TheChek News Flow

Government needed £19bn to bridge gap between spending and income

UK public finances deteriorated further in February as spending on Covid-19 measures continued to grow while tax receipts fell.

The public sector spent more money than it received in taxes and other income last month, requiring it to borrow £19.1bn, the highest February figure since records began in 1993, new data showed on Friday.

The figure from the Office for National Statistics was lower than the £21bn forecast by economists polled by Reuters. It included a £14.2bn annual increase in central government expenditure, including £3.9bn spent on coronavirus job support measures.

Tax receipts fell by £1.5bn in February compared with the same month last year as Covid-19 restrictions closed business and limited consumer spending.

Rishi Sunak, chancellor of the exchequer, said the government’s support measures were the “responsible thing to do”, but that it was necessary to “return the public finances to a more sustainable path once the economy has recovered”.

In the 11 months to February, public sector net borrowing rose to an estimated £278.8bn, also the highest on record.

The Office for Budget Responsibility, the UK fiscal watchdog, this month revised down its public sector borrowing forecast for 2020-21 to £355bn from the £394bn forecast in November.

The OBR forecast includes an estimated £27.2bn in write-offs of business loans issued under the government’s coronavirus programmes, which are yet to be reflected in the ONS numbers.

The funding for government coronavirus support schemes, combined with reduced tax receipts and a fall in output, have pushed public sector net debt as a ratio of GDP to levels last seen in the early 1960s. Public sector net debt in February was equivalent to 97.5 per cent of GDP. 

Alibaba’s Taobao Deals app, which it launched in March last year in order to compete with low-cost group-buying rival Pinduoduo, will open a mini-programme within the WeChat eco-system, according to multiple Chinese media reports.

This means Taobao Deals shoppers will be able to use WeChat Pay in order fulfil orders made through the mini-programme, marking the first time WeChat Pay (the main rival to Alibaba’s Alipay in China’s digital payments space) will be made a payment option for any Alibaba-owned marketplace.

Neither Alibaba, nor Tencent, immediately responded to BoF’s requests to comment for this story.

Taobao Deals facilitates “customer-to-manufacturer” shopping, allowing its users to order products direct from factories at lower prices. By November last year, it had accumulated more than 100 million annual active buyers.

Alibaba and Tencent joining forces, even in this small way, is a significant change in posture for two of China’s biggest digital players, which have long competed for market share over a number of business segments. Tencent is a major backer in JD.com, long Alibaba’s fiercest e-commerce platform rival in the China market.

But that old dynamic is being forced to evolve by new entrants to China’s digital space, including Pinduoduo, Douyin and Kuaishou, all of whom have made their e-commerce ambitions clear. Some have also begun dabbling in their own digital payment platforms.

Pinduoduo released a better-than-expected fourth-quarter earnings data earlier this week, with its annual active buyers reaching 788.4 million, surpassing Alibaba for the first time.

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The sneaker giant’s sales grew at a much slower-than-anticipated rate in its fiscal third quarter.

Nike Inc.’s pandemic sprint ran into trouble at the ports and in a locked-down Europe — but the sportswear giant still managed big bottom-line gains in its fiscal third quarter.

The sneaker and fashion giant’s net profits increased 71 percent in the quarter to $1.4 billion, up from $847 million a year earlier. Earnings per share of 90 cents came in well ahead of the 76 cents Wall Street analysts anticipated.

The top line was much more problematic.

Sales for the quarter ended Feb. 28 rose just 3 percent to $10.4 billion with sales down 1 percent on a currency-neutral basis. That came as a disappointment as analysts on average were looking for 9.1 percent revenue growth.

Investors took a step back, sending shares of the company down 2.8 percent to $139.22 in after-hours trading as they evaluated the impact of pandemic-driven disruptions at ports and stores.

Nike’s North American sales fell 10 percent in the quarter, which the company pinned on “supply chain challenges, including global container shortages and U.S. port congestion, impacting the flow of inventory and timing of wholesale shipments.” Inventory was delayed by more than three weeks during the quarter, impacting the timing of wholesale shipments.

