Brexit and the luxury brands of Britain

(A version of this article appeared in LiveMint on November the 17th, 2016.)

British Prime Minister Theresa May’s visit to India and trade talks with her Indian counterpart take me back to the midsummer’s day in 2016. We in Britain woke up to find that the Leave campaign, colloquially called Brexit, had won the referendum. The pound plummeted and for a while, the stock markets were in chaos. Markets stabilised but the pound continued a downward trend, beating historic lows.

Britain luxury brands are known for their heritage, design, craftsmanship, and quirky individuality which together shape a luxury narrative matched by no other country’s. London too is a choice destination for the experience of buying both British and non-British luxury brands.

The weakened pound was good news for tourists visiting the UK. The month of Ramazan, which traditionally brings wealthy visitors from the Middle East to London, followed. Flight bookings from Europe as well as Asia reportedly rose after the referendum. Premium and luxury hotels benefited from a rise in reservations and stays by overseas guests too. All this made London the hottest and cheapest luxury shopping destination this summer. Much shopping took place as is evident from UBS’s analysis of tax refund receipts. Tax refunds, which are typically sought on big ticket goods, rose by 36% in August.

So far the Brexit vote looks good for luxury shoppers from outside the UK. The picture for luxury brands is more complicated.

The iconic British brand Burberry has seen a 30% rise in sales in its British stores in the last six months. Facing headwinds otherwise, Burberry has also cut prices in its Hong Kong stores, taking advantage of the weaker pound as the brand notably incurs 40% of its costs in Britain.

It is a mixed picture for luxury watches, which are often presented as investment pieces, hence seen as considered purchases not impulse buys affected by currency fluctuations. Many coveted luxury watch brands are imported into the UK and the weaker pound has made the imported goods more expensive. Prices for brands such as Cartier and Mont Blanc, owned by the Richemont Group, have been increased while Hublot, Omega and Tag Heuer, owned by LVMH and Swatch Group, are holding on. The latter category of brands is taking the impact on its margins. For now.

The British luxury watch maker Bremont however is quids-in despite 30% of its costs being imports of Swiss watch parts, which are now more expensive. A weaker pound has helped the firm deal with falling sales in Asia and come out stronger.

To complete the picture and London being a hub for creative entrepreneurs, I spoke with proprietors of several upcoming luxury brands. My conversations revealed a mixed picture. Many small luxury brands source parts, finished products or packaging abroad while serving mainly local British customers. After the referendum, the bill of materials is decidedly more expensive by 10-30% depending on where they import from. As small businesses and nascent brands, however, they cannot always pass on the costs as price increases to the customer. Some however are slowly edging up prices of some products while keeping other prices steady. Overall this does not bode well for smaller, upcoming British luxury brands. Tighter margins will hamper their growth, and in many cases, their ability to survive.

It is also important to remember that despite the outcome of the referendum, Britain is, at the time of writing, still operating in the single European market with free movement of people. This makes it easier for people from Euro countries to travel to and shop in the UK. Any change in the ease of travel will affect Europeans travelling to and shopping in the UK just based on a weaker pound.

Luxury marques already under pressure, such as British car maker Aston Martin, expect a short term lift from the weakened pound but that may only last till Britain quits the single market. The automotive supply chain is global, and that will continue to affect the brand’s margins and profitability especially if Britain loses single market privileges and is not able to strike similarly attractive deals with the many countries where Aston Martin sells.

Some luxury brands are already thinking long term. For instance, Bremont is collaborating with the Advanced Manufacturing Research Centre in Sheffield to reduce its reliance on imported parts. Aston Martin too has made recent investments in product development and a new plant in the UK although its reliance on imported parts will continue for a while. But absent any clarity on the nature of trade deals Britain may be able to make, the return on these investments remains uncertain.

The pound recorded a brief recovery on November the 3rd, 2016 after the High Court ruled that the government will need parliament’s approval to trigger Article 50 which is essential for the official start of negotiations with the European Union. The judgment has temporarily buoyed the Remain voters. The uncertainty is further compounded by the government choosing to appeal the decision in the Supreme Court.

Luxury brands, like many others, will just have to sit tight and watch. After all, what is a couple of years in the grand schema of luxury brands that have lasted or intend to last for centuries?

Of pigs and predictions

The Trump victory has left many of my friends reeling and in disbelief. It has also already brought out criticism of pollsters and polling data. Some sceptical ones go a step further and condemn all prediction makers, and mock machine learning and artificial intelligence. This condemnation is foolish and tantamount to throwing the baby out with the bathwater.

Prediction models turn on data, collected from the right questions being asked of the right statistical sample of people. Reductive questions generate neat data sets which then provide all the right answers.

But as experienced market research people will tell you, far fewer people, than those who enthusiastically nod and say they will purchase a new product, actually do. It is not that people are lying, it is just that human beings tend to give answers to please the asker. On politics and other emotionally charged matters, this tendency to give socially acceptable answers to minimise confrontation is especially pronounced. People also change their minds over time.

