• EMEA

Pivoting, public services and premia

By Richard Pickering, Head of Futures Strategy

A pivotal moment – There comes a point in any deal, when the positioning and brinkmanship ends and tough decisions need to be made. For Brexit, that might well be today. At the point of writing this on Wednesday morning, Theresa May faces the unenviable task of presenting to her cabinet what appears to be agreed terms for a withdrawal agreement. If the rumours are to be believed this takes the form of a BINO (Brexit in Name Only); one which from an economic perspective appears relatively benign (sterling has reacted with cautious optimism), but from a political perspective is likely to be very challenging. The main challenge from Brexiteers is the continuing regulatory ties to the EU without the corresponding input; ‘a vassal state’ according to Jacob Rees-Mogg. Meanwhile, the DUP’s concerns are that the deal fundamentally damages the union. Although all parties await to see the draft text, Arlene Foster’s party prefers the risk of a new General Election to ‘the break up of the UK’. This will please Jeremy Corbyn who, to Tony Blair’s criticism, has not yet called for an election but has called for reassurances of a ‘meaningful’ parliamentary vote on the terms of the exit. Increasingly, May looks unlikely to be able to deliver this deal, facing opposition from all sides of the Commons, including her own. Although a second referendum remains unlikely, odds have been tightening to less than 2/1. May’s own prospects are also shortening, with her role at the top being measured by most in months. To underscore the futility of her position, the odds of the UK applying to rejoin the EU prior to 2027 have now come down to less than evens.

Financial exclusion – Not so long ago, banks (together with other service providers like coffee shops and estates agents) picked up the slack on the high street as clothing sales dwindled. However, one of the big trends of the past 5 years has been the closure of banks, as retail banking becomes a web and mobile operation. This works fine for most of us who have moved to internet banking and find it more efficient, but for some groups the closure of physical branches might prove a barrier to accessing financial services. Last week, the Treasury Committee launched an inquiry into whether vulnerable customers are losing out, and the potential to introduce a ‘duty of care’ on banks to provide access. In the UK we typically rely on the market to decide what customers want, and as services and products have become digitised, the government has been unwilling to step-in and stem the trend toward online. In the event of a different approach to bank branches, then what next, and how far should our public duty extend? Whilst it feels very unlikely that there would be any interference with most commercial activity, quasi-public services could feasibly end up under the same microscope, for instance post offices. Beyond that, village shops and local pubs are both under threat and both play a key role in many people’s lives, for which vulnerable people are typically less able to find a substitute.

Holiday on the High Street – For most of us, going on holiday is the most exciting ‘experiential’ thing that happens to us all year. Booking a holiday however is not and this is why the travel industry has moved to a predominantly online model, with Mintel reporting that 64% of British holidaymakers now book their holiday online. However, this perhaps misses a trick. Holidays tend to be emotive purchases that provide the opportunity to achieve emotional price premia. In a bid to bring consumers back to the physical world where they can better exploit this potential, Virgin Holidays has this week opened a new store in Milton Keynes called the ‘V-room‘ with the main purpose of the store to enable holidaymakers to ’try before they fly‘. Customers who are unsure whether to upgrade their flights can sit in Virgin Atlantic’s Upper Class and Premium Economy seats and even experience life in an executive lounge with hand massages, manicures, prosecco along with a a virtual reality ride to Las Vegas on offer. Who needs to actually go abroad?

Getting physical – If retail is about raising product awareness and creating an intention to purchase, then it makes sense for the retailer to be located in a place where it can most easily connect with the greatest number of customers. This used to be the high street, but people are increasingly congregating online in greater volumes. The top four most downloaded non-gaming apps are all owned by Facebook (Facebook, WhatsApp, Messenger and Instagram), and the average user spends 50 minutes per day using this collection of apps. This creates one of the most engaged audiences in the world. However, as we career towards Christmas even an online giant such as Facebook sees the advantage in a physical presence. It has teamed up with Macy’s to deliver nine pop-ups selling the top performing 100 brands from their online platform. This works for Facebook as a low-cost entry, short commitment to physical retail, at a busy point of the year. It also works for Macy’s by providing something new and interesting to attract the crowds. On a higher level, this is perhaps evidence of a trend away from retailing being the domain of specialist sales experts, and towards retailing being the domain of those who can command the largest audience, with retail being one way of monetising that audience.

Eagle has landed – Whether due to stereotyping, prejudice or as a well-intended heuristic, people make judgments about individuals based on the identity of groups that they fall into. The same is true of cities, and it can have damaging consequences. My home town of Hull gets a bad rep that it does not (entirely) deserve. Part of Hull’s issue is that its municipal boundaries have been drawn very tightly to the urban core. Therefore, for statistical purposes Hull’s relatively affluent hinterland is excluded, which pulls it towards the bottom of many tabloid league tables (and towards the top of less desirable ones). Eagle’s Landing (GA) has the opposite challenge. This wealthy suburb of the US city of Stockbridge suffers on account of its association with the wider municipality. Hence (reportedly) sought-after restaurant The Cheesecake Factory opted not to locate there, due to median earnings being half their typical target requirement when blended with the rest of Stockbridge. Eagle’s Landing residents then started a campaign to secede from Stockbridge, which ultimately proved unsuccessful this week. In reality, in a world of postcode level data, retailer location decisions are unlikely to be blended at city level; however, poor city branding and local promotion can still drive unhelpful heuristics in time-poor executives, and hence the need to maintain a good rep remains important.

I’m Lovin’ It – Deciphering the future often involves looking for activity in the past that is likely to repeat itself. For this reason, statistical correlation sits at the heart of forecasting. There are two dangers to be aware of in this. Firstly, when the future no longer resembles the past, due to a change in the patterns of activity, perhaps driven by technology and changing social mores. Secondly, when the correlation is pure chance, and not due to causation. This week, I read an article by a financial analyst exploring ‘The McRib effect’, a correlation between the availability of the seasonal McRib in McDonald’s and the performance of the S&P 500 (0.07% higher on those days). For those looking for further examples, you may be interested to learn that, per capita, cheese consumption correlates with the number of people dying in any given year by becoming entangled in their bedsheets (r=95%), and the divorce rate in Maine correlates with per capita consumption of margarine (r=99%). Following some of our own analysis, we managed to find a strong correlation between the number of people reading New Europe each week and UK GDP, proving beyond doubt that continued readership is the best guard against recession.

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