Brick-and-mortar retail sales in Europe, the Middle East and Africa fell 45 percent as Nike-owned stores faced mandatory COVID-19 closures in January and February. About 65 percent of the companies’ stores in the region are now open to at least some degree.

Offsetting those declines was a 42 percent jump in Greater China, on a currency-neutral basis.

While Nike sells through many retail partners, the brand is doing best on its own, with direct sales up 20 percent to $4 billion and digital sales surging ahead 59 percent for the quarter.

“This continues to be a dynamic external environment, but I am proud how adaptable Nike is,” said John Donahoe, president and chief executive officer, on a conference call with analysts. “No matter what happens — COVID-19 spikes forcing store closures, port congestion on the West Coast, and more — this team responds with solutions. We adjust and we win.”

Donahoe linked the company’s strength to its branding power.

“We remain consumers’ number-one favored brand in all 12 of our key cities in both men’s and women’s businesses,” the CEO said. “We’re also seeing particularly strong connections in Greater China where our strong portfolio of brands, including Jordan and Converse, is helping to extend our leadership position. All over the world, the relationships we have with consumers cannot easily be replicated. Our brand differentiates us, driven by the unique competitive advantages that we enjoy.”

Donahoe also gave a nod to the company’s efforts to build its digital operations and take advantage of its positioning in the market. “Nike’s digital transformation remains a unique advantage,” he said. “Scale matters. The strength of our brand allows us to stay personal, at-scale, with consumers in all of our geographies, and more than ever, the portfolio effect of being a truly global brand is powerful.”

Now the company is looking to push the power of its brand as the world — fingers crossed — opens back up.

But it might not be a straight line from here to there.

Matthew Friend, chief financial officer, said, “While we are optimistic about the pace of the vaccine distribution and how this will enable safe reopening of the global economy in the near future, the effects of the virus continue to create short-term volatility in our business performance.…Our operating priorities remain unchanged, and we’re focused on what we can control — optimize marketplace supply and demand with speed and agility, accelerate the pace of direct connections with consumers, and exert our financial strength to move faster toward our long-term strategic vision of the Consumer Direct Acceleration.”

Matteo Marzotto Buys Two Companies in Luxury Goods Supply Chain

Matteo Marzotto has created a new holding integrating two companies and specializing in manufacturing components for luxury brands.

MILAN — Italian entrepreneur Matteo Marzotto has embarked on another fashion project, but this time he has turned his attention to Italian craftsmanship and the special, high-quality components that differentiate luxury goods brands.

With two business partners, he has formed Ambria Holding and taken majority stakes in Italian companies Zeta Catene and Galvanica Formelli, both located in the Arezzo, Tuscany area. Zeta Catene produces more than 2,000 types of chains of different shapes, sizes and materials, such as brass and silver, as accessories for bags and shoes. Galvanica Formelli offers metal details, components and galvanic treatments for fashion accessories.

“Over the years, I noticed the incredible skills of our Italian artisans, but at the same time, there is a general lack of unity, while I believe that through integration, we can become specialists in the supply chain,” contended Marzotto.

This is an industrial, not a financial project, he underscored, aiming at improving efficiency in general and in the management of costs, offering clients “improved quality, service and lead time, adding value through integrated synergies.”

Better components make for better quality of accessories, Mazotto continued. “Fashion brands are not merely looking at containing costs, seeking for best-priced components. On the contrary, designers know that precious details will make the difference in the end quality and they seek precious materials and excellent service. And designers are happier if they can see different and more complex variations of the components.”

Marzotto declined to reveal the amount spent on the acquisitions, but said Ambria Holding will invest more than 5 million euros in the first year on the development of the project. For starters, the holding has acquired a new site near Arezzo to expand production, in addition to the two existing plants. Zeta Catene and Galvanica Formelli totaled 20 million euros in sales, with a solid profitability, he offered.

Marzotto has taken on the role of president of the holding, while his partner Marco Casoni is the chief executive officer. Marzotto and Casoni, a former Dondup and Marni executive, have worked together for years, first at Valentino and then at Vionnet. The third partner is Michele Paris.

