MONEY AND THE CITY
Giantism in stores
Nicholas Davenport
According to the Queen's speech the Government's objective is to promote the interests of the individual whether as a citizen or as a consumer. How does the bid made by Boots for the House of Fraser promote the interests of their customers? Those who shop at Harrods tell me that ever since Sir Hugh Fraser took over that great store the quality of the service has steadily declined. They say that you have to wait a lengthening time to get served and when you do attract an assistant he or she is often rude and unpleasant because of overwork or under-pay. Harrods is said to contain one million square feet of which more than 600,000 square feet is selling space. This seems uneconomical compared With super-stores like Sainsbury or Safeway and it is perhaps in the mind of the super-managers of Boots to re-build Harrods, re-organise the place and get away from the idea that it is a nice cosy Place where you can buy or order anything from boats to beds, from nights-out to day-nurseries. The Proposed bid 'by Boots certainly excited our members in Parliament who are concerned about us consumers. They asked Sir Geoffrey Howe to refer it to the Monopolies Commission but he rightly said that the merger fell Within the scope of the Fair Trading Act and he would await the advice of Mr John Methven, the Director General of Fair Trading in our present Corporate State.
Of course, no one in the House of Commons said a word about us !nvestors. Boots shares fell immediately on the bid by 25p to 257p. House of Fraser also dropped 15p to 135p which was some 35p below the value of the offer from Boots. From the investors' point of view company bigness is badness. At present prices Boots has a market capitalisation of around £475 million and House of Fraser around £155 million. Add the two together and you get £630 million. Now most investors like to see their shares move quietly up as their company's business grows but what buying power would be required to move up a market capitalisation of £630 million? Not half of all the new money coming in to the unit trusts, which in cidentally has dropped to £101 million a month, would make much impression of such a huge market lump.
An illustration of what may happen market-wise to a giant merger is provided by Grand Me tropolitan. This excellently managed hotel and catering group took over IDV (distillers, wine merchants etc) and then after a long-prolonged market battle the huge Watney Mann brewery group. All this gave it a market capitalisation of close on £500 million. The shares have dropped from a high of 220 to 100, a fall of 60 per cent. Again, if all the unit trust managements thought that the shares were now undervalued their buying power would not make much impact on £500 million.
Giantism in the company world is not an attractive feature for investors except in two special industries — oil and property. To be engaged in the international oil business, which has to double its shipping and distributive plant every ten years to keep pace with growing consumption, which has to spend hundreds of millions each year in trying to find new oil reserves, you cannot be too large. A market capitalisation of the Royal Dutch Shell group of over £3,000 million is in tune with its world-wide business. Incidentally while it takes a huge amount of buying to move the price of Shell, the market is one of the freest in the investment world. In the property world the greater the mixed bag of good properties your company holds the better it is for shareholders in this inflationary age. For example, Land Securities, which is the leader of the property share market, has a market capitalisation of around £400 million but as it has just announced a new valuation its net asset value has risen to about £760 million. No one will object to a market capitalisation so large as £400 million if it is nearly 50 per cent below its real value. Incidentally the property snare market has had a face lift since the Government announced that it is impossible to put a price._ control on long-term commercial rentals. But it will have a pretty long face if ever the Labour Party returns to power. Mr Anthony Crosland told the House of Commons last week that the next Labour government would tax to death the huge inflationary profits made by land development companies.
But to come back to giantism in stores. The advantages gained by Boots taking over the House of Fraser are not apparent. Boots has 1,350 shops including 200 still trading as Timothy Whites. Why they took over Timothy Whites is also not apparent. Customer service in my personal experience as a shopper has declined in Timothy Whites. Boots have a big enough job to do in improving the customer service in their own 1,150 shops. It is said that the Fraser empire can help Boots overseas because chains of chemists' shops in the EEC are illegal. Under European law any pharmacy must be owned by the pharmacist who runs it, which is a nice human touch. But this argument seems far-fetched because Boots has subsidiaries in Australia, New -Zealand, South Africa, India, Pakistan, Kenya, Nigeria and Singapore, whose sales turnover is £22.2 million. Moreover Boots export nearly £11 million of products. The argument that Boots' manufacturing business of £50 million plus a year is t6o small
to ensure 'long-term viability ' with its existing retail outlets sounds to me a typical managerial pretence to justify bigger jobs and importance for the top managerial team. It is a pity the old Boot family sold out years ago and left it in the hands of professional managers who were obviously very disappointed when the Monopolies Commission refused to allow them to take over Glaxo.
The House of Fraser has a turnover of over £200 million a year and shopping outlets in twentyseven towns in Scotland (with many stores in Glasgow and Edinburgh) and in about fifty towns in England and Wales (with many stores in London, including Barkers, Dickins and Jones, Pontings, D. H. Evans, Army and Navy as well as Harrods). It has also stores in Belfast, Cork and qopenhagen. The idea that Boots can teach Sir Hugh Fraser lessons in how to retail goods in department stores of this variety seems to be very arguable. I cannot see what advantage will accrue to the shareholders of the House of Fraser, let alone the customers. "1 am making proposals," Mr Heath told the Institute of Directors last week, "for giving capitalism a human face and perhaps a pleasant and acceptable face." I cannot see that giving the Fraser .stores the 'Boots' they will have a more pleasant and acceptable face for their customers.
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