banned. Newspapers, websites, TV news should all be forced into spreading economic good news stories. The self-fulfilling prophecy then kicks in and we get economic growth. Then the made-up headlines turn out to be somewhat surprisingly prescient.

But then we have a name for that type of behaviour - propaganda. And it doesn't have a good reputation.

I hesitate therefore to encourage this type of thing. Maybe a better approach is to follow the sage old advice:
If you can't say something nice, don't say anything at all.

That ends up not being dishonest, but equally doesn't dent confidence and economic recovery in the same way as the negatives do. Let's get a positive conspiracy going. A conspiracy of silence. Just give people a chance to spend and invest and recruit and spend, and to feel relatively good about doing it.

I have long said that if unemployment increases from 5% to 10% (quite extreme numbers) then the economic effects can be offset if the remaining employed people increase their spending by 5%. That takes confidence. Confidence that you won't be next. Confidence that you will help contribute to a recovery if you do it.

Is retail a dead end?

Retailers have had a tough time recently. Scratch that...retailers have a tough time any time the economy weakens. JJB Sports are the latest company to create the troubled headlines.
Yet we, the British, are said to be a nation of shopkeepers, and the retail industry is central to our economy.
So is retail a dead-end? Or a panacea? Or is it a little bit of both?

The fact is that most retailers work on incredibly tight margins. I used to work for Tesco, and their published net profit margins hover at around 7% of Revenue. Compare this to the Capital spend required just to maintain the stores and there is not a lot of spare cash to go around.
Some start-ups can carve out a niche with higher gross margins, but if fully and properly costed, net margins can also be very hard to find.
Move to some other countries and things are even more finely balanced. In Germany retail margins are generally lower than in the UK - staff are much more rare in a German retail store because of that. The experience of queuing at one of only two populated tills when shopping in a supermarket there makes you appreciate the banks of tills in a UK equivalent with only 1 or 2 people waiting at each.

Bricks and mortar-based retailers have significant fixed costs in rent and rates, and semi-fixed costs in staff to uphold. Online retailers benefit without these, but have higher systems, fulfillment and marketing costs to offset instead. Good role model retailers (like Tesco) that combine bricks and clicks and run both effectively and efficiently, still end up with a 7% net margin...and probably a return of more like 2% after essential maintenance capital.

So is it all worth it?
Retail is central to the economic well-being of the UK and many other countries. Jobs, wealth creation, much of it flows through the UK's shops. It is a tight balancing game, but even the apparently small margins, when applied to a massive revenue, can generate profits of over GBP2 billion for Tesco.
In the good times, cash flows into the tills and provides the profit to pay for all those jobs, support a massive infrastructure engine behind it all and powers the economy forwards. If the government is looking for industries to help bring the economy back on track, then retail must be at the forefront of their minds.

Yet individual companies will remain incredibly sensitive to changes in consumer spending...much more sensitive than their landlords, local authorities etc who are the recipients of the retail industry's fixed costs. And so some retailers will always struggle in a downturn. 

All the more incentive to be the best in class, to be better, more nimble, more reactive to the circumstances, than the competitors in order to retain or even grow market share during the tough times, as well as being able to enjoy the sunshine and make hay during the good.

Look for the confounder

I have blogged before about correlation and causation, and the importance of looking for possible "confounders" when there is a correlation but no causative relationship.
Today I want to apply this to education.
I have long been skeptical about the annual improvements in A level results, supposedly demonstrating the improving quality of school leavers but possibly indicating continuously falling standards. I have also thought that this may just be sour grapes on my part, and a desperate attempt to try to justify that A levels were simply much harder "in my day"...but that's just the grumpy old man coming out in me.
This year, 2012, the proportion of students obtaining an A* grade has fallen for the first time after 20 years of that continuous "improvement". A shame for the students themselves.
Also this year is the first year where the A level students of this summer become the University freshers of September/October. This first year when Unis can charge fees up to GBP9,000 per year.
What's the connection? There are, of course, a number of possibilities:

• There is no connection
• One is causing the other...and since the fee increases were announced before any student sat their exams, it has to be the fee increases causing the poorer results
• There is something else going on, with this "something else" potentially causing both, 
• or this "something else" is sitting in between the 2 ie high fees causes X which causes poorer results 

The point of this blog is not to answer the question - I simply don't have the data to be able to prove any of the above. 

I have my opinion, of course...but I can't prove I'm right with my assertion that government policy is driving both of these effects - with the proportion of people going to Uni just getting too high, the disparity between the number of graduates and the number of graduate jobs becoming unsustainable. The government have decided to reduce the numbers...financial disincentives combined with managing qualifying standards (don't try to tell me that the previous 20 years wasn't a "managed" result).

My point is that such options are always possible when there is a correlation. In business it is critically important to look for the real reasons...not to assume, not to guess, not to stick with an industry standard belief...in order to drive your business forward.