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THE POINT Issue 20 | November 2011
THE POINT
Intelligent investing in Europe
from Bridgepoint
Issue 20 | November 2011
The expanding middle
Emerging markets are spawning a new brand
of consumer
www.bridgepoint.eu
Sleep: over
Open your eyes to
chronic fatigue issues
Are you being served?
The customer is
always right Truth be told
Sorting fact from fiction
on the web
bridgepoint.eu
CONTENTS
2
INS & OUTS
Investments and exits
across Europe 6
MANAGEMENT FOCUS
Sleep: over
Eight hours a night used to be the norm; now it is
a luxury. But what is the impact on productivity?
10
TALKING POINT The expanding middle
The emerging markets’ middle classes are
growing rapidly: farsighted companies can reap
the beneifts
17
22
IN MY OPINION
IN THE SPOTLIGHT
The truth is out there?
Serve to survive
In an age when the internet allows
everyone to be an instant expert,
Simon Kuper asks how we can tell
fact from fiction
Reducing service levels is tempting in hard times.
The consequences may be less appealing, however
26
FACE TO FACE
Bill Johnson
The chief executive of SPTS, a Bridgepoint-backed
company at the forefront of electronic engineering
31
MARKET INSIGHT
Homeward bound
Developing countries have become the bastion
of manufacturing. But times are changing...
36
LAST WORD
It’s all Globish to me
Robert McCrum demystifies the world’s
most widely spoken lingo
FOREWORD
The turning tide
When a segment of a market or society starts to flex its muscles,
governments and businesses take note. That is what is happening in
the emerging markets where, as economic conditions in the West
stagnate and those in Asia, Africa and Latin America grow, a powerful
middle class is emerging.
As we explain in ‘The expanding middle’ (page 10), you ignore this phenomenon at
your peril. For businesses supplying these markets, the issue is simple: an expanding
middle class and rising disposable incomes mean new consumption levels of goods
and services.
For many years in manufacturing the mantra has been ‘China, China, China,’ but we
are starting to see a more nuanced approach from European industry. Ten years ago,
companies were enthusiastic about outsourcing manufacturing to Asia. Today, there
is increasing evidence that the cost-effective edge provided by offshore production is
narrowing. The challenge of deciding what a company’s best manufacturing mix
should be is explored on page 31.
Anyone can be an expert these days thanks to the likes of Google and Wikipedia. We
consider whether this is entirely beneficial. We ask (page 17) if it is possible to make
people use the internet more sceptically, or is it now the case that “credibility is only
one of the reasons that readers click a link, and not always the main one” ?
THE POINT
November 2011
Issue 20
Published by Bladonmore (Europe) Ltd
Editor
Joanne Hart
Design
Bagshawe Associates UK LLP
Reproduction, copying or extracting by any means of
the whole or part of this publication must not be undertaken without the written permission of the publishers.
The views expressed in The Point are not necessarily
those of Bridgepoint.
www.bridgepoint.eu
At the risk of stating the obvious, service matters. Just ask the many thousands of
customers worldwide who have tales of unfulfilled promises, incoherent letters or
calls from companies. Of course, this should always be a concern for business but
perhaps even more so in challenging economic times. ‘ Serve to survive’ (page 22) asks
how and why customer satisfaction should always be guaranteed.
We also explore the impact of sleep deprivation on performance at work and the way
different nationalities display different sleep patterns. If you want to know how to
reduce the detrimental effects of sleeplessness, see our feature on page 6.
Finally, in what, I am pleased to report, has been a particularly busy period of activity
for Bridgepoint and its funds, pages 2 to 4 of The Point provide updates on investment
activity in France (Infront, Mezzo di Pasta and Foncia), Spain (wind energy) and the
UK (ERM, SPTS and Shimtech Industries).
The Point aims to stimulate interest in topics that we believe are
relevant to the performance of corporate Europe. I hope you
enjoy reading it as much as we enjoy writing it n
William Jackson
is managing partner of Bridgepoint
1
INS &OUTS
BRIDGEPOINT
news across Europe
First past the post
Bridgepoint acquires leading sports marketing group, Infront Sports & Media. Infront Sports & Media, one of the
world’s best­known sports
marketing companies, has been
acquired by Bridgepoint. A key
player in football, winter and
summer sports, the group
generated revenues of more than
€600 million last year. Operating out of more than 20
offices across Europe and Asia,
Infront works with a range of
football federations, leagues and
clubs, including the German
Football Federation DFB, the
Italian premier league Lega Calcio,
2
AC Milan and SV Werder Bremen.
Infront also handles complex
events such as the FIFA World Cup
as well as the FIM Superbike
World Championship. In winter
sports, the company is the
undisputed market leader,
representing six out of the seven
Olympic winter sports federations,
including the Fédération Interna­
tionale de Ski (FIS) and the
International Ice Hockey Federa­
tion (IIHF). Infront is one of the
leading sports marketing organisa­
tions in China too, representing the
Chinese Basketball Association at
league and national team level.
“Infront is a scarce asset in an
attractive sector with a strong
management team and a unique
competitive position. We expect
Infront to continue to grow as it
captures new opportunities in the
international sports entertainment
market, ultimately establishing
Infront as the global number one
sports marketing group,” says
Bridgepoint partner Xavier Robert.
The global sports rights market
is worth more than $120 billion,
with the global market for media
and sponsorship rights
representing around $55 billion.
Bridgepoint has amassed consid­
erable experience in the sector
and is currently invested in Dorna,
the global rights holder to the
MotoGP Motorcycle World
Championship. The firm also has a
successful track record in TV
production that includes
All3Media in Great Britain,
producer of Formula One in the UK
and Marathon Group in France,
sold respectively in 2006 and 2007.
Bridgepoint will encourage the
further development of Superbike
and MotoGP, although both series
will continue to be organised and
managed separately.
“With Bridgepoint as our
shareholder, we are in a position to
tackle many additional opportuni­
ties now presented by the market
while remaining highly focused on
the continued delivery of high
quality services to our clients and
partners in all areas of our existing
business,” says Infront president
Philippe Blatter.
Bridgepoint is acquiring 100 per
cent of the business from Jacobs
Holding AG, the Junkermann
Group and Dr Martin Steinmeyer n
When the Spanish wind blows
Plugging into SPTS
Bridgepoint funds have moved into the Spanish wind
sector, one of the fastest­growing arms of the renewable
energy industry.
Funds advised by Bridgepoint have
acquired 11 wind farms in Spain, the
largest independent platform of
wind assets in the country.
The transaction values the assets
at €596.5 million and underlines
Bridgepoint’s commitment to the
renewable energy sector. Wind energy is a key energy
source in Spain, covering 15 per
cent of electricity demand in 2010.
Over the past six years, the industry
has delivered a compound annual
growth rate of 15 per cent and this is
expected to persist, as Spain
envisages an increase in wind
capacity of nearly 15GW by 2020.
Bridgepoint’s new wind assets, in
Castilla Leon, have been purchased
from Spanish construction group
Auxiliar de Construcción y Servicios
(ACS) and have more than 440MW
of installed capacity,
enough to power at least
half a million homes. Back in 2004, Bridge­
point invested in
Spanish wind farm
operator CESA, sold to
Acciona two years later.
As part of the latest
transaction, former
Acciona CFO Josu
Arlaban has been
appointed chief executive. “Our aim is to build a strategic
asset through greater efficiency and
selective acquisitions, which will be
highly attractive to utilities or energy
companies keen to increase their
exposure to the renewable energy
industry,” he says. “We believe this business can
become the leading player in the
Spanish wind industry,” adds Felipe
Moreno of Bridgepoint in Madrid n
Bridgepoint has backed the
management buyout of SPP
Process Technology Systems
(SPTS), a leading player in the
manufacture of semiconductor
components. SPTS makes equipment used
in the production of devices on
semiconductor substrates, the
wafers that form the base of a
wide range of electronic
products. Based in Newport,
Wales, and San Jose, California,
SPTS delivered sales of €217
million and EBITDA of €58 million
in 2010. “SPTS has strong positions in
every sector in which it operates,
and a global customer base in end
markets poised for long­term
growth. In addition, we have
identified a number of initiatives
to optimise performance,
including acquisitions in attrac­
tive niche markets,” says
Bridgepoint director Chris Bell. (See Face to Face on page 26) n
An ERM exit
Bridgepoint has exited Environ­
mental Resources Management
(ERM) in a deal valuing the
environmental consultancy at
$950 million (€665 million). The
sale comes six years after Bridgepoint first invested in ERM,
at which time the business was
valued at $535 million.
The company expanded
considerably under Bridgepoint’s
ownership: last year revenues
grew by 12 per cent to $483
million while EBITDA rose 18 per
cent to $76 million.
“ERM is a first­class business
that has capitalised on the
market­driven opportunity arising
from increased regulation,
compliance and demand for
natural resources and sustain­
ability. It is strongly positioned
for a great future,” says Bridgepoint partner Chris Busby.
The group is being sold to
private equity firm Charterhouse
and ERM partners n
3
French property purchase for Bridgepoint
Bridgepoint has moved into the French property management business
with the acquisition of leading operator Foncia.
