tag:theconversation.com,2011:/ca-fr/topics/company-results-30896/articlescompany results – La Conversation2022-10-04T15:03:12Ztag:theconversation.com,2011:article/1888522022-10-04T15:03:12Z2022-10-04T15:03:12ZHow the tech giants are innovating to weather the looming downturn<figure><img src="https://images.theconversation.com/files/479423/original/file-20220816-10908-u60oql.jpg?ixlib=rb-1.1.0&rect=35%2C17%2C5955%2C3952&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In uncertain economic times, businesses are trying to become more resilient.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/businessman-umbrella-facing-strong-headwind-1823843783">photoschmidt / Shutterstock</a></span></figcaption></figure><p>Rising inflation and looming recessions are squeezing household finances, but businesses also worry about an economic downturn. This is not just because of higher bills, but also because consumers spend less and finance from banks and investors dries up when the economy worsens.</p>
<p>Even strong industries such as technology feel these effects. With the Standard & Poor’s 500 stock market index down 17% in the year to date, and the Nasdaq 100 tech sector index down 33%, market uncertainties can affect a company’s ability or willingness to spend on the type of innovation that can help build strength in advance of the next downturn. </p>
<p>But <a href="https://www.researchgate.net/publication/238048698_The_Impact_of_the_Economic_Crisis_on_Innovation_Evidence_from_Europe">research</a> into business recoveries following previous financial crises shows that some companies do increase investment in innovation to survive. This makes them more resilient in the face of future downturns. </p>
<p>JP Morgan Chase, the largest bank in America by assets, for example, did relatively well during the last financial crisis. This was partially due to its <a href="https://www.bloomberg.com/opinion/articles/2020-07-14/jpmorgan-chase-earnings-dimon-secures-fortress-with-billions">diversification efforts</a>. It emerged from the 2008 crisis with a “fortress balance sheet” and an improved position versus other banks, which has helped it navigate the more recent global pandemic.</p>
<p>Businesses in sectors such as tech and finance are now attempting to weather the current slump by protecting their businesses with similar strategies. This route has also been proven effective by <a href="https://www.tandfonline.com/doi/full/10.1080/13662716.2018.1431523">other studies</a>, which demonstrate that innovative companies achieved higher sales growth rates than non-innovative companies during past recessions. And that is a <a href="https://www.emerald.com/insight/content/doi/10.1108/IJCHM-08-2013-0373/full/html">key determinant</a> for success especially in the long run.</p>
<p>Still, justifying spending on future growth is difficult when times are tough. Recent months have brought <a href="https://www.cnbc.com/2022/08/13/tech-companies-shed-workers-even-as-the-talent-shortage-rages-on.html">job losses</a>, recruitment <a href="https://uk.finance.yahoo.com/news/tesla-apple-microsoft-peloton-all-of-tech-companies-hitting-the-brakes-on-hiring-202428628.html">freezes</a> and delayed plans for tech startups to <a href="https://www.cnbc.com/2022/06/09/fintechs-delay-ipo-plans-focus-on-profitability-amid-recession-fears.html">list themselves</a> on stock exchanges. </p>
<p>Even the giants of the tech space have experienced financial difficulties. Amazon’s pandemic <a href="https://www.theguardian.com/technology/2022/jul/28/amazon-second-quarterly-loss-earnings">slump continued</a> during the second quarter, Apple’s revenue rose slightly but <a href="https://www.dailymail.co.uk/news/article-11059663/Amazon-posts-2-billion-loss-second-straight-quarter-Apple-profits-fall-8.html">profits fell</a> and Facebook-owner Meta reported its first-ever quarterly <a href="https://techcrunch.com/2022/07/27/meta-posts-its-first-ever-quarterly-revenue-decline/">revenue decline</a>.</p>
<p>And yet, some companies are maintaining stronger growth prospects than others. Microsoft expects its revenue and operating income to increase at a <a href="https://www.channelnewsasia.com/business/microsoft-soothes-market-fears-forecast-double-digit-revenue-growth-2837561">double-digit pace over the next 12 months</a>. </p>
<p>Its efforts to prepare for this recession started well before 2022. The company’s focus on <a href="https://www.nytimes.com/2022/07/26/technology/microsoft-earnings.html">newer areas</a> such as cloud computing in recent years is now helping it to manage the impact of factory shutdowns in China and falling demand for PCs that have inevitably hit sales of the Windows operating system software. </p>
<p>Instead, Microsoft is now signing larger deals for its Azure cloud-computing software, moving clients to pricier versions of Office cloud programmes and has switched to a <a href="https://news.microsoft.com/2011/06/28/microsoft-launches-office-365-globally/">subscription-based model</a> for its software products and services versus its previous one-time buy offering. </p>
<p>What Microsoft has recognised is that cloud computing, along with other deep technological trends such as <a href="https://ethereum.org/en/web3/">Web3</a> – the next generation of the internet – , artificial intelligence and machine learning are here to stay. Being the first to build new capabilities in these areas provides an important long-term advantage in many industries. </p>
<p>Also, the success of tech companies with a single offering has reversed in 2022. From the beginning of 2020 to the end of 2021, many single-idea businesses saw a boost from people being stuck at home for work and play – think <a href="https://fortune.com/2022/02/03/pandemic-peloton-netflix-investors-outlook/">remote cycling app Peloton, Zoom, Netflix</a> and trading platform Robinhood.</p>
<p>In the current economic environment, however, investors expect businesses to generate a healthy cash flow and are <a href="https://fortune.com/2022/08/10/vc-funding-drying-venture-capital-startups-founders-surviving-market-downturn-peter-pezaris/">no longer willing</a> to lavish highly valued companies – known as unicorns in the tech world – with unending capital. This means companies may need to find other ways to pay for expansion and diversification during difficult times. </p>
<h2>Future ready businesses</h2>
<p>The companies that are <a href="https://hbr.org/2022/03/what-makes-a-company-future-ready">ready for the future</a> are the ones that can deliver immediately while also building their next new, innovative product or service. Recent <a href="https://link.springer.com/article/10.1007/s40685-019-0085-7">research</a> has shown businesses that are more resilient anticipate, cope with and then adapt to new circumstances.</p>
<p>At the International Institute for Management Development (IMD) in Switzerland, I am part of a group of researchers who have developed an index to rank companies on this ability to adapt and become “future ready”. </p>
<p>We use <a href="https://www.imd.org/future-readiness-indicator/home/our-research-methodology/">a score</a> based on data from 24 variables grouped across seven factors: financial fundamentals, investors’ expectations of future growth, business diversity, employee diversity and environmental, social and governance awareness , research and development, early results of innovation efforts, and cash and debt positions. This research shows that future ready companies, whether in finance, technology or some other sectors, exhibit very similar traits.</p>
<p>Financial technology companies (fintech) – start-ups that aim to disrupt industries like financial services – were a darling during the pandemic. PayPal and Block (formerly Square) topped our ranking in the financial service industry in 2021. But this year, they have been <a href="https://www.imd.org/future-readiness-indicator/home/financial-services-2022/">replaced at the top</a> by several more traditional industry titans, including financial firms JPMorgan Chase and DBS Bank of Singapore. </p>
<p>As fintech companies have increasingly attempted to bypass traditional financial services providers with digital services, these companies have started to expand their businesses digitally. DBS has developed a marketplaces for selling cars, renting property and getting deals on electricity, mobile, and broadband services. The bank’s latest quarterly earnings <a href="https://www.channelnewsasia.com/business/singapore-banks-top-estimates-flag-caution-weak-markets-2654651">remained robust despite weak markets</a> and were its second-highest on record.</p>
