Lost plot at WH Smith

VENTURE capital group Permira and WH Smith have apparently been arguing all week about whether the stationery retailer should pay around £9m to the latter as an indemnity.

The money would cover Permira's costs in the event that it may not be able to agree a price for a takeover, once it has looked at the books, which the WH Smith board would find acceptable.

It seems rather cheeky. If WH Smith has that much money to throw around, surely shareholders would consider it better spent as an inducement to a rival bidder to get involved so we can enjoy an auction. No one asked Permira to come acourting and common gallantry should tell it that if it wants to seduce the lady, it should not expect her to pay for the engagement ring.

WH Smith has lost the plot, as Woolworths did, as Marks & Spencer has and as Boots may well do because they were not constantly seeking to improve their offering.

Good retailers, like Dixons yesterday, constantly re-examine whether the business is still totally relevant to its market and invest eye-watering sums to keep up to date.

This has to be done because if the brand loses its way it is not just a setback, it is a disaster. It breaks the bond of trust between retailer and customer - one that may have taken a generation to build and which, once broken, is very hard to repair.

The other mistake so often made in retailing is to blame life-long employees when something goes wrong. Inevitably, they are accused of having grown out of touch, the implication being they must be replaced. Lifers may make mistakes but they also understand the essence of the brand and know what is needed to restore it to health.

New management from outside cannot understand the culture and usually, unwittingly, destroys it. It then ends up trying to build a new business in the shell of the old rather than restoring the old to health.

The stock market, with its short-term focus, does not help. It is no coincidence that the one consistent success in the department stores sector is the John Lewis Partnership - now celebrating its 75th year - which is owned by those who work in it. Customers know what it stands for, which is why its Waitrose food business is recapturing the high ground in which Sainsbury's once made its name.

It is no surprise, either, that Tesco is the retail phenomenon of our times, because if ever there was a business where the management is steeped in the culture, it is this.

So what's the message? Basically, that there are no short-term miracles in retailing. Once a business loses its way, it will take more than a bid from a private equity house to get it back. It takes someone with a deep understanding of the business and its customers, but someone who also has years to spend rebuilding their trust.

Going for broke

IT IS almost a business truism that when an entrepreneur goes bankrupt in America it is seen as part of a learning curve that makes him or her more eligible for backing next time, but when someone goes bust here they are never trusted again.

Now, John Armour and Doug Cumming of the Centre for Business Research in Cambridge have found a real-world correlation between bankruptcy law and the demand for venture capital, having studied the legal regimes and entrepreneurialism of 15 countries.

They found that having the right legal climate is just as important in creating the right conditions for new business as is the overall level of economic growth, or the level of patent activity.

From this, they suggest, the less-onerous bankruptcy laws that came into effect in Britain this month should provide a boost to business formation and increase demand from entrepreneurs for venture capital.

It may be self-evident but it is also encouraging, to have it empirically confirmed that 'investor-friendly' regimes create a supply of, and a demand for, venture capital greater than exists in more hostile environments.

What is interesting, though, is how specific proposals make a real difference - as in the severity of bankruptcy laws and the reluctance of people to take the plunge.

Germany, where it takes six years to get discharged from bankruptcy, has one of the lowest incidences of entrepreneurs seeking private equity finance.

This seems to have been recognised in the reform here which, in allowing people to be discharged within 12 months, sought to 'aid rehabilitation and business start-ups and re-starts'.

So now the Government can claim, in answer to all the complaints about red tape, that it has created in Britain one of the best places to go out of business.

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