Foncia, the principal property manage­
ment group in France, has been
acquired by Bridgepoint, in conjunction
with French investment firm Eurazeo.
Foncia has a wide European
network, operating not only in France
but also in Switzerland, Germany and
Belgium. With 600 agencies and almost
7,000 employees, the company
focuses on three activities: property
management,
lease manage­
ment & rental
services and
property sales.
Ancillary services
such as credit
and insurance
brokerage are
also offered by the company. In France
alone, the group manages more than
one million properties, while its leasing
& rental business is responsible for a
further 250,000 homes. Foncia is also
highly profitable, generating EBITDA of
€83 million on revenue of €580 million
last year.
The French residential property
management services market is
estimated to be worth €8
billion and has grown at an
overall rate of 3.5 per cent
per annum over the past 10
years. Comprised largely of
small independent players, the
sector offers strong opportunities for
consolidation. Foncia is ideally placed to
benefit from this trend and is also
expected to grow through further
penetration of its services. During the
recent downturn, Foncia proved
resilient and the intention is to focus on
growth across Europe. “We will work closely with manage­
ment to accelerate the company’s
growth, focusing on improving
technology and investing in staff.
Having performed robustly through the
downturn due to the ‘sticky’ nature of
its customer base, Foncia will now
focus on becoming the undisputed
European leader in property services
management,” says Bridgepoint
partner Benoit Bassi n
Double first for Bridgepoint Development Capital Bridgepoint Development Capital has
made two substantial acquisitions in very
different sectors.
An international specialist engineering group and a
French fast­food pasta chain have been acquired by
Bridgepoint Development Capital (BDC). In the engineering sector, UK­quoted aerospace group
Hampson Industries has sold four component
businesses to BDC, in a deal valued at $84 million. Based
in the US and UK, the businesses are global leaders in the
manufacture and supply of shim components to the
commercial and military aerospace markets. Shims are
used during the assembly of complex aerostructures and are typically sold to the major aircraft OEMs and their
top suppliers.
Following the BDC transaction, the acquired
businesses will be renamed Shimtech Industries and
chaired by Clive Snowdon, a veteran of the aerospace
industry. BDC partner Adrian Willetts says: “We will work with
4
management to identify opportunities for further market
consolidation through selective acquisitions, which will
allow Shimtech Industries to offer customers greater
geographic and product opportunities.”
BDC has also acquired Mezzo di Pasta, a fast­food
chain with 126 outlets, including five franchise
operations overseas. Serving a range of pasta dishes
cooked to order, the chain operates principally in
town centres but recently moved into shopping
malls, exhibition centres and service stations.
Workplace outlets are
under consideration
and master franchises
have been developed in
Spain, Switzerland and
Mexico. A test franchise
has just opened in
Germany and the
company is expected to
accelerate openings in
France too n
Management focus
S
LE
A
S
Sleep:over
Everyone needs it. Everyone
wants it and most people just
don’t get enough of it. Why is
sleep deprivation so prevalent
and does it really matter?
GR
OW
TH
IT
OF
PR
long with food and
shelter, sleep is one of
the most natural
instincts in the world. But, while
the developed world is perfectly
able to deliver on the first two, it
finds slumber increasingly
unattainable.
A combination of postrecession cost-cutting and the
prevalence of ‘always on’ 24/7
communications technology has
created a new norm in many
organisations, where fewer and
fewer people have more and
more work to do. And while
most employees would agree
that putting in a few more hours
is vastly preferable to the
A
6
alternative, it does create a
backlog of sleep deprivation.
Chronic tiredness is now one
of the biggest complaints among
office workers and the
consequences are plain to see.
Take a glance around your
workplace – how many of your
colleagues truly look like they’ve
been getting eight hours straight
for the past few weeks? Now
look in the mirror – what about
you? Chances are you’re
exhausted as well.
A recent study from the UK’s
Economic and Social Research
Council, which questioned
100,000 people in 40,000
households, found that longer
‘‘
Americans were the
working
include high
most likely to cite
hours lead
blood
workplace stress for
on average
pressure,
poor sleep patterns,
to less
heart
with 30 per cent
sleep.
disease,
fingering it as the prime
Some 11 per
some
types
cause, closely followed
cent of men
of
cancer,
by Germans at 27 per
and 14 per
even obesity
cent and the British at
cent of women
and diabetes
24 per cent”
who work 48
(because when
hours a week or
you are tired, your
appetite increases). But
more sleep for less
sleep deprivation also has a
than six hours a night. This is a
worrying statistic, given
much more immediate impact on
people’s productivity at work.
widespread acceptance that
“Sleep deficit has a serious
seven to eight hours is optimal.
impact on work performance.
Equally troubling, around 10 per
You are more edgy, less
cent of adults take sleeping pills
tolerant of others and
three times a week or more in
quicker to anger, and as
order to get to sleep at all.
a result you make
The problem seems to be
poorer decisions,” says
even more acute for those in
executive coach
senior positions. A study of 2,500
Miranda Kennett.
managers conducted on behalf of
Many of Kennett’s
consumer electronics company
top-level clients see
Philips found that 61 per cent of
sleep deprivation as
them felt their work was
a fact of life. But she
impaired by lack of sleep.
says memory, mood
Americans were the most likely
and higher cognitive
to cite workplace stress for poor
functions are all impaired by too
sleep patterns, with 30 per cent
little sleep.
fingering it as the prime cause,
“I firmly believe that if you’re
closely followed by Germans at
going to be at anything like your
27 per cent and the British at 24
peak performance, you need to
per cent. The laid-back Dutch
manage your sleep. It’s like going
were the least affected at 12 per
to the gym – you won’t be fit for
cent, and Dutch managers also
life or leadership if you don’t,”
slept more than those in other
she explains.
countries. Even so, they could
And while disrupted sleep may
only manage an average of six
not be an entirely modern
hours and 38 minutes a night.
problem, our high-tech way of
Potential health issues
life certainly doesn’t help. “A lot
of sleep problems are down to
Clearly, sleeplessness is on the
overstimulation. The invention
increase but how much does it
of the electric light bulb has a lot
actually matter? Chronic lack of
to answer for,” says Kennett.
sleep has been linked to all kinds
of health problems. These
“Our body clocks are based on
circadian rhythms – the pattern
of going to sleep when it gets
dark and waking at dawn – but
ever since humans have been
able to extend their productive
time by flicking a light switch,
we have been overstimulating
our brains and confusing our
body clocks.”
7
EM
AIL
P&L
P
EE
SL
TR
AD
IN
G
S
LE
SA
GR
OW
TH
IT
OF
PR
FORECAST
BU
CU
ST
OM
UT
Y­O
ECONOMISE
ER
SUPPLIERS
Wall Street Crash and
subsequent Great Depression,
contemporary political or
corporate leaders might not
choose to emulate his behaviour.
“I am lucky; I was born with a
huge amount of energy,” says
James Beaumont, managing
director of water testing business
DelAgua. “A 16-hour day is okay
for me and I can get by on six
Quantity matters
hours’ sleep for weeks and
But how much sleep is enough?
weeks. For me, it’s variety in
While it is true that all animals
what I do that’s more important
exhibit sleep-type
than sleep. So I try to take an
behaviour, from human
hour out in the middle of the day
beings to millimetreto do something different – I play
long nematode
rackets and smashing a ball
worms, the answer
around a court really helps me
is far from clear.
stay fresh.”
The traditionally
But even he realises that sleep
quoted seven to
deprivation has to be paid for in
eight hours for
the end. “My experience is that if
adults is an
you are really motivated, you can
average, based
keep up a very punishing work
on a very wide
schedule for as long as it takes to
distribution
get the job done. But once you’ve
curve. Some people can get by on done it, there is a comedown at
five or six hours a night –
the end. So if you run at 120 per
Margaret Thatcher
cent for a month, you
need a few days at 50
and Winston
per cent to recover,”
Churchill being
he suggests.
two famous
Some 11 per cent of
The trick to
examples –
men and 14 per cent of
managing sleep is
others require
women who work 48
to know yourself
much more.
hours a week or more
The 30th
and work within
sleep for less than six
president of
your limits, says
hours a night”
the United
Nick Hood, head of
States, Calvin
external affairs at
Coolidge, was
global risk analysis
reputed to sleep 10 or
firm Company Watch.
11 hours a night. As some
“Like so many people, I work too
economists blame him for
many hours and I am tired all the
sowing the seeds of the 1929
time so I have to manage the
This phenomenon has reached
something of a nadir, thanks to
today’s round-the-clock working
patterns and connectivity.
Having worked a 10-hour day
and spent the evening with their
BlackBerrys on their laps, many
people have trouble nodding off
at bedtime. Hardly surprising,
say sleep experts.
‘‘
8
‘‘
tiredness as well as the sleep
itself. What are you? Early bird
or night owl? You need to
understand and pamper your
own metabolism,” says Hood,
who also racks up a punishing
200,000 miles a year travelling
across 21 countries.
“The general rule on foreign
trips is that you won’t get enough
sleep, you have to get used to it.
But that means you have to pace
yourself, and it’s vitally
important to recharge at
weekends. Every businessperson
I know thinks they can work a 16hour day, party all night and still
be fresh for a 7.30am power
breakfast. But you can’t keep that
up,” he adds.
mentally too, providing
‘downtime’ during which
our brains can ignore the
outside world for a while.