<p>Still, growth did not happen across all business segments for DBS in 2022. It’s income from areas such as wealth management and investment banking <a href="https://sg.finance.yahoo.com/news/dbs-reports-second-highest-net-062053961.html">decreased</a> because these markets are slowing down. However, income from consumer lending, insurance and card fees grew. This shows how a diverse business can remain resilient in today’s business environment.</p>
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<img alt="Smartphone with Amazon Care logo, surrounded by pills." src="https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/479823/original/file-20220818-434-4n33ms.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Amazon has expanded into the healthcare industry in recent years.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/amazon-care-logo-seen-on-smartphone-1945159594">mundissima / Shutterstock</a></span>
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<p>Amazon is also diversifying into yet another new business, despite <a href="https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022">current economic uncertainty</a>. It recently <a href="https://press.aboutamazon.com/news-releases/news-release-details/amazon-and-one-medical-sign-agreement-amazon-acquire-one-medical">announced</a> it has agreed to buy primary healthcare firm One Medical for US$3.9 billion (£3.2 billion). One Medical is a membership-based primary care provider that operates in 16 US markets.</p>
<p>This is not the first time Amazon has dabbled in healthcare. It teamed up with JPMorgan and Berkshire Hathaway four years ago to create Haven, which <a href="https://hbr.org/2021/01/why-haven-healthcare-failed">aimed to provide</a> better healthcare and lower costs for their combined 1.2 million workers. That didn’t work out and was folded in 2021. </p>
<p>Amazon’s other activities in this area include PillPack, an online pharmacy purchased in 2018 for $753 million, and the creation of an in-house telemedicine service for its employees, called <a href="https://www.aboutamazon.com/news/retail/amazon-care-now-available-nationwide-as-demand-continues-to-grow">Amazon Care</a>. Its latest foray with One Medical is a great example of the long and winding road of trial and error that a company often takes before hitting the jackpot of both making itself more resilient, while also disrupting a US$4 trillion market.</p>
<p>The former CEO of Intel, Andy Grove, <a href="https://www.yumpu.com/en/document/read/36242620/2001-annual-report-intel">wrote in reference</a> to the first dot-com bubble: “We know that a downturn is no time to shy away from strategic spending … There is always too much of yesterday’s technology and never enough of tomorrow’s … Consequently, during this downturn, we did what may seem counterintuitive: we accelerated our capital investments.”</p>
<p>This is how companies invest their way out of downturns. And it’s why these companies often manage to emerge from a crisis stronger than ever.</p><img src="https://counter.theconversation.com/content/188852/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Howard Yu does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>In the current economic climate, some businesses are building resilience by expanding into new marketsHoward Yu, Professor of Management and Innovation, International Institute for Management Development (IMD)Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/832112017-08-31T20:28:36Z2017-08-31T20:28:36ZFace Value: business leaders are betting we will spend more<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em></p>
<p><em>The Conversation’s <a href="https://theconversation.com/face-value-sentiment-analysis-shows-business-leaders-are-positive-about-the-year-ahead-73904">Face Value</a> uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
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<p>A contradiction is emerging between how consumers should be feeling and what the heads of companies expect them to do. What we know about <a href="https://theconversation.com/vital-signs-it-will-take-more-than-asking-for-a-pay-rise-to-fix-australias-wages-problem-79748">low wages growth</a> and <a href="https://theconversation.com/vital-signs-that-feeling-you-get-when-the-economy-cant-be-explained-by-economic-models-82255">underemployment</a> seems to suggest households would be tightening the purse strings but the sentiment of business leaders is very positive in sectors relying on consumer spending.</p>
<p>Wages are struggling to <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.23.html">keep pace</a> with the prices of the things we buy and average hours worked (per worker) have also been <a href="http://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.17.html">trending down</a> or flat at best. This is not a picture of robust consumer finances. </p>
<p>On top of this retailers are facing the threat of competition <a href="https://theconversation.com/amazon-poses-a-double-threat-to-australian-retailers-78534">from US giant Amazon</a>. Yet according to our analysis of the outlook of leaders of Australia’s ASX 200 companies, positivity has increased.</p>
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<p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis. <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">The “polarity” score</a>, which measures whether the sentiment is positive or negative, has increased from 0.11 to 0.15 (a statistically significant improvement). </p>
<p>We also looked at how subjective these statements were and found there’s been no significant increase in how opinionated these statements are. </p>
<p>Our findings also mirror other business confidence surveys and even the Reserve Bank of Australia’s own outlook, which also paints a buoyant picture. The RBA <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">expects</a> growth in the economy to strengthen gradually to be around 3% in the first half of 2018. The RBA expects wage growth to gradually pick up over the next year or two and for average hours worked to increase somewhat.</p>
<p>Similarly, the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> Actual Composite index strengthened in June 2017, rising 1.8 points to 65.0. This factored in a strengthening in the labour market, as manufacturing firms plan to hire more workers and manufacturing wages rise. And the <a href="http://business.nab.com.au/nab-monthly-business-survey-july-2017-25783/">NAB business confidence survey</a> also reveals that business conditions and confidence are improving. </p>
<p>The positive outlook for economic growth according to the <a href="http://www.rba.gov.au/publications/smp/2017/aug/pdf/06-economic-outlook.pdf">RBA</a> is driven by resource exports notably iron ore and liquid natural gas (LNG) production, household consumption including retail sales, and non-mining business investment. The RBA also expects wage growth to soon pick up.</p>
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<a href="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1561&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1561&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1561&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1962&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1962&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184134/original/file-20170831-24251-13klqgy.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1962&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>These drivers are reflected in our sentiment analysis. Business leaders in ASX categories relying on household spending, have stronger than average positive outlook on the future, with an average score of 0.18.</p>
<p>This was led by businesses like JB HiFi (0.41), TabCorp (0.23) and Flight Centre (0.18); and also consumer staples led by Ardent Leisure (0.50), Treasury Wine Estates (0.38) and Coca-Cola Amatil (0.18).</p>
<p>The outlook for manufacturing is also positive due to a range of factors such as infrastructure spending by governments, stronger world growth, and improved international competitiveness due to a lower currency, commercial construction and home building, according to the <a href="https://10-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2017q2_0.pdf">Westpac-AusChamber</a> index. This is supported by our analysis which found stronger than average sentiment from business leaders in the materials sector (0.17), through companies such as Amcor (0.26).</p>