The investment continues to be channeled in the fashion sector, “but from a different point of view, one that offers a lot of potential,” said Marzotto. With his visibility and stance in the industry, it is likely he will promote the new holding with fashion brands. Bound by privacy agreements, Marzotto declined to provide the names of the luxury labels Zeta Catene and Galvanica Formelli have been working with for years.

Several major brands have invested in acquisitions in the supply chain, from Prada and the Ermenegildo Zegna Group to Gucci, Chanel and Hermès.

Marzotto in November 2018 resigned from the role of vice president of IEG Italian Exhibition Group, the trade show operator that originated from the merging of Fiera di Vicenza and Rimini Fiera in 2016. He was previously president of Fiera di Vicenza, relaunching and revitalizing jewelry trade show VicenzaOro. “That experience offered me a lot of visibility into Italian craftsmanship and many of these luxury components could be compared to jewels,” he said.

Marzotto is a former investor in Vionnet and, before that, he was chairman of Valentino. He is president of contemporary premium and denim brand Dondup. Asked about the rumors about its owner, private equity fund L Catterton mulling a sale, he declined to comment. Marzotto, who has a minority stake in the brand, has been revising its distribution, spearheading a product expansion, bringing the brand’s children’s line in-house, and boosting communication.

According to speculation, the Made in Italy fund, managed by Quadrivio and Pambianco, is eyeing an acquisition of Dondup, as reported, and the transaction could be finalized by the end of next week, sources say.

Stakes in Dondup were acquired by the European arm of L Capital in 2009 and then by L Capital Asia in 2015. (L Capital is now part of L Catterton.)

The rapid and widespread rollout of the COVID-19 vaccine means Britons will be socializing, entertaining and spending again soon, said McKinsey's Anita Balchandani.

LONDON — Fashion and luxury sales will recover more quickly in the U.K. than in Europe due to the country’s rapid and widespread vaccine rollout, according to the latest research by McKinsey & Co.

The consultancy said in its new Fashion & Luxury 2021 report that fashion net sales in the U.K. are set to be minus 8 to 12 percent this year, compared with 2019. Continental Europe’s recovery will be slower, with minus 12 to 24 percent in fashion net sales, compared with two years ago.

While U.K. growth will outstrip that of its European neighbors, it won’t be as fast as China’s, which is expected to see a 4 to 6 percent surge in sales. The U.K. projections are roughly on a par with the U.S., which is poised to see a 10 to 12 percent decline in sales this year compared with 2019.

Although the U.K. was slow to lock down last year when COVID-19 first hit, the country was relatively quick to develop and distribute the Oxford-AstraZeneca COVID-19 vaccine, and to roll out the the Pfizer/BioNTech and Moderna ones, too.

According to government statistics, more than 25 million people in the U.K., almost 50 percent of all British adults, have received at least one dose of a COVID-19 vaccine. The rollout is ahead of schedule, and the country continues to be among those with the highest vaccination rates globally.

As reported, Britain is still in the midst of its third lockdown in 12 months, although schools are back, and nonessential retail and services, such as salons, are set to reopen on April 12.

According to a roadmap set out by Prime Minister Boris Johnson last month, all social restrictions will be lifted by June 21.

In the fourth quarter, McKinsey said a full and effective vaccine rollout and the avoidance of a third wave of COVID-19 in the fall and festive season in the U.K. “could enable solid growth, even ahead of 2019 levels.” Growth could be between 1 and 5 percent, the report said.

The successful vaccine rollout means that homebound Britons will be eager to entertain, socialize and shop once restrictions begin to lift after the Easter holiday.

“The big difference [in the U.K.] is the vaccine rollout and therefore the opportunity to go back to more normal operating. It not only opens the stores, it also opens up the number of occasions for which people dress and consume fashion,” said Anita Balchandani, partner, head of apparel, fashion and luxury for EMEA at McKinsey.

“When we’re back in a world of more hybrid working, with days in the office and days at home, there will be occasions for people to dress up. There will also be pent-up demand for special occasions and self-expression and events. As life goes back to normal, the big lift will really be tied to the vaccine rollout.”