Brains are also believed to
interpret, understand and log
all the sights, sounds and
information they are
bombarded with during the day.
The type of work you do and
even geography can play a part
in determining sleep patterns,
too. Eman Martin-Vignerte, a
sales manager for Bosch Healthcare, was born in Qatar,
educated in Germany, is married
to a Frenchman and now works
in the UK.
“In the Middle East, work
starts at 6am and stops at noon
for a siesta in the heat of the day.
The purpose of sleep
Then you work again from 4pm
The precise biological function of
well into the evening,” she says.
sleep is also poorly understood,
Dinner in the Middle East is
although it is generally accepted
frequently taken at 11pm or later,
that something pretty important
so sleep is taken in a couple of
must be going on while we are
shorter chunks. This may have
dormant, otherwise we would
something to do with ambient
not all need to do it. One theory
temperature, an important
suggests sleep allows our bodies
consideration because in order
to repair cellular damage caused
for us to get to sleep, our body
by the chemical processes of
temperatures need to fall
metabolism. Another maintains
slightly. In Germany and most of
that stocks of ‘ready-use’ energy
Northern Europe, for instance,
in the form of the energythe norm is to work
rich neurochemical
from 8am or 9am
adenosine triphosto 5pm or 6pm
phate, depleted
and sleep from
during our
10pm until
Sleep deficit has a
waking hours,
around 6am.
serious impact on work
are rebuilt
In Southern
performance. You are
during sleep.
Europe, by
more edgy, less tolerant
Sleep is
contrast,
of others and quicker to
reckoned to be
workers used
anger, and as a result
important
to take a siesta
you make poorer
‘‘
The 30th president of the
United States, Calvin
Coolidge, was reputed to
sleep 10 or 11 hours a night,
although he has since been
blamed for sowing the
seeds of the 1929 Wall
Street Crash and
subsequent Great Depression”
during the heat of the day
although this habit is dying out
in urban areas, as Spain and Italy
adopt the hours and habits of the
rest of the Continent.
“When I started my career, I
was a development engineer in
Germany and my hours were
very regular,” says MartinVignerte. “But now I am in sales,
I sleep a lot less regularly. I work
across three time zones so I
might have a conference call
with Korea at 4am my time, then
another at 8pm in the evening
with American colleagues. I have
always been flexible about going
to sleep, but I have had to learn
to be even more flexible. It can
be done.”
Martin-Vignerte admits this
hectic schedule can be
punishing: her favourite
technique for managing sleep
deprivation is the power nap. “If
I do get really tired, I will nip off
to the loo and take a 15-minute
power nap. I went on a course to
learn how to do it and it really
helps. You focus on something
important and relaxing in your
life, perhaps your family or a
special place, it’s rather like
meditation. I feel a different
person afterwards,” she says n
decisions”
9
Talking point
The expandin
Western consumers are under
pressure, but in emerging markets a
new middle class is developing –
presenting a wide range of
opportunities to companies that tap
into this brave new world. 10
­
g middle
ohn Prescott, former UK Deputy
Prime Minister, seemed for years
to epitomise working-class
Britain. Which made it all the
more surprising when he
declared in 1997: “We are all
middle class now.”
History has shown he was
right – but not in the way he
intended. In Europe and the US,
the middle classes are suffering.
Rising inflation, stagnant growth
in income and soaring energy
prices have prompted a fall in
living standards and persistent
fears about prospects for the socalled ‘squeezed middle’.
But elsewhere in the world,
millions of people in fastgrowing emerging markets and
once povertystricken developing
China is expected countries are
to surpass Japan enjoying hefty gains
as the second­
in income, a shift
largest travel and that has widespread
tourism market in implications for
the world by 2013, corporate and
and forecasts
consumer behaviour.
suggest it will be
As economic
worth $600 billion conditions stagnate
by 2020”
in the West,
J
‘‘
businesses are looking to the
burgeoning middle classes of
Asia, Africa, CEE and Latin
America to fuel consumer
spending. Attention is particularly focused on the largest
economies in these regions –
Brazil, Russia, India and China –
which are delivering annual
rates of economic growth not
seen in the West since the
Industrial Revolution.
There is no doubt that living
standards are rising in these
countries, but does this really
mean the middle-class population is soaring? In Britain, for
example, being middle class is as
much to do with speech and
upbringing as wealth. In France,
‘la bourgeoisie’ denotes a rigid
set of attitudes developed over
centuries. But, for companies
looking at emerging markets, the
issue is simpler: ultimately, it all
comes down to income.
All about money
The World Bank uses an income
range of $2 to $13 a day as a
definition of the middle class in
the developing world. Although
11
the figures seem exceptionally
low, the key point is that
increasing numbers of people are
moving away from the poverty
line – 1.2 billion of them,
according to the World Bank.
Surjit Bhalla, managing
director of Oxus Research and
Investments in New Delhi, uses
more demanding criteria,
defining the middle class as
those earning between $10 and
$100 a day. Even using these
figures, he estimates that the
middle class rose from 33 per
cent to 57 per cent of the world’s
total population between 1990
and 2006.
Jon Copestake, chief consumer
goods analyst at the Economic
Intelligence Unit (EIU), says the
key moment is when consumers’
‘‘
12
make sacrifices to create a better
life for themselves”.
And Mikhail Deliagin, director
of the Moscow Institute of
Globalization Studies, suggests:
“The middle class presupposes a
certain level of consumption and
a certain pattern of behaviour, a
particular psychology and a
particular set of values.”
One thing is clear: whatever
the definition, huge numbers of
middle-class consumers from
emerging markets are beginning
to flex their monetary muscles.
McKinsey, the management
consultancy, estimates that the
global middle class spent $6.9
trillion in 2010. And it forecasts
this figure will rise to $20 trillion
during the current decade –
about twice the current
consumption in
the US. Such
The middle class presupposes a certain expenditure
level of consumption, a particular psychology would be hard to
and a particular set of values”
ignore at the best
of times, but
income reaches a “tipping point”.
when domestic Western demand
“This is when your disposable
is so weak, emerging market
income reaches a point at which
expenditure becomes particuyou can buy more goods than the
larly significant.
basics for life such as food, water
Brand­led consumption
and clothing,” he explains.
Others talk about a changing
The trillion-dollar question is,
mindset too. Eduardo Giannetti
how best to exploit it? So far,
da Fonseca, one of Brazil’s
luxury goods companies seem to
leading economists, describes
be leading the way, perhaps
the middle class as “people who
because, as McKinsey points out,
are not resigned to a life of
15 per cent of global middle-class
poverty, who are prepared to
spend comes from just 1.8 per
cent of the world’s population,
swimming-pool builders in
which it describes as “upperEuropean property supplemiddle” class, earning
ments). But,
McKinsey, the
looking further
between $56,000 and
management
ahead, this is a
$113,000 a year.
consultancy,
small part of the
According to Mark
estimates the
overall story. In
Henderson, director at
global middle
time, a far wider
Walpole, a not-for-profit
class spent $6.9
range of
organisation that
trillion in 2010. It
businesses will
represents British luxury
benefit from
goods companies, sales in forecasts this
figure will rise to
increased demand
this particular sector are
growing at an annual rate $20 trillion during for consumer
the current
goods such as cars,
of 11 per cent.
decade – about
healthcare
“This is way ahead of
twice the current products and
the UK economy and is
consumption in
consumer
being driven by Middle
electronics, the
East spend and because of the US”
Chinese demand for
sorts of products
brands like Burberry,
Western
Mulberry and Jimmy Choo
households take for granted.
shoes,” he says.
“As per capita incomes rise,
Rahul Sharma, managing
consumption habits become
director of retail consultancy
increasingly sophisticated,”
Neev Capital, echoes this view,
says Jonathan Jackson, head
pointing out that emerging
of equities at stockbrokers
markets make up half the sales
Killik & Co. “Once consumers
and more than half the profits for
enter the middle-class income
luxury goods manufacturers.
bracket, their spending shifts
“The attraction is that because
towards lifestyle-oriented
they sell to a small upper-middlediscretionary goods and
class population, luxury goods
services, with increasing
tend to be priced at a premium of
amounts of money being spent
almost 25 per cent,” he says.
on personal care, entertain“This is very different from the
ment and fashion,” he adds.
mass-market story.”
China, for example, is
Across Europe, anecdotal
forecast to see 100 million
evidence of such conspicuous,
households joining the middle
brand-led consumption abounds
class over the next decade,
(including a surge in Russianmaking it one of the most
language adverts by
important markets in the
‘‘
world for consumer goods.
Luxury goods manufacturers will
clearly benefit from this trend,
but so should carmakers, health
and beauty groups, white and
brown goods manufacturers,
even companies making
washing-up liquid or toothpaste.
The change in Brazil
China is not the only fastgrowing economy, however, and
the same rationale can be
applied to
In Brazil, Unilever
several other
has designed a
countries. An
detergent, Ala,
interesting
specifically for
example is
washing in fresh
Brazil, where
river water. The
there has always
company also
been a small,
sells tiny soaps
wealthy middle
and single
class and a large,
‘‘
sachets of
shampoo in
India”
13
‘‘
poor working class. But
according to Brazil’s Center for
Social Policies (CSP) the ‘new’
middle class ballooned from 37
per cent of the population in
2003 to just over 50 per cent by
2009. As a consequence, the
middle class now has greater
purchasing power than its
wealthier counterpart. “From the
standpoint of economics, this is
the dominant class,” says CSP
director Marcelo Neri.