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<a href="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=788&fit=crop&dpr=1 600w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=788&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=788&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=990&fit=crop&dpr=1 754w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=990&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/184162/original/file-20170831-22561-11iygfp.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=990&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>But the outlook isn’t all positive among our business leaders. Sentiment was weaker than average in utilities (0.07) led by AGL (-0.03). This is hardly surprising given the high uncertainty around energy policy – AGL for example owns coal-fired power plants. Also sentiment was somewhat weaker (0.13) than average among industrial company leaders, the sentiment in Qantas’ outlook was negative (-0.03) and property/real estate company Lend Lease (0.09) was also weak.</p>
<p>Perhaps the gloomy slow wage growth and underemployment will catch up to the more positive sentiment on consumer goods and services in company reports. Or this contradiction might simply reflect the high uncertainty in the global environment. </p>
<p>Consumers certainly seem a little confused: the weekly ANZ-Roy Morgan Consumer confidence Index <a href="http://www.theaustralian.com.au/news/latest-news/consumer-confidence-bounces-but-still-weak/news-story/2fd06c35ac402ece43723cd00ce48538">ticked up</a> slightly last week but has <a href="http://www.roymorgan.com/morganpoll/consumer-confidence/consumer-confidence">jumped around</a> in recent months. Certainly the positive sentiment from business leaders about consumer spending we see in company reports seems optimistic.</p><img src="https://counter.theconversation.com/content/83211/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has previously received funding from the Australian Research Council. </span></em></p><p class="fine-print"><em><span>Ben Hachey is an employee of Red Marker. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p>The sentiment of business leaders has remained positive and improved over the past 12 months according to our analysis.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/725852017-03-14T04:44:01Z2017-03-14T04:44:01ZExplainer: how the Australian dollar affects the results of companies<figure><img src="https://images.theconversation.com/files/160127/original/image-20170309-21015-n90o7z.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Some companies are really affected by foreign exchange markets.</span> </figcaption></figure><p>Like any other major currency, the Australian dollar (AUD) plays a crucial role in the economic and financial system. Exports and imports, domestic and international investors are all affected by, and react to, exchange rate fluctuations. One way to see this in action is by looking at the <a href="https://theconversation.com/au/topics/company-results-30896">latest round</a> of company results.</p>
<p>The past year can be characterised as a relatively stable year for the AUD. One Australian dollar can currently buy <a href="https://www.businessinsider.com.au/the-australian-dollar-has-tumbled-to-a-6-week-low-2017-3">around 0.75 US dollars</a> and it has traded within the 0.70 - 0.80 range throughout the year. </p>
<p>However, the AUD is special among the major currencies as it belongs to a rather small group of “<a href="http://www.investopedia.com/university/forex-currencies/currencies8.asp">commodity currencies</a>”. These currencies generally move along with the prices of commodities and the shares of commodity-based companies. Because of this, the movements of the Australian dollar affects companies differently than classical theory might suggest.</p>
<h2>The AUD and commodity prices</h2>
<p>You can see the differing impact of the AUD through the financial reports of four companies; Evolution Mining, an Australian-based gold miner, Qantas, which burns jet fuel and imports planes to provide air transport, JB Hi-Fi, which sells consumer goods (much of which is imported), and Carsales.com, an online platform for buying and selling cars. </p>
<p>Rising gold prices are good for Evolution Mining while rising oil prices are bad for Qantas. Since commodity prices move with the Australian dollar, both companies are affected by currency changes through their exposure to commodity price changes. In other words, an appreciating Australian dollar is good for Evolution Mining and bad for Qantas. </p>
<p>The commodity - currency link is less important for the other companies which are less exposed to commodity prices and thus display a more “classical” reaction to exchange rate changes. Normally, when the AUD depreciates relative to other currencies, it becomes more expensive to buy goods or services from overseas and our goods become cheaper for foreigners to buy. It works the other way round as well - when the AUD goes up it becomes cheaper to import and our exports become more expensive.</p>
<p>JB Hi-Fi may be positively affected by an appreciating Australian dollar as imported consumer goods become cheaper with a stronger AUD. The same factors come into play for Carsales.com – a lot of cars and parts are imported. However, Carsales.com’s recent expansion into <a href="http://www.afr.com/business/media-and-marketing/advertising/carsales-buys-argentinas-demotores-for-67-million-20170130-gu1vlk">Latin America</a> and <a href="http://www.afr.com/business/banking-and-finance/investment-banking/carsalescom-buys-126m-stake-in-sk-encar-20140306-ixn12">Asia</a> makes this a little more complicated.</p>
<h2>How the effects of dollar fluctuations show up in results</h2>
<p>Evolution Mining’s <a href="http://23crl33wq4oxpmtj2wj16cs9.wpengine.netdna-cdn.com/wp-content/uploads/2017/02/1644874.pdf">financial results</a> show a significant fraction of their gold production is <a href="http://www.investopedia.com/articles/basics/03/080103.asp">hedged</a> through until December 2019. This means the company bought “insurance” against adverse gold price fluctuations. The insurance explains the rather weak exposure to the Australian dollar and the gold price.</p>
<p>Qantas’ <a href="http://investor.qantas.com/FormBuilder/_Resource/_module/doLLG5ufYkCyEPjF1tpgyw/file/half-year-results/2017-1H17-Media-Release.pdf">financial report</a> notes that the “short-term outlook remains subject to variable factors, including oil price movements, foreign exchange movements and global market conditions.” Qantas is trying to limit these issues by hedging against a worst case scenario where fuel costs blow out. The report also mentions fuel-efficient planes which will lower the future exposure to oil price changes.</p>
<p>JB Hi-Fi <a href="https://www.jbhifi.com.au/Documents/Appendix%204D%20and%20Financial%20Report%20-%202017%20Half%20Year.pdf">reported</a> small changes to its foreign currency translation reserve of A$5 million and notes that it uses foreign exchange forward contracts – a way to lock in a certain future exchange rate and thus eliminate exchange rate risk. </p>
<p>Carsales.com <a href="http://shareholder.carsales.com.au/Investor-Centre/?page=ASX-Announcements">reported</a> a $A1.3m loss this year for “translation of foreign operations”. The ongoing expansion into Latin American and Asian countries most likely increased the foreign exchange exposure depending on the correlation of the currencies within these regions and between the regions. If the currencies are highly correlated, the foreign exchange exposure to the markets may be significant. </p>
<p>The latest financial reports illustrate the importance of the Australian dollar as a commodity currency. Evolution Mining and Qantas are exposed to commodity prices and thus to the Australian dollar, while JB Hi-Fi and Carsales.com are less obviously exposed to changes in the Australian dollar. </p>
<p>What is remarkable is that Evolution Mining and Qantas explicitly mention risk factors that may affect future profits while JB Hi-Fi and Carsales.com are rather silent regarding risk factors.</p>