During a briefing on Wednesday to discuss the new research, Balchandani talked about the various dynamics impacting the sale of fashion, footwear and jewelry across all categories and price points in major markets worldwide; the enduring popularity of online shopping, and the changing role of retail, online and offline.

She said 2020 had been “a devastating year” for the industry in terms of revenue and profit, and that there is much ground to recover. She said the first quarter has been “a write-off for the industry” overall, and worse than projected due to the store closures in Europe and the U.K.

Balchandani also argued that online shopping will remain popular even as physical stores start to reopen. In the second half of 2021, online sales penetration will rise from the current 36 percent to as much as 42 percent, before settling down to 37 to 38 percent by 2022-23.

She added that the physical retailers that did the most soul-searching — and auto-correcting — during the pandemic will emerge as the winners, post-pandemic. Stores with an omnichannel approach, digital services for clients, and speed to market capabilities will find themselves in a stronger position this year than their slower-moving peers.

In addition, physical stores and brands that know how to tune in to customers and create a “relevant experience” will also thrive, she said.

Asked about the fate of department stores, Balchandani said the winners will be those “who were investing in experience and really giving customers a reason to visit the store versus doing the transaction online.”

She believes that “people will go back to craving social shopping and experiences,” and that if a store “isn’t firing on all cylinders and understanding its customers” then it will be in a vulnerable position once lockdown lifts.

In online retail, Balchandani said she expects to see more concessions and alternatives to the traditional wholesale model emerging.

“Online concessions will become key and enable the brands to have a better oversight and ability to manage pricing and inventory on the [multibrand] online platforms,” she said.

With regard to supply chain and deliveries, Balchandani added the more flexible that online and physical retailers are, the better, and the race is on for retailers to get product onto the shop floor, website or consumer’s doorstep as quickly as possible.

During lockdown, she said the most flexible businesses “were really able to spot where the demand was, and to double down and buy more inventory in those areas. They were also able to pull out of inventory that would have ended up sitting in a warehouse. They realized that flexibility might indeed trump volume — and cost efficiency.”

Looking ahead, Balchandani said the survivors will be those “who are asking those hard questions, the ones that are taking this moment of dislocation and disruption to set the record straight. We hope the fashion industry takes this opportunity to reimagine itself for the next phase of growth and recovery.”

In separate report to be released on Thursday, McKinsey Global Institute elaborated on some of Balchandani’s themes.

Called “The consumer demand recovery and lasting effects of COVID-19,” the report said consumer recovery post-pandemic is likely to be “robust but uneven” with some lasting effects from COVID-19 on consumer behavior.

Jaana Remes, a partner at the McKinsey Global Institute and coauthor of the report, said that while “there is still a lot of uncertainty, an effective vaccine rollout…could restore consumer demand to pre-pandemic levels, fueled by rising consumer confidence, pent-up demand and accumulated savings.”

The report points out that, unlike in past recessions, the COVID-19 crisis involves “no consumer debt overhang, bursting asset price bubbles or long-term business cycle fluctuations.”

Instead, the sudden and deep drop in consumer spending in the initial months of the pandemic resulted mainly from cutbacks to in-person consumer services, especially travel, entertainment and dining.

The report noted that these categories had been growing over the long term, “and consumer surveys indicate a likely strong demand rebound after the pandemic.”

“The massive spike in the savings rate across the United States and Western Europe (amounting to a doubling of annual savings in the United States in 2020) left many households in a strong position to spend. China’s robust consumer spending recovery after gaining control of the COVID-19 virus is another reason for optimism for most countries,” the report said.

At the same time, it warned that in the U.S., young and low-income households, which have been “disproportionally working in hard-hit service-sector jobs and occupations with accelerated digitization and automation, are likely to face purchasing power constraints after stimulus support ends. A more uneven recovery could result in the widening polarization of consumer demand and an increase in inequality.”

In Europe, by contrast, the stronger social safety net (including more stable employment contracts and more expansive labor protection) as well as mechanisms to protect low-income segments, will support the recovery of discretionary consumption, according to McKinsey.