The shift has prompted a rapid
uptake in the purchase of
consumer electricals. The
number of homes with a washing
machine rose from 33 per cent in
2003 to 44 per cent in 2009. The
share of those with a fridge rose
from 86 per cent to 94 per cent.
Such goods are commonplace in
the West, but for numbers of
emerging market consumers,
they represent a step change in
lifestyle. For others, however,
these items remain out of reach.
Know your market
Martin Ravallion, director of the
World Bank’s development
research group, separates the
developing-world middle class
into two tiers – upper ($9-$13 a
day) and lower ($2-$9 a day).
The numbers in the lower tier
increased by almost 1.2 billion
between 1990 and 2005. The
increase in the upper tier was a
far more modest 95 million.
14
­
While emerging
markets are
diverse, multina­
tionals almost
always benefit
from finding a
local partner”
Clearly, the
range of
goods to
which
consumers
aspire varies considerably
according to which middle class
they belong to. And different
tactics are required to match
goods with domestic income
levels, local taste and local
customs.
In Brazil, Unilever sells a
detergent, Ala, specifically for
washing in fresh river water, a
smart move given more than half
the population still does not own
a washing machine. The
company also sells tiny soaps
and single sachets of shampoo in
India for a few rupees. Sharma at
Neev Capital says the sachets
have worked well, attracting
people in rural areas who were
“not used to putting anything in
their hair”.
“They could be priced really
low, so they were genuinely
affordable and because of that
people were not worried about
trying them once and seeing if
they liked them,” he explains.
Many other companies have
used India as a testing ground for
affordable products, such as a
$30 mobile phone handset or
Tata’s Nano car, the cheapest
available in the world. “The
combination of volume and
affordable pricing is driving
innovation,” says Sharma.
Another way of keeping costs
down is to make containers
refundable. Coca-Cola
introduced slightly smaller and
cheaper bottles in rural China
that people drink on the spot and
return immediately.
At the other
end of the
scale, an
expanding
media
presence in
countries such as India means a
growing number of consumers
are aware of branded goods,
often before they can actually
afford them. Sharma adds: “You
meet a construction worker in
Mumbai and he will be wearing a
fake Nike T-shirt with the
‘swoosh’ because he is aware of
the brand. But once his income
rises, he will be happy to trade
up to the real thing.”
Western firms can fall into
traps, however. Quintessentially,
a UK-based luxury concierge
service, highlights diverging
tastes between traditional and
new middle classes. In Brazil, for
example, the nouveau riche may
be keen to snap up branded
clothes and bags, but traditionally wealthy Brazilians see this
behaviour as “corny” and giving
“free propaganda”.
On a more down-to-earth
level, Sharma points to Anglo-
French group Kingfisher’s move
into China, with the launch of
DIY stores aimed at
homeowners. Unfortunately for
the home improvement retailer,
low labour costs mean the
Chinese tend to pay people to do
the work rather than do it
themselves. “It was a case of not
understanding
the consumers,”
says Sharma.
The EIU’s
Copestake
believes this
underlines an important lesson:
while markets are diverse, one
common benefit for multinationals is to find a local
partner. “The strategy has been
tried and tested with food and
drink and it really helps because
partners can give advice on
market pitfalls and how to adapt
products to the market.”
This can mean investing time
and money reconfiguring the
business model to tap into what
seems to be a relatively small
market. “You can’t just go in with
a product as you would in
London or the US as a means of
obtaining success,” Copestake
says. “It’s not a quick fix and may
mean spending millions on
research and development to get
the potential of the market.”
The next phase
To date, multinationals have
been focused on the supply of
‘‘
When the US
became an
industrial nation,
the market
leaders in 1925
remained the
number one or
number two
player for the rest
of the century”
goods, both luxury
and day-to-day.
Looking ahead,
services may offer the
next phase of
opportunity, as the
emerging middle
classes demand more
sophisticated
technology and know-how. The
CSP report, for instance, shows
the number of Brazilian
households with a computer and
internet access has doubled since
2003, as has the number with a
mobile phone. Even direct
rubbish collection and the
provision of sewerage systems
have shown a noticeable increase
in Brazil.
Western expertise can prove
beneficial in many of these
sectors – and in areas such as
logistics – importing goods or
bringing them from field to store.
International consumer groups
and retailers have real expertise
here. “Tesco and companies like
it have an important role to play,
bringing logistics technology to
reform the supply chain and
transport fresh food efficiently,”
says Sharma.
Being middle class also implies
increased leisure time, another
important opportunity for
Western companies. Management consulting firm Boston
Consulting Group, for example,
expects China to overtake Japan
as the second-largest travel and
tourism market in the
world by 2013, and
forecasts it will be
worth $600 billion by
2020. And Deloitte
predicts that by 2015
the tourism industry
in China and India
will be greater than
those of Britain, France or Japan.
“The greatest potential in
these markets will lie in
developing mid-market and
economy-branded products
aimed at the domestic traveller,”
says Alex Kyriakidis, global
managing director of tourism,
hospitality and leisure at
Deloitte.
Significantly too, as
households become richer they
will start to prioritise education
and healthcare, which will open
up whole new markets for the
West. Far-sighted companies are
already positioning themselves
in these important new regions,
ensuring they are well placed for
the future.
The lessons of history bear out
the importance of first-mover
advantage: when the US
underwent industrialisation,
market leaders in 1925 remained
the number-one or number-two
player for the remainder of the
century. “As middle classes
develop worldwide, the most
important thing is brand and
brand sentiment,” says the
EIU’s Copestake n
15
In my opinion
Anyone can be an expert on anything these days,
thanks to Google and Wikipedia. Is this freedom of
information in action or a real social danger? FT columnist Simon Kuper checks the facts.
o
usted South African president Thabo
Mbeki, one of the first web-savvy heads
of government, never believed HIV
causes Aids. He felt this notion reeked
of ancient Western prejudices about oversexed
Africans. Surfing the internet in the late 1990s, he
found scientists who agreed with him.
Eventually, Mbeki contacted David Rasnick, a
biochemist at the University of California who didn’t
believe HIV causes Aids either. Rasnick and others
encouraged Mbeki’s views.
Later, the president even had his own theory of
Aids posted online on the main website for Aids
dissidents, virusmyth.com. (The site remains
active today.)
It’s a problem of our age: on the internet,
everyone can become an expert in minutes. Mbeki’s
‘expertise’ and subsequent disapproval of orthodox
Aids drugs proved unusually damaging. A study by
Harvard researchers in 2008 found South Africa
could have prevented 365,000 deaths if it had given
anti-retroviral and other common drugs to Aids
17
patients, to help stop pregnant women infecting
their babies.
There is wonderful information on the internet
and dangerous garbage too. Politicians, corporate
executives, doctors, the sick, journalists, market
researchers, students and countless others use the
web to find out what is true and what probably isn’t.
The problem is, most people don’t care much about
that distinction.
From Britannica to Wikipedia
I’m a truth-seeker myself. I have been trying to write
the truth in articles and books for 25 years, so my
career divides almost equally between the preGoogle and post-Google eras. When I started out,
the struggle was finding information. In 1992, for
instance, I was planning a research trip to
Cameroon. From the UK, it was almost impossible to
follow current events in the West African backwater.
I visited the Cameroonian embassy in west London
to ask to read the country’s newspapers. I was
blocked at the door. At the time I took this for
rudeness, but I later found out that the embassy was
barring strangers for fear that they might be
creditors demanding money.
Trying to build my own journalistic database, I
used to store old newspapers and magazines in my
room. While I was still living with my parents, this
used to drive my mother berserk. But she did
understand my quest for information. She herself
worked for Encyclopaedia Britannica. She commissioned experts to write entries, and was forever
anguishing about which professor was best in each
particular field.
We got the Britannica for free, but most homes
couldn’t afford the full set. When Sonia Sotomayor
became a justice in the US Supreme Court in 2009,
one explanation of her rise was that her family was
possibly the only one in its Bronx housing project to
own the Britannica. Wikipedia’s founder Jimmy
Wales also read the Britannica as a child. That was
rare. Information was scarce in those times.
Then, in 1998, two graduate students at Stanford
University incorporated a company called Google.
They sublet a garage in Menlo Park, California, put a
whiteboard with the jokey text, “Google Worldwide
Headquarters” outside, and began beta testing a
search engine. The world changed. Suddenly,
everyone could be an expert, instantly.
I first became an instant expert 10 years ago,
when I was invited to debate euthanasia on Dutch
TV. The invitation included a free flight to
Amsterdam, so I went. My ignorance about
euthanasia turned out not to be a problem. After an
hour’s online research, I could go on television and
debate the topic as if I’d been steeped in it all my
life. Back then, it felt like cheating. Now we all do
this constantly.