<p>If companies are affected by exchange rate changes, consumers are affected as well. If a firm gains from a rising Australian dollar, consumers may gain from cheaper products and services. One way for consumers to understand the impact of the dollar on the Australian economy is to look at its effect on company results.</p><img src="https://counter.theconversation.com/content/72585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Dirk Baur does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Australian dollar is special among the major currencies as it generally moves along with the prices of commodities. Because of this the dollar affects companies in different ways.Dirk Baur, Professor of Finance, The University of Western AustraliaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/739042017-03-08T19:27:10Z2017-03-08T19:27:10ZFace Value: sentiment analysis shows business leaders are positive about the year ahead<p><em>When Australian companies report results they typically include an outlook statement from the business’ leaders, giving investors some guidance about their expectations for the future. They issue these forward-looking statements with some caution as investors might rely on them, and the law requires that they be based on “reasonable grounds”.</em> </p>
<p><em>The Conversation’s Face Value uses sentiment analysis to try and determine how Australian business leaders are feeling about the future.</em></p>
<hr>
<p>Heads of Australian companies are reasonably positive in their outlook for the rest of the year, according to our analysis of outlook statements of ASX top 100 companies, reporting results in the past month.</p>
<p>We used <a href="https://www.cs.uic.edu/%7Eliub/FBS/NLP-handbook-sentiment-analysis.pdf">sentiment analysis</a> to identify whether these statements were subjective and, if so, whether the opinions expressed are positive or negative. For the analysis here, we used a manually-crafted dictionary of sentiment keywords. Each keyword had a score for subjectivity and positive or negative sentiment. </p>
<p>So in terms of subjectivity score, numbers near zero indicate factual text and larger numbers indicate opinionated text. Sentiment ranges from -1 to 1 with smaller numbers indicating negative sentiment and larger numbers indicating positive. </p>
<p>We compared the outlook statements from February 2017 to those of the same month in 2016 and the sentiment was stronger in retailing than any other sector (chart below) and had doubled in strength since 2016 when it was not the strongest sector. </p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard3?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Strong retailing sentiment reflects households spending more due to low interest rates and some additional wealth generated from rising house prices. The job market has been steady, with unemployment <a href="http://www.abc.net.au/news/2017-02-16/unemployment-jobs-abs-data-january/8276040">falling slightly</a> in January to 5.7%, although this was due to a rise in part-time rather than full-time jobs. </p>
<p>It seems that sluggish wage growth has apparently not hurt retailing sentiment – the wage price index, a measurement of wages, has struggled to keep pace with inflation, <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyTopic/955FBDF6A933C1FDCA2568A900136286?OpenDocument">growing at 1.9%</a> during calendar 2016 and likely to remain soft in 2017. Yet consumers have maintained their retail spending by <a href="https://www.rba.gov.au/speeches/2017/sp-gov-2017-02-22.html">cutting back their saving</a>.</p>
<p>Leaders of companies in the pharmaceuticals, biotech, telecommunication and software sectors were positive again in 2017 with their outlook statements. This could be driven by <a href="http://www.pwc.com/gx/en/pharma-life-sciences/pharma2020/assets/pwc-pharma-success-strategies.pdf">long-term factors</a> such as Australia’s ageing population and associated demand for medicines. </p>
<p>Those in the real estate sector were also positive this year and sentiment improved from 2016, this is likely to be driven partly by buoyant residential and commercial property markets. This is characterised by declining vacancy rates, rising demand for properties and supply constraints.</p>
<p>Sentiment was weakest in the utilities and energy sectors in 2017, this could be because of the market prospects for electricity, gas and oil. Difficulties in the electricity sector in terms of price and reliability of supply have become almost daily news, and policy uncertainty would contribute to the negative sentiment on what the year might bring.</p>
<p>Sentiment in the energy sector deteriorated from 2016 to 2017 reflecting the <a href="https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-er-2017-oil-and-gas-industry-outlook.pdf">ongoing downturn in the oil and gas sector</a>. Weak oil and gas prices are driven by long-term factors such as the boost in supply from the shale oil production and the growth in renewable energy supported by governments around the world. These factors are not going away any time soon.</p>
<p>In the outlook of banking and financial companies the sentiment has declined in 2017 relative to 2016, as the industry continues to be <a href="http://www.pwc.com.au/publications/assets/major-banks-analysis-11-nov-2016.pdf">pressured</a> by slowing credit growth, falling net interest margins and rising bad debts, as well as regulatory uncertainty.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard1?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>It’s important to note the subjectivity of these outlook statements, whether they might represent opinions rather than objectively verifiable evidence. This could be an issue, for example, in the retail sector. </p>
<p>Some retail companies such as Harvey Norman and JB Hi-Fi scored the highest for subjectivity, indicating a lot of opinion in the outlook statements, despite the positive sentiment. Also a few oil and gas companies, with quite negative sentiment, also scored highly for subjectivity. One of the highest subjectivity scores was for Caltex.</p>
<iframe width="100%" height="950" scrolling="no" frameborder="yes" src="https://public.tableau.com/views/SentimentAnalysis2017/Dashboard6?:embed=y&:display_count=no&:showVizHome=no"></iframe>
<p>Overall however, the positive sentiment in the recent company reporting season is consistent with a range of favourable macroeconomic drivers. The Australian economy is <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">expected</a> to grow by around 3% over the next two years. </p>
<p>Mining investment is expected to stop declining, at least if not rise, in the near future. The rise in commodity prices over the past six to 12 months is expected to hold up. </p>
<p>The election of US President Donald Trump and the British exit from the European Union (Brexit) inspired a <a href="http://www.marketindex.com.au/all-ordinaries">bounce in stock markets</a>, this reflects an optimism about the forecast economic impact of these events. In the case of Trump, an infrastructure and tax cut inspired boost to investment spending; and in the case of Brexit, more due to popular optimism about reclaimed sovereignty than rational evidence <a href="https://woodfordfunds.com/economic-impact-brexit-report/">about real economic effects</a>.</p>
<p>Other drivers <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">include</a> the low Australian dollar, at least lower by 28% from the highest level in 2013. This helps make export and import competing sectors more competitive, which is reflected in a boost in exports and a rise in building and renovation activity. This is also driven by the prospect of ever-increasing real estate prices in our two largest capital cities.</p>
<p>The positive sentiment outlook here also resonates with a range of other positive business confidence analyses over recent months. The <a href="https://au.investing.com/economic-calendar/nab-business-confidence-217">NAB business confidence survey</a> in February reports positive and strongly improving business conditions. The <a href="http://www.roymorgan.com/findings/7138-roy-morgan-australian-business-confidence-january-2017-201702081623">Roy Morgan monthly business confidence</a> index rose 2.4% in January. </p>
<p>The most recent <a href="https://www.aigroup.com.au/policy-and-research/economics/economicindicators/">Ai Group Indices for Services and Construction</a> were both strong and indicate expansion of these sectors. And the <a href="https://19-acci.cdn.aspedia.net/sites/default/files/uploaded-content/field_f_content_file/auschamberwestpac2016q4.pdf">Australian Chamber-Westpac survey of industrial trends</a> strengthened at end 2016 by almost 5% from the previous quarter.</p>
<p>The above analysis is perhaps a glass half-full viewpoint. Yet we can also point to the ultimate forward looking indicator of the Australian economy – the Australian stock market – as further evidence of good times ahead. The All Ordinaries index of Australian shares was 5811 points on 8 March, an increase of 12% at the same date in 2016. That points to a positive outlook for Australian companies and therefore ultimately for all Australians through their wages, dividends earned by their superannuation funds, and taxes collected by the Australian government on behalf of all households.</p><img src="https://counter.theconversation.com/content/73904/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ben Hachey is an employee of and has been granted stock options in Hugo.ai. Ben has received funding from the Australian Research Council, the Capital Markets CRC and Google. He is Secretary of the Australasian Language Technology Association.</span></em></p><p class="fine-print"><em><span>Ross Guest does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Face Value analyses the sentiment of business leaders in ASX top 100 companies and for 2017 it seems positive, although sometimes highly opinionated.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityBen Hachey, Honorary Associate, School of Information Technologies, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/728442017-03-06T19:24:42Z2017-03-06T19:24:42ZCompany results: how competition is transforming Australia’s retail sector<figure><img src="https://images.theconversation.com/files/158405/original/image-20170225-22981-ucf0nc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Aldi's decidedly Germanic expansion strategy continues to eat into Woolworths’ earnings.</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>Several pressures are emerging in the Australian economy that are making business competition more unpredictable and challenging. Three examples in the retail sector, as evidenced by recent half-year financial results, are the emergence of new competitors, Australia’s changing tastes, and disruptive technologies.</p>
<h2>More investment extending overcapacity?</h2>
<p>Incumbent firms, when confronted by agile new entrants, face some tough choices. In some respects the best way to counter new entrants with better business models is to change and expand the way you operate. For myriad reasons, this is usually impossible.</p>
<p>What firms generally do is try to replicate the new entrants’ approaches within their own business. Qantas pulled this off fairly well with Jetstar: it built a low-cost airline to counter Virgin’s emergence in Australia. But large grocery retailers Coles and Woolworths, facing a similar threat in their sector, are struggling to counter the threat posed by new entrants.</p>
<p>One of these new entrants is Aldi. Its decidedly Germanic expansion strategy continues to eat into Woolworths’ earnings. <a href="http://www.woolworthsgroup.com.au/icms_docs/186045_half-year-results-announcement.pdf">In Woolworths’</a> near-A$19 billion food business, sales were up by more than A$500 million while earnings declined by around A$130 million in the half-year to December 31, 2016.</p>
<p>One interesting statistic in Woolworths’ results was the decline in sales per square metre for the Australian food division from A$16,251 to A$15,927. This is a decline of just over 2%.</p>
<p>In the context of higher real sales numbers, this shows Woolworths is growing its retail space quickly. There’s evidence of this by the growing number of smaller inner-city stores, and new stores in the capital cities’ urban fringes.</p>
<p>This can be contrasted with Aldi’s smaller stores and relatedly simpler and more agile logistics arrangements. This particular measure shows how Woolworths’ legacy store structures and leases continue to hold back any fundamental turnaround in profitability – and why perhaps Woolworths’ landlords should be worried.</p>
<p>The conundrum for the likes of Woolworths, Metcash (supplier to IGAs) and Coles is that they are driven to lease new, generally smaller-format, stores to retain customer patronage, but moving out of their older sites is rarely feasible. As such, by trying to refresh their retail locations they are also adding more and more floorspace to a business where floorspace is driving less in sales.</p>
<p>The problem is that Woolworths is adding more retail capacity to a sector that is approaching saturation, with a rapidly growing competitor in Aldi. As such costs are increasing and margins are declining. </p>
<p>This is a classic economic imbroglio: firms see such innovative expansions as a means to solve their problems, but in many ways it makes those problems worse.</p>
<h2>Changing tastes upend value chain arrangements</h2>
<p>There is more to the story of a tougher retail environment than Aldi. Changes in what Australians are buying at the checkout is impacting supply chain arrangements significantly, and tilting profits to producers of higher quality and more healthy foods – and away from retailers. </p>
<p>As our national average girth expands, there is evidence that Australians are starting to change their ways in relation to heavily sugared grocery mainstays like soft drinks, sweet biscuits and the like.</p>
<p>This is evidenced by <a href="http://www.asx.com.au/asxpdf/20170222/pdf/43g5vs32tdr8sy.pdf">Coca-Cola Amatil’s tough result</a>. Its sales volumes were down by 2.1%, while revenues were down by 3.4%. This shows Australians are drinking less and paying less for their products. The squeeze was more acute for “sparkling beverages”: its volumes were down 4.7%.</p>
<p>While better-quality and healthier food is great news for Australia’s health, it is not so great for our grocery retailers. The decline of high volume consumer staples like chips and soft drinks is bad news for retailers, which use such products to draw in customers. This means retailers have to be more cost competitive and margin-sensitive across the complete business, not just in the drawcard products.</p>
<p>The flipside of this can be seen in the listed fruit-and-vegetable producer Costa Group, Australia’s largest grower and packer of fresh fruit and vegetables. <a href="http://investors.costagroup.com.au/Investor-Centre/?page=asx-announcements">Its results</a> showed sales up by 9% and earnings up by 26.6% year on year.</p>
<p>Since its listing in 2015, Costa’s share price has increased from A$2.25 to more than A$3.50. Its stronger margins since listing is a sure sign that, as a supplier to grocers, it is getting a stronger share of the food value chain – at the supermarkets’ expense.</p>
<h2>Innovation is disrupting business models</h2>
<p>Technological innovation <a href="https://en.wikipedia.org/wiki/Joseph_Schumpeter">drives waves</a> of creative destruction in economies allowing firms to continually revolutionise and competitively recreate themselves. Economist Joseph Schumpeter noted that economies progress through such innovation, albeit at the expense of firms left behind by the new innovators.</p>
<p>This is nowhere better illustrated than among Australia’s pizza retailers, where <a href="http://www.asx.com.au/asxpdf/20170215/pdf/43g0bb360j4z9z.pdf">Domino’s</a> ascendancy is close to complete. In its recent <a href="http://www.asx.com.au/asxpdf/20170215/pdf/43g0bb360j4z9z.pdf">results</a>, profits were up by more than 30% year-on-year. </p>
<p>As a retailer, Domino’s has taken command of its market segment through innovation, IT development and marketing in an unprecedented manner.</p>
<p>Illustrative of this is <a href="http://www.smh.com.au/business/retail/dominos-pizza-enterprise-is-set-on-a-3minute-pizza-and-2000-new-stores-20160404-gnye7k.html">its 3/10 project</a>, which aims to have pizzas for pickup available in three minutes or home-delivered in ten. Innovations such as this have left Domino’s competitors in its wake.</p>
<p>Even this market hero, however, has clay feet. Domino’s share price has declined sharply recently, in part due to a series of <a href="http://www.smh.com.au/business/retail/dominos-scandal-franchisees-selling-visas-20170211-guau8x.html">scandals</a> ranging from alleged immigration fraud to widespread <a href="http://www.smh.com.au/business/workplace-relations/dominos-pizza-workers-kept-in-the-dark-about-underpayment-for-almost-two-years-20170214-gucq1f.html">underpayment of workers</a>.</p>
<p>In terms of technology-based disruption, more is on the way. Innovators like Amazon have signalled an interest in moving heavily into the Australian economy, expanding its e-commerce model into groceries. </p>