The world’s chief source of instant expertise is the
online encyclopaedia Wikipedia. Last year UNUMerit, a research centre of the United Nations
University, conducted a survey of Wikipedia,
canvassing 176,000 readers and 54,000 contributors, spread across many countries. One interesting
finding: 45 per cent of the contributors had not
attended university. No wonder, because half of all
respondents to the survey were under 22 years old.
Contributors (average age 26) were only slightly
What matters to most people is not that the source is
true but that they like what it says, and that it’s credible
enough to defend”
18
Last year, Chinese police revealed
that employees at the big dairy
company Mengniu and a Beijing­
based internet marketing
company had paid writers to
spread rumours that deep­sea fish
oil was bad for your health”
older than readers (average age 25). Almost 90 per
cent, incidentally, were male.
In other words, the typical contributor to
Wikipedia is not the august professor who would
have impressed my mum. Nor would she have been
reassured to hear that Wikipedia started by
absorbing articles from the famous 1911 edition of
her own encyclopaedia, and from other similarly old
reference books that had gone out of copyright. She
used to worry that 10-year-old entries were
outdated. Yet many Wikipedia entries (the one
about the Greek philosopher Diogenes, for instance)
grew out of a text written for the Britannica by some
august professor circa 1909.
Wikipedia’s founders had wanted to do things my
mother’s way, using an up-to-date coterie of experts,
but they quickly found out it was very hard to get a
significant number of articles, because it was too
much effort for people. Now you don’t even need to
log in and you can add something. And whatever
you add tends to become the world’s favourite
source on your chosen topic.
The problem is not just when Wikipedia (or any
other website) is flat-out wrong. A subtler problem
is when knowledge is only skin-deep. Take the
statement, “In 1492 Columbus discovered America.”
That statement isn’t wrong per se. But it begs a
number of questions. How could Columbus
“discover” an inhabited territory? What made that
vast and diverse territory “America”? And so on.
Often, websites give you facts (true or otherwise)
without understanding.
Evaluating sources
Clearly, anyone researching online needs to
understand sourcing. Indeed, universities and
schools are increasingly teaching students to
evaluate sources, although many students still cite
the internet as their source. But sourcing is even
more complicated than most people understand.
Scientific research depends on peer review so if
Professor A writes something, it only becomes
accepted as true once other experts in the profession
accept and repeat it. Unfortunately, few people
outside academia understand how science works.
Typically, bloggers and journalists place too much
faith in a single piece of research, notably health
research. Academics perform one study that finds a
link between some factor and a disease. Websites
then hype the study: “Stress (or cell phones, or hair
dye) causes cancer!”
Yet any single academic study, however good,
doesn’t tell us anything for certain. If it contradicts
most other studies on cancer, or Aids, or has no
biological rationale, then its validity is doubtful.
What’s important is the totality of evidence from
many studies and from biological research. Online
readers often don’t understand this, which frees
them to believe whatever they want to believe. The
internet helps you find whatever truth you are
looking for.
That is what President Mbeki did. The Aids
dissidents he relied on weren’t uncredentialled
18-year-old boys. Rasnick was a PhD biochemist.
Charles Geshekter, another of Mbeki’s informants,
was a respected historian of Africa, albeit not a
medic. Crucially, though, their views on Aids had
failed the test of peer review. That is why they were
dissidents. Mbeki was relying on a few studies amid
a sea of knowledge. And of course he handpicked
the studies that bolstered his prejudice: that sexual
behaviour did not cause Aids.
Sometimes the main problem for web surfers is
lack of time. When you are trading stocks, seconds
count. When ‘news’ pops up online that affects a
stock, you don’t always have time to perform a
sophisticated source analysis. One morning in
October 2008, for instance, an item appeared on a
19
site called iReport saying that Steve Jobs, founder
and former chief executive of Apple, “was rushed to
the ER just a few hours ago after suffering a major
heart attack”. Apple’s shares fell 10 per cent in 10
minutes. The stock soon recovered, after Apple
nixed the false rumour, but still closed the day 3 per
cent lower. iReport, as it turned out, was a “citizen
journalism” site run by CNN. That means that
anyone could post items on the site. The story about
Jobs appears to have been posted by an 18-year-old.
iReport’s stories were neither filtered nor edited, yet
because of the CNN imprimatur they ran the risk of
being taken seriously.
It wasn’t the first time a false internet report had
moved a giant stock. United Airlines was even
unluckier: in September 2008, a Bloomberg
employee accidentally included a six-year-old story
about United’s bankruptcy in a “news alert”.
United’s shares fell 75 per cent. As a United spokeswoman said: “It is what happens when people are
irresponsible and don’t check facts, and our lawyers
are investigating.”
Some false “reports” are put up online in error.
Others are made up deliberately, however. After all,
there are few easier ways to earn a quick buck on
the stock market than to disseminate a bogus story
about a stock.
Of course, false rumours have moved stocks since
speculators in Amsterdam first began to trade shares
400 years ago. I know this to my own cost: in my
own worst moment in journalism, as a young
business reporter in 1996, I wrongly reported that
the jewellery company Signet was about to be taken
over. My source was an outside investor in Signet.
(Only later did I figure out he might have had an
ulterior motive.) When my article appeared, Signet’s
market value rose by millions of pounds.
Mistaken stories have always appeared, but the
internet has multiplied the speed of the news, and
the number of unverified sources. At least my wrong
article was checked by three subeditors, even if they
did all pass it through.
Web surfers tend to believe what they read on the
web, and some opportunistic companies make use
20
of this tendency.
45 per cent of contributors to
In China, reports
Wikipedia did not attend univer­
the Washington
sity. No wonder, because half of
Post earlier this
all contributors and readers are
year, there is an
under 22 years old”
“online army” of
thousands of
people who are
paid by
companies
to plant
false
information about rival
companies on blogs, chat
rooms and message
boards. Last year, for instance,
Chinese police revealed that employees at
the big dairy company Mengniu and a Beijingbased internet marketing company had paid
writers to spread rumours that deep-sea fish oil was
bad for your health. It just so happened that a rival
of Mengniu’s, a company called Yili, had a milk
product aimed at children containing that very fish
oil. One fictional parent wrote on an internet forum:
“Now it was exposed that the milk product ... can
make children sexually premature. I’m going crazy.”
If people surfed the internet more sceptically,
understood which sources were more reliable than
others and knew how academic research works,
they might swallow less garbage online. However,
it’s doubtful that most web surfers really are striving
for truth. To quote the journalist-turned-novelist
Tom Rachman: “Alas, credibility is only one of the
reasons that readers click a link, and not always the
main reason.” Many web surfers, such as Mbeki, are
looking for a “truth” that suits them. What matters
to most people is not that the source is true but that
they like what it says, and that it’s credible enough
to defend.
If there is an unprecedented amount of garbage
masquerading as truth today, the internet is partly
to blame. But just as pernicious is the widespread
desire to believe that garbage n
*Additional research by Pauline Harris
In the spotlight
Serve to
survive
When times are hard, it is all too easy for businesses to cut back on
customer service. But this may be a short­sighted solution,
prompting savvy consumers to move their business elsewhere. hat price poor
customer service? A
total of $338.5 billion
or $243 per customer lost,
according to Genesys, a supplier
of customer management
software, which conducted a
survey across 16 countries. The
underlying message is clear:
service matters. Get it wrong, and
you will lose both customers
and profits.
W
22
This is hardly a startling
conclusion. How many of us have
hung up rather than go through a
series of automated commands
before we get to a real person?
Decided to shop elsewhere rather
than wait for the sales assistants
to finish discussing their plans for
the weekend? Left a restaurant
after waiting too long to be
served? Or chosen to fly with a
higher-priced airline rather than
be herded like cattle through the
departure gate?
But, even though numerous
consumers know the value of
service, far too many companies
struggle to get the message. Good
service can, of course, be
expensive and when the
economy is faltering and demand
is sluggish it is tempting to look
for savings on the shop floor. But
the impact of rationalisation
programmes on customer
‘‘
relationships can be highly
damaging – far from improving
profits by cutting costs,
companies can actually lose
money as dissatisfied customers
take their business elsewhere.
those surveyed said
they were not
willing to
compromise on
service in return for
lower prices.
A downward trend
Coping with the
downturn
In its Global Consumer Survey,
consultancy group Accenture
found that almost two-thirds of
consumers – 64 per cent –
switched from at least one service
provider in 2010 because of poor
service. Retailers were the worst
affected, with 26 per cent
switching to different store
groups, but that was closely
followed by banks at 22 per cent
and internet service providers at
19 per cent. Accenture also found
that levels of customer satisfaction had fallen since 2009 in all 11
areas which it measures,
including key attributes
such as the time it takes
to be served and the
length of wait to resolve a
service issue. Perhaps most
surprisingly in these
economically stretched
times, more than half of
Good places to look
for potential over­
investment include
marketing campaigns
and excessive use of
bill credits and
adjustments. The
business case for
these ‘customer
delight treatments’
can include unreal­
istic assumptions
about how they will
increase customer
referrals and
retention. And often,
there is no business
case”
Encouragingly too,
consultancy firm
McKinsey says there are ways
companies can reduce costs while
maintaining or even improving
customer service. “The
challenging economy is putting
consumer companies such as
airlines, banks and retailers in the
difficult position of cutting back
the service levels that customers
have come to expect in recent
years. These companies are
closing retail locations, reducing
hours of
operation, and
making do with
fewer staff in
stores and call
centres,” say
principals Adam
Braff and John C.
DeVine.
“Meanwhile,
faced with rising
costs, they are also increasing
prices, either overtly or through
fees. As a result, our customer
experience research shows that
satisfaction scores are reversing
the upward trend of the past few
years and actually dropping in a
number of industries.”
One way to avoid this, they
say, is for companies to make
sure they know what actually
drives customer
23
‘‘
satisfaction. A mobile phone
company was operating a call
centre, for example, where the
key variable was the length of
time taken to answer the phone.
McKinsey found customers were
delighted if the phone was
answered immediately, and
dissatisfied if they were left
hanging on beyond a specified
length of time. Braff and DeVine
concluded the business could
save $7 million and improve
customer satisfaction if it focused
on this one specific area and also
managed call centre staff levels to
improve the slowest satisfactory
response time.
“The same principles apply to
setting up a new account,
scheduling an appointment,
answering a non-urgent email, or
having customers wait in line,”
says the consultancy. “Other
good places to look for potential
over-investment include
marketing campaigns (for
example, offering to move a
customer to a cheaper rate plan
24
regardless of whether the
customer says cost is a problem)
and excessive use of bill credits
and adjustments. The business
case for these ‘customer delight
treatments’ can include unrealistic assumptions about how they
will increase customer referrals
and retention. And often, there is
no business case.”
A wireless service
Almost two­thirds of consumers –
64 per cent – switched from at
least one service provider in 2010
because of poor service”
about the use of email adverts,
online banners, comparison sites
and other internet tools. And
two-thirds of those surveyed said
they were increasing their use of
technology in areas such as
automated phone attendants,
live internet chats and selfservice options on a website,
suggesting these developments
have improved service levels over
the past several years.
Intriguingly, customer willingness to use technology differs
Of course, the internet is having a
major impact on customer
service, particularly global
More than 80 per cent of consumers in France
online retailer
and Germany are happy to use the web alone to
Amazon. The US
consult customer services; in the UK and the
giant consisNetherlands, the percentage falls to around half”
tently tops the
league table of
customer satisfaction and its
markedly across Europe. More
speed of service and efficiency of
than 80 per cent of consumers in
complaint-handling mean it sets
France and Germany are happy
the standard that other retailers
to use the web alone to consult
must follow.
customer services; in the UK and
With regard to online service,
the Netherlands, the percentage
Accenture’s survey found
falls to around half, according
consumers were enthusiastic
to Genesys.
‘‘
Wherever businesses are located, using the internet to
streamline customer service may
help costs but it does not mean
they can give up on more traditional methods. Across Europe,
almost 90 per cent of consumers
said they had conducted at least
one so-called ‘cross-channel’ conversation during 2010 – switching between stores, telephone
and internet. While customers
are happy to start their transaction using the most convenient
outlet, they prefer to resolve
more complex issues by talking
to someone real from customer
services. And, when asked where
they most wanted investment to
be focused, 43 per cent of respondents plumped for better assistance from humans.
This leaves companies facing a
difficult challenge. They must
maintain levels of service, regardless of economic difficulties,
or risk seeing their consumers
swap to another supplier. The internet can prove helpful but it
also facilitates switching to other
service providers. And the web is
rarely sufficient in itself. Customers want to access new technologies while still being able to
fall back on human interaction.
As the Genesys report concludes:
“Businesses should plan for an
integrated solution that plans for
the future and is designed to
evolve and adopt new crosschannel mechanisms – but first
and foremost, they must provide
and support the mechanisms the
market in their country favours
today.” n
Ready to serve
Clive Schlee, chief executive of sandwich chain
Pret, attributes the firm’s success not just to its food
but also to its proud, professional staff. “We can’t
work out for sure which of these two is most
important, but we think it is likely that service is. It
is everything in today’s world,” he explains.
With this in mind, Pret’s attention to customer
service starts with recruitment: every potential new
recruit has to work in the store for one day, after
which the existing team have to vote on whether or
not they are suitable. This responsibility is more
than symbolic: Pret’s stores are surveyed by a
mystery shopper every week. If the shopper’s
experience of the service is good, everyone in the
store will get an extra £1 an hour in salary. For
employees earning around £6 an hour, the bonus
payment is significant.
The idea is that everyone should get the extra
money and, in practice, between 92 and 97 per cent
of the chain do – but the system means everyone in
the store has a real interest in ensuring their
colleagues are up to scratch.
That team spirit is reinforced by Pret’s system of
awarding ‘shooting stars’ to staff. When an
employee is promoted, he or she is also given
between £50 and £100 to share among those who
helped them gain their promotion.
Pret does not offer new recruits a formal
induction programme. Instead, it encourages staff
to be themselves.
“We look for enthusiastic, energetic and friendly
people with leadership qualities. You don’t join Pret
if you really want to be a librarian,” says Schlee.
Leadership qualities are important because the
chance of career advancement is real. There are
about 50 steps of promotion, outlined to everyone
when they start. This offers employees a real sense
that they have a future in the company, not just on
the shop floor but in management too. Some 60
per cent of head office personnel started out
selling sandwiches, while sales and operations
managers are among those who started life as
team members.
Schlee maintains the key mistake rivals make is
that they “ritualise” the process: staff are told what
to say and how to say it and, while they all claim
that service matters, in practice, their commitment
is little more than lip service.
25
Face to face
An innovative edge
Bill Johnson started out as a low­paid worker in the Midwest. Today
he is chief executive of SPTS, a Bridgepoint­backed company at the
forefront of electronic engineering. 26
­
I
n 1964, at the age of 16, Bill Johnson went to work at Spartan-Atlantic
Department Store, a discount outlet in Minnesota, where he then lived.
Johnson was “a grunt” – a low-paid holiday worker hired to do the most
menial work there was.
“There were four of us, all working for the assistant manager. We were
sent on to the roof to shovel snow off the top of it; we moved fixtures
around, that kind of thing. It was a great experience because it convinced
me I never wanted to do that kind of thing again,” says Johnson.
He never did.
After graduating in physics at Minnesota University,
Johnson went on to do a master’s in electrical
engineering and a PhD in material sciences at
Michigan Technical University. By this time, the
world of computer science was just beginning to
open up and Johnson soon moved to its epicentre,
California, working in technology, marketing and
senior management for software and hardware
companies.
By 2003, he had become a consultant to the
industry, and four years later he was approached by
the Japanese aerospace and electrical engineering
group Sumitomo Precision Products with a particular assignment.
“I was introduced to the president of SPP,
Susumu Kaminaga, who asked me to join the
company and help him figure out what do to with
STS,” says Johnson.
At the time, STS was a struggling specialist
technology business based in Newport, Wales, that
had been spun out of Electrotech, an early pioneer
in the semiconductor and silicon field. Electrotech
had also demerged a related business, involved in
the production of semiconductor processing
equipment, which eventually became known as
Aviza.
“Aviza had a base just a few miles down the road
from STS and the two companies were doing
complementary things. But Aviza had another
branch in California where it was competing with
the mainstream silicon chip manufacturers and it
was having a really tough time,” says Johnson.
By 2009, Aviza’s difficulties in the US had become
terminal and the group filed for Chapter 11.
Meeting of minds
“I saw it coming but I recognised Aviza had a real
gem in the UK and I managed to convince SPP that
we should buy the business. I felt putting the two
together would create more than the sum of the
parts. Most of the SPP board didn’t agree with me
but the president did so we went ahead,” says
Johnson.
The merger created SPP Process Technology
Systems or SPTS, a company based in Newport and
San Jose, specialising in the production of large,
complex pieces of equipment used to make intricate
semiconductor devices. The group differs from
mainstream silicon chip manufacturers because its
customers tend to be involved in the computer
industry, whereas SPTS customers are focused
on cutting-edge sectors such as microelectromechanical systems (MEMS) and light-emitting
diodes (LEDs).
As Johnson explains: “If you buy an iPhone, it has
19 devices or chips in it that make it work, store
memory, react when it’s turned and so on. Apple
buys the chips from a manufacturer such as
STMicroelectronics or Taiwan Semiconductor
Manufacturing Company and we make the
27
machines they use to create the chips.”
The process is highly technical. Silicon wafers or
wafers made from compound materials are inserted
into the SPTS machines and adapted for use in
hundreds of everyday applications. Some machines
allow patterns to be etched on to chips, some allow
materials to be deposited on to them or some heat
the chips to an extremely high temperature.
“If you think of the chip-creation process as taking
place in a kitchen, we provide the oven, the mixer,
the chopper and the dicer,” says Johnson.
SPTS offers demonstrations of its equipment to
show customers that it works, but it is not involved
in the chip-making process per se. Nonetheless,
demonstrations are important as the SPTS kit does
not come cheap.
“These are large, specialised machines and they
rarely cost less than $1 million. Some pieces of
equipment cost $4 to $5 million apiece,” says
Johnson.
Nonetheless, demand for these products is robust.