<p>Its <a href="https://www.amazon.com/b?node=16008589011">Amazon Go</a> technology and business model, where customers walk in, take what they want, and walk out (with goods billed automatically to the customer’s account) is intriguing. </p>
<p>Innovations such as this promise to disrupt retail as much as platform-based innovators like Uber have <a href="https://theconversation.com/when-uber-is-legal-the-taxi-industry-will-have-nowhere-to-hide-48820">disrupted taxis</a>.</p>
<p>Amazon’s mainstay is general e-commerce. In the <a href="http://www2.census.gov/retail/releases/historical/ecomm/16q4.pdf">US,</a> e-commerce accounts for 8.3% of retail sales, while in <a href="http://business.nab.com.au/nab-online-retail-sales-index-june-2016-17897/">Australia</a> the figure is around 6.8%. In both markets e-commerce is experiencing double-digit percentage growth. It is chipping away at the fundamental economics of traditional retailers like Myer, which continues to struggle.</p>
<h2>Batten down</h2>
<p>Taken together, the retail sector will continue to be a tough place for incumbents to thrive. </p>
<p>Innovators entering without the legacies of outmoded business models and with the benefit of new technology will continue to usurp incumbent firms. </p>
<p>For consumers, choice and convenience will continue to emerge. For incumbents unable to deliver on these outcomes, the future is bleak.</p><img src="https://counter.theconversation.com/content/72844/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For consumers of Australia’s retail sector, choice and convenience will continue to emerge. For incumbents unable to deliver on these outcomes, the future is bleak.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/737662017-03-03T00:44:38Z2017-03-03T00:44:38ZThree reasons businesses are paying higher dividends rather than investing<figure><img src="https://images.theconversation.com/files/158840/original/image-20170301-29906-5utgwp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">More than A$72 billion has been paid in dividends in 2016-17.</span> <span class="attribution"><span class="source">AAP/Dean Lewins</span></span></figcaption></figure><p>Typically, low interest rates, together with record profits, would create an environment in which businesses would be happy to invest in new projects – providing a boost to economic growth and jobs. Unfortunately, Australians do not appear to be living in “typical” times. Rather than lifting investment, businesses <a href="http://www.afr.com/markets/asx-200-dividend-count-heads-to-record-72bn-on-resources-comeback-20170224-gukd0j">have chosen</a> to return cash to shareholders in the form of <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">record dividends</a> and share buybacks.</p>
<p>There are many possible reasons – including political uncertainty – why businesses are seemingly ignoring the supportive economic environment and paying such large dividends (A$72 billion in 2016-17) instead of reinvesting in growth opportunities. </p>
<p>Three likely candidates are firm commitments to set dividend payouts, the sustainability of current commodity prices, and a perceived lack of investment opportunities.</p>
<p>This is not necessarily bad for the economy. Private investors will be happy to have more cash in their pocket, and at least some of the extra cash handed to shareholders will result in increased consumption, which may encourage businesses to invest in the future.</p>
<h2>Three key reasons</h2>
<p>Having come to the end of a major investment cycle, many resources companies are reluctant, for example, to build more mines and create more supply, as this creates downward pressure on prices. These companies have committed to a set dividend payout ratio. Mining giant <a href="http://www.afr.com/business/mining/bhp-billitons-bumper-profit-lifts-dividends-20170221-guhoeu">BHP Billiton</a>, for example, promises to pay its shareholders at least 50% of underlying profits.</p>
<p>The high level of dividends in the mining sector probably says something about the sustainability of current commodity prices. Despite extra supply from a number of additional mines (and increased production from existing mines) being available in 2016, the iron ore price <a href="https://thewest.com.au/business/fmg-rewards-investors-with-sharp-rise-in-profits-ng-b88394202z">has surged</a> to more than US$90 per tonne.</p>
<p>However, for mining companies to justify investing the billions of dollars required for a new mine, they need to have some comfort that such prices will persist. While the majority of forecasters have revised up their estimates, the consensus is still for the price to <a href="http://www.theaustralian.com.au/business/mining-energy/ord-minnett-lifts-2017-iron-ore-price-forecast/news-story/63a174477dda6339e5b876faaf9b57fb">fall below</a> US$60 per tonne by 2018. </p>
<p>The third reason is a perceived lack of investment opportunities. One explanation for this may be a reduction in infrastructure spending by state and federal governments owing to <a href="http://www.investordaily.com.au/markets/40402-lack-of-projects-stifling-infrastructure-investment">fiscal constraints</a>.</p>
<p>If businesses cannot identify a project that provides an adequate return on capital, then they are better off returning cash to shareholders. <a href="http://www.investopedia.com/articles/02/010902.asp">Corporate finance theory</a> would suggest this is good. </p>
<h2>What about political uncertainty?</h2>
<p>Perhaps the largest drag on investment results from the high level of uncertainty about the geopolitical environment. </p>
<p>Domestically, there appears to be little policy direction from a Coalition government wary of a rise in populism. </p>
<p>Regionally, Reserve Bank Governor <a href="http://www.rba.gov.au/speeches/2017/sp-gov-2017-02-24.html">Phillip Lowe</a> has identified possible risks in China owing to a continued build-up of debt. </p>
<p>And, globally, the Trump administration is perhaps the biggest cause of uncertainty. </p>
<p>In the months since Donald Trump’s victory in the US presidential election, global sharemarkets have rallied strongly. Australia’s market has been no different.</p>
<p>The All Ordinaries index has risen by 10% in the past quarter. However, the key to maintaining high prices is earnings growth. </p>
<p>The February earnings season did not disappoint in this respect. For the last quarter of 2016, Australian businesses reported the <a href="http://www.afr.com/news/economy/business-profits-shatter-expectations-inventories-hold-ground-20170227-gulzhg?login_token=1UZXumTn4h-43F5vZJ0QD2dus0wdSchPrpvvjWsnDgjG9IGS2VPlyecD1fUk0M1rk4tKscIDnUmbLueM_azPvg&expiry=1488313477&single_use_token=7HtqqeQ2AmYd_v3OsuJ90gZ7G1hInuTHy4c_lhDVCbveVTjHkRY7w3R4tdJkoMM0eNhgv_0IIRkWk3ChkuwBUQ">biggest earnings increase since 2001</a> – well ahead of market expectations.</p>
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<p>The <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5676.0Main+Features1Dec%202016?OpenDocument">strong results</a> have largely been driven by a 21% (A$4 billion) surge in mining industry profits. Thanks to a dramatic increase in commodity prices, tighter cost controls and increased efficiencies, the industry reported gross profits (trend estimate) of more than A$24 billion for the quarter. </p>
<p>Across the board, firm profitability has benefited from below-trend growth in wages.</p>
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<p>Deregulation, infrastructure investment and tax reform could boost global growth and encourage investment by Australian firms in the process. However, negatives resulting from the potential for trade war (or worse) owing to the redrawing of US foreign policy will clearly hold back investment.</p>
<p><a href="https://espace.curtin.edu.au/handle/20.500.11937/38374">My research</a> has shown that political uncertainty is ultimately a negative for sharemarkets. Frictions in the investment decision process act as one mechanism for this relationship. In the meantime, shareholders should enjoy the benefit of higher dividend payouts while they last.</p><img src="https://counter.theconversation.com/content/73766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Lee Smales does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Rather than lifting investment, Australian businesses have chosen to return cash to shareholders in the form of record dividends and share buybacks.Lee Smales, Associate Professor, Finance, Curtin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/633942016-09-05T20:16:28Z2016-09-05T20:16:28ZCompany results wrap: news publishers are transforming, but into what?<p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