New markets
“We are serving new and emerging markets, new
industries and new applications. Take MEMS, for
instance. Ten years ago, MEMS devices were just
used in airbags for cars. Now they are used for smart
phones, Wii games, even the machines you strap on
when you’re running to see how many steps you’ve
taken. New products are coming on to the market
all the time that use these devices and we make the
equipment needed to create them,” explains
Johnson.
“LED is another exploding industry, used in LCD
TVs, every kind of computer and wireless screen and
for consumer lighting,” he adds.
This is a far cry from the mainstream silicon chip
manufacturers.
“Parts of that industry have been around for 30
years. I cut my teeth there but it is now a mature
industry, everyone knows how to make the devices
and it is dominated by huge companies. Our
markets are very different. They’re growing rapidly,
new technology is being introduced all the time and
new processes are required. For me, that is very
exciting, in terms of both the technological advances
and the strategic opportunities they present to
SPTS,” says Johnson.
Those opportunities have already helped SPTS to
28
blossom since its formation two years ago. Back
then, the two original businesses were generating
around $80 million of revenue. In 2010, sales were
more than $215 million and Johnson hopes to
double that figure over the next few years, despite
the fragile state of the global economy.
“Our markets are diverse and they are not in sync
with each other. The LED market has very different
growth drivers from the MEMS market, for
example. In Japan, they have declared that all
consumers will have to switch to LED lighting and in
Europe and the US they are talking about it so that
presents us with opportunities. I think we are
positioned well for the future. We are not recessionproof but we are recession-resilient. In Silicon
Valley, they all see their growth coming from Asia
but we think our growth will come from Asia,
Europe and the US,” says Johnson.
In previous downturns, companies making silicon
chip manufacturing equipment have tried to
encroach on SPTS territory, but Johnson suggests
this piecemeal approach is not terribly effective.
“Our customers are at the forefront of technology
so they need lots of hand-holding and lots of
flexibility. Each machine has to be slightly
customised to fit their specification and this can be
very difficult for large companies which are used to
making everything in the same mould. They just
can’t react as quickly as we can,” says Johnson.
“We also match up with our customers in terms of
size. We are large enough to have critical mass but
not so large that we can’t focus on them and their
needs. We really work in partnership with them. It’s
an overused term but in our case, it’s true,” says
Johnson.
Johnson is keen to grow SPTS organically and
through acquisitions, taking the business into
adjacent processes and broadening the range of
products the company can offer its customers.
One­stop shop
“When we merged STS and Aviza, it meant we
could offer more to our customers. Over time, I
would like SPTS to become the one-stop shop for
the markets we serve,” he explains.
That ambition is supported by Bridgepoint, which
backed an MBO of SPTS earlier this year.
“Bridgepoint gives us financial stability and they
have been very encouraging about our growth
Name: Bill Johnson
Age: 63
Nationality: American
Education
University of Minnesota and University
of Michigan
First job
Shovelling snow from the roof of a
discount department store
Car
A grey­blue Audi TT convertible with an
oolong­grey 2012 TT convertible on
order
Finest professional achievement Bringing SPTS together
Finest personal achievement
Seeing my children grown up, gainfully
employed and good citizens
Lifetime ambition
To leave my part of the world better than
when I entered it
ambitions. We spoke to several private equity firms
but they were the clear winner because of their
profile, their professionalism and the behaviour of
their people during the MBO process,” he says.
Johnson describes SPTS as “a truly global
business” with 500 employees operating in 19
countries and dual headquarters in Wales and
California. Based near San Jose, Johnson
“commutes” to the UK every month and travels to
the group’s other offices too.
“I spend a lot of time on aeroplanes but it gives
me the space to think and plan,” he says.
A father of four children and with six grandchildren, Johnson tries to spend as much time as he
can with his wife and family and counters life on the
road with a passion for wine.
“We live on a vineyard in Livermore. We grow
Cabernet Sauvignon, Malbec and Cabernet Franc
grapes and sell them to local boutique wineries,”
says Johnson.
The vineyard is managed by professionals but
Johnson also makes his own wine, about a barrel
a year.
“I make Chardonnay, Syrah, Cabernet Sauvignon
and sometimes Zinfandel. I just sit in the wine room,
watch the wine age and I can pull a glass from the
barrel when I feel like it. It’s very relaxing,”
he says n
29
30
Market insight
Over the past few years, European
manufacturers have taken
advantage of cheap Asian markets
to reduce their prices at home.
Now times are changing. 31
­
‘‘
urgical Innovations (SI) is
a small, unpretentious
manufacturer based in the
north of England. At the forefront
of technology for minimally
invasive – or keyhole – surgery,
the company is one of the fastestgrowing businesses in the
Yorkshire region.
Non-executive chairman Doug
Liversidge attributes the group’s
recent success to a decision, two
years ago, to bring manufacturing back to the UK from
disparate sites across the globe.
He also believes the time is right
for other manufacturers to do
their sums again.
“Bringing manufacturing back
home has paid off for us and I
recommend that other
companies should look at doing
the same. We have since trebled
our workforce here in Leeds and
our quality has significantly
improved,” he says.
SI previously used manufac-
S
32
The future of European
manufacturing is changing and
European manufacturers are
reasserting their confidence in
a global market”
turing plants in China, Eastern
Europe and North Africa, but a
full evaluation, including the cost
of executives travelling back and
forth and the time spent making
sure the quality of goods was
acceptable, prompted a change
of heart.
“When we looked at it
properly, there wasn’t the
advantage that first appeared,”
Liversidge says. “The time has
come to bring manufacturing
back home. Lots of other
companies in the Sheffield area
are looking hard at this,” he says.
Further south, garden
furniture maker Li-Lo Leisure is
hoping to hear shortly whether it
has been given planning permission to build a new UK factory,
which will create 100 jobs, on
land it owns in Loughton, Essex.
The company wants to bring its
manufacturing operation back to
the UK because costs have
rocketed in China, where most of
its products have been made for
the past decade.
This trend is not isolated to one
or two companies. And it is not a
purely British phenomenon. As
transport costs surge and Asian
workers demand higher wages,
more and more Western
companies are finding the
advantage they had sought
from outsourcing manufacturing
and production to the East has
been eroded.
Jürgen Maier, a managing
director at German industrial
conglomerate Siemens, explains:
“Ten years ago we were
enthusiastically transferring
manufacturing to Asia, now
less so.”
Soaring commodity prices
have a significant role to play too.
According to the International
Monetary Fund, these rose 30 per
cent year-on-year in the first five
months of 2011 alone. At the
same time, oil prices have been
rising steadily and the long-term
outlook for energy prices
suggests further increases are
likely. When raw material costs
increase, the incremental value of
outsourcing becomes commensurately lower.
Perhaps it is not surprising
therefore that a recent survey
from accountancy firm BDO Stoy
Hayward and manufacturing
trade body, EEF, revealed that
one in seven British companies
had repatriated manufacturing
operations to the UK in the past
two years. A new survey, to be
conducted over the next few
months, is expected to reinforce
this trend, reporting that British
companies are more circumspect
than ever about moving production offshore.
Maier says rising commodity
prices play a part but they are not
the only issue. “Other factors are
more critical: high labour
inflation rates, high labour
turnover, the time it takes to
transfer knowledge and achieve
the same quality levels and rising
logistics costs,” he explains.
Supply chains from emerging
markets have also turned out to
be riskier than companies
expected. Orders can take
months to fulfil and there is a
widespread disregard for intellectual property. There is evidence
too that some of Europe’s larger
retailers are looking closer to
home to source products that are
no longer cost-effective to
produce offshore. The short lead
times offered by production in
the domestic market are particularly attractive, given the
unsettled nature of consumer
confidence.
Sir Philip Green of UK highstreet retail chain Arcadia Group
said earlier this year, for
example, that he was considering
bringing some production back to
the UK. And Clarks, the
shoemaker that closed its last
British factory in 2005, is also
understood to be considering
moving some production back to
the UK.
Wrong message
Yet there are dissenting voices, or
at least those who question a
blanket return to the good old
days of the 1950s and 1960s.
Professor Richard Dashwood at
Warwick University’s Manufacturing Group says: “Most of the
work that has gone offshore has
been at the low-value, highvolume end of the market. Do we
want to send out the message
that the UK is now just as cheap
as Asian economies for manufacturing? We shouldn’t want to get
this work back, what we should
be aiming for is high-value, lowvolume manufacturing at the top
end of the value chain.”
And UK Trade & Investment,
which helps British companies
33
‘‘
expand into overseas markets,
suggests: “European manufacturing can’t compete on price, it
has to compete on quality. It is
high-volume, low-skill manufacturing that has migrated abroad
and there is little sign of that
returning.”
Some of the biggest European
retailers concur, saying that
despite rising commodity costs, it
remains considerably cheaper to
manufacture in Asia. Marks &
Spencer uses some specialist
British manufacturers – for
hosiery and furniture – but only
15-20 per cent of products it sells
come from Europe and North
Africa, mainly goods for fast
fashion lines. Most of its clothing
is still sourced from South Asia
(30 to 40 per cent) and the Far
East (40 to 45 per cent) and that
balance is likely to remain.
Clothing chain Next also
expects to continue manufacturing most of its goods in the Far
East. In a recent trading
statement, Next said that it
believed it was over the hump of
price increases and that it was
likely to be business as usual
34
As transport costs
surge and Asian
workers demand
higher wages, more
and more Western
companies are
finding the
advantage they had
sought from
outsourcing
manufacturing and
production to the
East has been
eroded”
going forward. The
company believes that
2012 will be a more
benign year for cost
price inflation, in part
due to a sharp reduction
in cotton prices and an
easing of manufacturing
capacity constraints in
the Far East.
Ben Gordon, chief
executive of British retailer
Mothercare, which is expanding
overseas, particularly in the
Middle East and Asia, says: “We
have developed a highly
successful international
sourcing operation based
predominantly in the Far East.
We have spent years establishing
a trusted supplier network that
not only gives us the commercial
benefits of quality, flexibility and
delivery, but also seeks to operate
at the highest ethical standards.”
European rebound
While clothing retailers may
continue to focus on Asian
manufacturing, other industries
believe Europe does have a role
to play. Siemens, for example, is
expecting to see at least a miniresurgence in manufacturing in
Europe. This will
be driven not
only by the
decreasing price
differential
between East and
West but also by
growing product
customisation,
growing
consumer
demand for ‘local’ products and
the growth of the green
economy, including the clean
tech sector. This desire for goods
produced close to home is
spreading rapidly across Europe,
affecting sectors as diverse as
food and car engines.
In the UK, manufacturing’s
contribution to the economy has
risen 3.6 per cent in real terms
since 2010. This increase is based
not on a surge of growth in lowpaid, low-skilled jobs but on an
expansion of high-tech,
knowledge-based production.
There are also occasions when
this knowledge enables European
manufacturers to cope better
with rising commodity prices
than their Asian competitors.
Andrew Johnson, senior
economist at the EEF, says
European producers have more
opportunities to add value to
their products, given their high
degree of human capital that can
be adapted and developed for
other applications. One coatings
manufacturer, for example,
recently offered its highly skilled
‘‘
staff incentives to reduce the
amount of the commodity
titanium oxide in its coatings,
thereby cutting the cost of
production.
Looking ahead, this advantage
may not last. Experts maintain
that, even if European manufacturers are enjoying a temporary
respite from the competitive
pressures of Asia, they should be
keeping a close eye on Chinese
manufacturers’ ability to move up
the value scale and produce
highly engineered goods.
“They have invested heavily in
an industrial base and a strong
university system. Entrepreneurs
in China work in industry, not in
services. They are investing in
skilled original equipment
manufacturers (OEMs) in Europe
– making cars at the likes of
Longbridge – and taking intellectual property back home. It won’t
be long before they can compete
with us to create the high-value
and high-tech products,”
Professor Dashwood says.
Siemens echoes these
concerns, pointing to the rapid
development of knowledge and
skills in China. In 2002, for
example, 26 per cent of global
GERD (gross domestic expenditure on R&D) was generated in
the EU and 5 per cent in China.
Just five years later, those figures
were 23 per cent and 9 per cent.
“We need to work very hard to
stay ahead,” Maier says.
Recent statistics paint a mixed
picture. The sector employed 33
million people in Europe in 2008,
but the financial crisis resulted in
a sharp and severe downturn in
industrial output in the European
Union and the numbers
employed shrank accordingly. In
some countries, the contraction
in activity was the largest seen
since the 1930s. Fortunately,
from a low point in April 2009,
there has been a steady increase
in industrial output in Europe, up
15 per cent by March of this year.
But, while the rise in commodity
costs and labour costs in Asia has
encouraged some manufacturers
to reconsider manufacturing in
Europe, many remain committed
to Asia. This is not simply
because costs are lower there
but because the region offers
huge potential for new
customers. As a
spokesman for
Peugeot, the
French car
manufacturer,
explains: “We
do not plan any
reduction of our
production capacities
in Europe but we also plan
to develop our production
capacities outside Europe in
developing markets such as
China, Latin America, Russia and
soon India.”
This sends a positive message
to European manufacturers.
While many may retain capability
in Asia, they will also think twice
before closing down completely
in their home markets. Time will
tell whether those who have been
bold enough to bring manufacturing back home can continue to
make the decision add up. But
the future of European manufacturing is changing and European
manufacturers are reasserting
One in seven British
companies repatriated
manufacturing operations to
the UK in the past two years”
their confidence in a
global market. For the most
ambitious, it is now a case of
manufacturing where the
customers are. It cannot be either
Asia or Europe. It has to be both n
35
­
Last
word
It’s all Globish to me
What do you get when you mix Chinese, Russian and French?
English of course, or rather Globish, as author and editor
Robert McCrum explains. The globalisation of
Anglo­American
language and
literature is the cultural revolution of our generation.
Today English is used, in some form, by about two billion
people, approximately one­third of the planet. As a
mother tongue, English is only outnumbered by
Chinese, spoken by nearly 1.8 billion people. But,
according to the British Council, some 350 million
Chinese people – more than the entire population of the
United States – also speak “some kind of English”. This lingua franca has been defined as ‘Globish’ for
one very good reason. Since the millennium, English
has moved into a new phase. Never before has there
been such a hunger for a common tongue with a global
reach. In China they call it “Crazy English”. Never mind
the label: for the first time in human history, it’s possible
for one language to be transmitted, and received,
across the whole planet. And it’s not just a linguistic
story.
For me, a milestone was reached in 2005. In
September that year, the Jutland Post, a Danish
magazine, published some cartoons poking fun at the
prophet Mohammed. Parts of the Muslim community
went wild, but the most bizarre response to this affair
was a protest by Muslim fundamentalists outside the
Danish embassy in London the following February.
Chanting in English, the protestors carried banners with
slogans such as “Freedom of Expression Go To Hell”
and “Down with Free Speech”. This collision of the
Koran with Monty Python was my ‘Eureka’ moment.
What more telling commentary on the power and
influence of global English could there be?
But it took a Frenchman, Jean­Paul Nerriere, to coin
the term Globish. An IBM executive, Nerriere had been
posted to Japan, where he noticed non­native English
speakers were communicating far better with Asian
clients than their British and American counterparts, for
whom English was the mother tongue. Standard
American or the Queen’s English was all very well for
Anglophone countries, but in the developing world,
36
there was a role for what Nerriere called “decaffeinated
English” or “Globish”.
Today, the word has become shorthand for the
emergence of English as a global communications
phenomenon, with a momentum that gives it
independence from its Anglo­American origins.
Nerriere advocates 1,500 “most commonly used
English words” and eliminating complexity, especially
figures of speech, such as “I burned with desire” or “I
missed the boat”. So, in Globish, “my nephew” becomes
“the son of my brother” while “a helicopter” becomes,
rather clunkily, “a kind of airplane that takes off and
lands without a runway”.
You can almost express the idea in a quasi­scientific
formula: English + Microsoft + the FTSE = Globish. But it
is not just about money and wires. Globish embodies a
longing for individual self­expression, helps liberate
markets and democratises politics.
Is this the end of Babel? Far from it. The world is still a
crazy patchwork of about 5,000 languages, reflecting
petty nationalisms. But when these proud, local
cultures find a need for global interaction, Globish is the
default position. And it does not have to be the
McDonald’s of English. Globish can be a lively and
original means of communication: contagious, populist,
adaptable and sometimes subversive.
Globish may ultimately go the way of Latin, Persian
and Sanskrit, former languages of power and influence.
Some say translation technology will make Globish
redundant. Who knows? The history of the English
language is littered with the burnt­out wrecks of shiny
new predictions. One thing is certain: at the beginning of
a new decade, Globish has a supranational momentum
in which it is becoming an educational and a
commercial tool and the expression of a changing
global economy. So when, as The New York Times
reported recently, an Indian and a Cuban working for a
mid­western start­up wanted to commission research
from a lab in Uruguay, with additional input from Israeli
technicians, the language they used was undoubtedly
Globish n
CONTENTS
2
INS & OUTS
Investments and exits
across Europe 6
MANAGEMENT FOCUS
Sleep: over
Eight hours a night used to be the norm; now it is
a luxury. But what is the impact on productivity?
10
TALKING POINT The expanding middle
The emerging markets’ middle classes are
growing rapidly: farsighted companies can reap
the beneifts
17
22
IN MY OPINION
IN THE SPOTLIGHT
The truth is out there?
Serve to survive
In an age when the internet allows
everyone to be an instant expert,
Simon Kuper asks how we can tell
fact from fiction
Reducing service levels is tempting in hard times.
The consequences may be less appealing, however
26
FACE TO FACE
Bill Johnson
The chief executive of SPTS, a Bridgepoint-backed
company at the forefront of electronic engineering
31
MARKET INSIGHT
Homeward bound
Developing countries have become the bastion
of manufacturing. But times are changing...
36
LAST WORD
It’s all Globish to me
Robert McCrum demystifies the world’s
most widely spoken lingo
THE POINT Issue 20 | November 2011
THE POINT
Intelligent investing in Europe
from Bridgepoint
Issue 20 | November 2011
The expanding middle
Emerging markets are spawning a new brand
of consumer
www.bridgepoint.eu
Sleep: over
Open your eyes to
chronic fatigue issues
Are you being served?
The customer is
always right Truth be told
Sorting fact from fiction
on the web
bridgepoint.eu