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<p><a href="https://aut.researchgateway.ac.nz/bitstream/handle/10292/9894/MyllylahtiM.pdf?sequence=3&isAllowed=y">New research</a> on the business models of Fairfax and APN from 2004 to 2013 confirms the two companies have failed to transform their revenue structures from print to digital. However, Fairfax CEO <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?Embed=Y">Greg Hywood</a> argues that the company’s 2016 full year result is “proof that the [digital] transformation of Fairfax Media over recent years has succeeded”. </p>
<p>Recently, American billionaire <a href="http://www.politico.com/story/2016/08/the-playbook-interview-warren-buffett-226892">Warren Buffet</a> said that for most American newspapers “the transition to the internet so far hasn’t worked in digital. The revenues don’t come in”. He added that “local newspapers continue to decline at a very significant rate”. </p>
<p>Despite the gloomy outlook, News Corporation is expanding its regional newspaper portfolio in Australia. The company is buying APN’s regional papers including 12 daily newspapers and 60 smaller publications. </p>
<p>In New Zealand, Fairfax Media and New Zealand Media Entertainment (NZME) are currently seeking merger approval from Commerce Commission. If the merger is cleared, the new company <a href="http://www.comcom.govt.nz/business-competition/mergers-and-acquisitions/authorisations/merger-authorisation-register/nzme-limited-and-fairfax-new-zealand-limited/">will have 89% market share</a> in New Zealand’s print newspaper market. Fairfax is expected to own 51% of the merged company’s shares (currently, News Corp owns 14.99% of NZME shares).</p>
<p>Why the sudden interest in the sinking ship, print? Is it because the assets are cheap? In 2016 Fairfax made a heavy loss as it wrote down almost a billion dollars of its publishing assets. </p>
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<p>A closer look at News Corp’s and Fairfax’s revenue structures may shed some light on this interest in print. </p>
<p>In 2016, Fairfax’s Metro Media, Australian community media, and New Zealand media contributed 75% <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">of the company’s total revenue</a>. Domain Group delivered 16% of its total revenue.</p>
<p>This simply shows that the company’s revenue, if not profit, is still reliant on the traditional revenue streams. Similarly, in the 2016 financial year, 64% of News Corp’s revenue came from news and information services and 9.9% from digital real estate services.</p>
<h2>Digital revenue covers a fraction of expenses</h2>
<p>Both Fairfax and News Corp argue they are turning into truly digital media companies, and clearly, something is changing. Both companies seem confident that their digital future lies in real estate and listing services. Commenting on the 2016 results, News Corp chief executive <a href="https://newscorpcom.files.wordpress.com/2016/08/q4-2016-press-release_final_08082016.pdf">Robert Thomson</a> said: </p>
<blockquote>
<p>“Since the advent of the new News three years ago, revenue at Digital Real Estate Services has more than doubled, and it is expected to become the biggest contributor to [earnings] in the future.”</p>
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<p>Similarly, Fairfax’s chief executive <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">Greg Hywood says</a> digital and non-print earnings now make up more than 40% of Fairfax’s earnings before interest, taxes, depreciation and amortisation (EBITDA). If this trend continues, he says, next year it will be closer to 60%.</p>
<p>Both companies make a decent profit on their digital real estate services (and the share of profit is growing), but Fairfax’s digital revenue currently covers only 14% of the companies’ total expenses. So the company’s bright digital future clearly requires more cost cutting. </p>
<p><a href="https://www.researchgate.net/publication/305387958_How_digital_are_the_news_publishers_A_study_of_newspaper_publishers%27_evolving_revenues_and_how_they_may_support_journalism_and_future_newsrooms">Recent research </a>
shows that both Fairfax and News Corp have some work to do before they are “truly digital”, meaning the majority of their revenue comes from digital sources. For example, <a href="https://www.academia.edu/27050041/How_digital_are_they_really_A_study_of_newspaper_publishers_evolving_revenues_and_how_they_may_support_journalism_and_future_newsrooms">in 2015 digital revenue made</a> 62% of media groups Norwegian Schibsted’s and German Axel Springer’s total revenue. For Fairfax, the same number was 16.4% and for News Corp 8%.</p>
<p>According to Fairfax, in 2016 its paid digital subscriptions grew 17% to 209,000. The revenue from these was $38 million, representing two percent of the company’s total revenue. News Corp’s digital subscriptions continue to grow and “account for approximately 45% of the subscriber base”. </p>
<p>The <a href="http://www.fairfaxmedia.com.au/ArticleDocuments/193/2016-08-10_%20Full%20Year%20Results%20-%20Media%20Release.pdf.aspx?">company states</a> that “digital revenues represented 23% of news and information segment revenue”. Based on this percentage, the digital revenue delivered by its news and information services made 1.2% of the company’s total revenue.</p>
<h2>Convergences across telcos and media</h2>
<p>A short-term outlook for the traditional television broadcasters in Australia and New Zealand is weak. For example, in August <a href="http://www.sevenwestmedia.com.au/docs/default-source/financial-results/presentation-of-results16C200EF9473.pdf?sfvrsn=4">Seven West Media</a> gave a profit warning and is expecting its profit to fall 15-20% in the coming year due to the flat advertising market. Its 2016 pre-tax profit was $207 million of which Channel Seven contributed 82%.</p>
<p>Clearly, digital transformation is proving challenging for television broadcasters as well as newspapers, and more consolidation can be expected across the sector. This will also occur across the media, telecom and internet service providers. In April, it was <a href="http://www.stuff.co.nz/business/world/79326452/APN-and-Nine-mull-A-1-6b-television-radio-and-outdoor-merger">rumoured</a> that APN and Nine Entertainment were considering a mega merger, but this is yet to materialise. </p>
<p>In New Zealand, the pay television provider Sky TV is seeking merger approval with Vodafone NZ. <a href="http://www.comcom.govt.nz/business-competition/mergers-and-acquisitions/clearances/clearances-register/vodafone-europe-b.v.-and-sky-network-television-limited/">Sky TV says</a> the merger is necessary because, “the change in how video content is delivered to consumers is transforming traditional television and content markets”. The company is facing increasing competition from companies such as Netflix, Quickflix and Apple TV. </p>
<p>Interestingly, Fairfax Media is also branching out in New Zealand by launching a new internet service provider – Stuff Fibre. The new service will offer uncapped ultra-fast broadband, unlimited data, and no fixed term contracts. </p>
<p>Fairfax is clearly seeking to expand and to control its online content and video delivery. In New Zealand, the company already has an agreement with Radio New Zealand and TVNZ for content delivery.</p>
<p>Yes, media companies are transforming, and they have to, as the financial results demonstrate. On Friday, APN announced that it is now an “outdoors media and radio” company, as opposed to a news publisher or news corporation. Fairfax and News Corp are starting to look more like digital real estate providers. This strategy makes business sense, but one has to wonder if there is still room for journalism within it.</p><img src="https://counter.theconversation.com/content/63394/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Merja Myllylahti does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Media companies say their results are an indicator of a transformation taking place from traditional business to newer profitable digital platforms, but it seems the proof is still missing.Merja Myllylahti, Project manager and author for Journalism, Media and Democracy (JMAD) Research Center, Auckland University of TechnologyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/631922016-09-05T12:49:21Z2016-09-05T12:49:21ZCompany results wrap: retail sales flat, but some retailers buck the trend<figure><img src="https://images.theconversation.com/files/136505/original/image-20160905-20255-n1p051.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The success of companies like T-shirt brand Threadless shows innovation matters in retail.</span> <span class="attribution"><span class="source">Todd Kopriva/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p><em>Companies have finished reporting results for the financial year so it’s time to take stock of how the different business sectors of Australia are fairing. In our <a href="https://theconversation.com/au/topics/company-results-2016-30905">company results wrap series</a> we take a step back from the short-term focus of quarterly profit and loss statements and examine what big picture factors are at play.</em></p>
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<p><a href="http://www.abc.net.au/news/2016-06-02/retail-sales-rise-in-april-abs/7470310">Retail sales data</a> showed growth in the sector falling flat last week, and it remains a tough time to be a retailer in Australia. </p>
<p>Overall, shoppers are expecting more for less, abandoning any sense of loyalty. However, there are bright sparks of success in the moribund sector that point towards what works and what doesn’t in making profits in retail. </p>
<p>Australia’s overall inflation, currently at historical lows, is only kept above zero by the increasing prices of services like health and education, not by retail goods. Retail staples like food, clothing and footwear are <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6401.0">all cheaper</a> than this time last year. Price competition, and pressure on margins in the grocery and clothing markets is intense. </p>
<p>The deflation in “food and non-alcoholic beverages” prices recently reported by the ABS can be most readily explained by the Aldi effect. Aldi’s continued expansion throughout regional Australia and continued push westward to South Australia and Western Australia is <a href="https://theconversation.com/woolworths-counts-the-cost-of-masters-blunder-with-food-business-under-fire-55385">playing havoc with the retail margins of both Coles and Woolworths</a>. Both have fallen to around 4.7% of sales as price declines have been outstripped by operational cost efficiencies. The major challenge for both Coles and Woolworths, however, is to address the fundamental difference in their cost of doing business versus the lean operations of Aldi. </p>
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<p>Away from groceries, as the seasons turn, Australia’s bulging wardrobes continue to make room for yet more clothes and shoes. Despite this, prices are falling. In clothing and footwear, deflation is better explained by the <a href="http://s3.amazonaws.com/academia.edu.documents/30860078/show.pdf?AWSAccessKeyId=AKIAJ56TQJRTWSMTNPEA&Expires=1472687430&Signature=u7LKyzI7pSctEQUMVqPJk7aoauY%3D&response-content-disposition=inline%3B%20filename%3DWhat_drives_consumers_to_shop_online_A_l.pdf">ascendant online marketplace</a> and consumer preferences, shopping traits and experiences. Overall online clothing retail sales growth continues to <a href="http://business.nab.com.au/wp-content/uploads/2016/08/NORSI-July-2016-Final.pdf">far outstrip</a> bricks and mortar retail, with small online retailers (sales less than A$2.5 million) seeing <a href="http://www.sciencedirect.com/science/article/pii/S0022435901000562">strong growth of more than 20% per annum on the back of more agile systems and shopper convenience.</a></p>
<h2>Green shoots</h2>
<p>Looking below the “sectoral” numbers to some examples of individual businesses provides some interesting evidence of these trends - both supportive and contradictory. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/136507/original/image-20160905-20220-1wh7no1.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Retail chain Smiggle sells cheap things at high prices.</span>
<span class="attribution"><span class="source">rhoadeecha/Flickr</span>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<p>Online surfwear and sportswear retailer <a href="http://www.news.com.au/finance/business/retail/surfstitch-in-a-trough-on-heavy-loss/news-story/a6acf405718441a0deef0c4de2e938c1">Surfstich</a>, for example, saw its share price savaged after it posted a <a href="http://www.abc.net.au/news/2016-08-30/surfstitch-coming-apart-at-the-seams/7799500">massive loss on the back of a flagging acquisition strategy and management upheavals</a>. In a closely related market, however, <a href="http://www.kathmanduholdings.com/">Kathmandu</a> is performing relatively well, flagging higher margins and earnings to come. CEO Xavier Simonet attributes these outcomes to “product newness and careful management of promotional activity” – basically selling a more narrow range of more appreciated goods with less discounting.</p>
<p>Premier Investments continues to outperform. Controlled by Solomon Lew and led by the colourful former CEO of David Jones, Mark McInnes, Premier seems to have the right portfolio of products and <a href="http://www.premierinvestments.com.au/wp-content/uploads/2016/03/20160318_PMV-Half-year-Results-Announcement.pdf">store-based and online business strategies</a> to maintain growth and margins. Its <a href="http://www.abc.net.au/news/2016-03-18/premier-investments-retail-group-profit-surges/7257238">Smiggle</a> business is a case in point. It sells cheap things at high prices to a demographic of adoring tweens, while the quality Peter Alexander brand works as a sales generating all-rounder in the family clothing sector.</p>
<p>Another somewhat bright spot seems to be <a href="http://www.arnnet.com.au/article/605540/kogan-profits-exceed-expectation-following-lackluster-ipo/">Kogan</a> – the online electronics retailer that recently listed on the ASX. It is a business that is hard to categorise. It has a portfolio of own-branded electronics, operates a channel of grey imported products from its offshore subsidiary, and is branching into services including travel. Trading at a discount to its IPO, it is fair to say the market is watching with interest rather than enthusiasm before it decides on the longevity of this idiosyncratic retailer.</p>
<p>One of the most resilient of retailers, <a href="http://www.sharecafe.com.au/sharecafe.asp?a=AV&ai=40971">Harvey Norman</a>, also reported last week. Its result was stellar and its share price soared. Sceptics wonder, though, how much of this can be attributed the the exit of Dick Smith and the rather topsy housing market which all but the most optimistic spruiker sees at or near its zenith.</p>
<p>Both Premier and Kogan point to an emerging trend – <a href="http://www.sciencedirect.com/science/article/pii/S0378720601001276">innovation matters in retail more than ever</a>. Strong growth among small online retailers is showing consumers want variety and novelty in their baskets and wardrobes rather than generic and cheap (or worse, generic and expensive). Globally, firms like <a href="https://www.threadless.com/">Threadless</a> (a T-shirt company whose customers design its logos) are trying new things and creating products that appeal to narrow yet loyal customer groups. In Australia, niche online retailers like <a href="http://babesintheshade.com.au/">Babes in the Shade</a> are showing they have a business model that can work over time.</p>
<p>But innovation is both risky and expensive. More often than not supermarket trialled novelties do not last, with the same true in clothing and elsewhere. This can explain the emergence of firms like Premier Investments that combine retail smarts, relatively deep pockets and novel ideas. Premier can afford the odd disaster when balanced with successes like Smiggle.</p>
<p>In the future, we expect more innovation and variety and thus more turblulence in the sector. Occasional narrow-brand innovators like <a href="http://www.nonib.com.au/">Noni B</a> will succeed, but a more likely model for success will be the porfolio players. They can ride out the ups and downs of retail’s various sub-markets and sustain profitability and growth.</p><img src="https://counter.theconversation.com/content/63192/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Rice is affiliated with the NTEU.</span></em></p><p class="fine-print"><em><span>Nigel Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>It’s a tough time to be a retailer in Australia, but there are some retailers that have found the formula for success.John Rice, Professor of Management, University of New EnglandNigel Martin, Lecturer, College of Business and Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.