If the outcomes of any large exercise, where people actually make active choices, shock us it is worth remembering that the only truth is revealed preference i.e. what our actual choices reveal about our preferences. Human beings do not always seek to maximise utility, often preferring to use simplifying shorthand or heuristics to make decisions. The heuristics could have encoded in them experience and knowledge, as well as prejudices and received wisdom.

The concept of revealed preference is, of course, flawed too. If I pick Candidate A over Candidate B, it does not say I prefer Candidate A, merely that I prefer Candidate A to Candidate B. In the future, if Candidate A is up against Candidate C, I may pick Candidate C not because of Candidate C’s superiority over Candidate A but because my preferences are not immutable. Faced with more than two options, we have a way to simplify the choice for ourselves as well as I have written here.

It may sound nihilistic to suggest predictive modelling is not really reliable. But if we are relying on flawed and mutating preferences, and treating them as immutable truths in our analysis, how can methodologies and predictive models generate anything reliable?

It would be akin to putting lipstick on a pig. We would have used up lipstick but the pig would still be a pig.

In the last UK general elections, the Brexit campaign, and now the US general elections, predictions have failed to, er, predict anything reliable.

It is time we learnt to judge differently — by expanding our comfort zones, by listening more, by asking and seeking to understand more, by being healthily sceptical, and by bringing critical thinking lenses to all those pursuits.

For now, if your side won, good for you. The advice to try and understand the other point of view applies to you too. But if your side didn’t win, dry your eyes, dust yourself up, and go out and talk to someone who is not cohabiting your comfort zone.

The narratives we hear will have rough edges, and not the cleanliness or reductiveness of survey questions. But that texture is the stuff understanding is made of. Less data, more understanding. That is what we need.

Slicing up the equity pie

This article is the fifth in the Startup Series on FirstPost’s Tech2 section and first appeared on Nov the 2nd, 2016.

Cofounder conflict over equity sharing can often cause a startup to be aborted before launch or otherwise fail quickly, as many of us who work with founders in very early stages know well. Some founders do not want to share equity. It is fine as long as they understand what is needed to grow the startup and can buy that talent in. Early stage ventures often cannot afford to pay people market rates, nor can they risk core talent walking away easily. Giving equity to cofounders, who bring key talent, helps address these concerns.

Founders often ask, “how much equity should I give my cofounder for the amount of work she will be putting in?”. My brisk answer to this “how long is a piece of string?” question is: “it is what you negotiate and what all cofounders are happy with”. Inevitably it leads to a further question whether there is a formula to make this negotiation easy and the answer to that is “No”.

Founder experiences show that a long term and successful cofounder relationship is predicated not so much on the slices of the equity pie but on the sense of perceived fairness in the arrangement, including in the course of the relationship.

To facilitate the equity sharing discussion, I start by advising potential cofounders to develop their vision for the venture together. Creating a shared vision and defining broad strategic goals then help them understand better the contribution expected of each of the cofounders in shaping the startup. More importantly, they develop some appreciation of how much weight each cofounder is pulling, and how their roles and contributions may evolve over the life cycle of the startup. At this point, I often see relatively inexperienced founders starting to relax and then I remind them to consider probable contingencies.

Roles and responsibilities aren’t cast in stone. Scope creep can and does happen. What happens, for instance, when the person, who was in charge of customer development and marketing, ends up leading on user experience design, developing the product roadmap, and owning all revenue generation and operations, because they appear to stack together naturally? How would the cofounders deal if she wants to return to the drawing board and renegotiate the slicing of the equity pie?

People and their priorities change over time. What happens if the chief technical architect develops the core product and then wishes to leave for a job with more income security and predictable hours because her family is growing, but wishes to retain her equity in the business? How would the remaining cofounders deal with that negotiation while also ensuring that the future of the core product is not jeopardised?

What about unforeseeable things? What if the business runs out of money before lining up the next round of funding? What if, in the virtual team, one of the cofounders becomes unresponsive while holding the business to ransom? What if a cofounder becomes unwell or dies unexpectedly, bringing her partner or family into the picture in the way nobody has quite imagined? These are a fraction of the scenarios that I have seen played out in cofounded startups where the cofounders were caught unawares.

Envisioning these possible scenarios is a squirm inducing exercise for most founders. But it also makes clear that the relationship the founders are about to enter is an evolving entity with uncertainties and potential conflicts in the future, not an immutable one. Cofounders also start to realise that fairness as accepted by all sides matters.

They also realise that above all, at all times, a focus on the business is crucial. It is not beyond possibility that a cofounder decides that not only will she leave the startup she will also ensure the startup does not survive after her. It is uncomfortable to think of such a scenario but it must be considered in advance.

How do we ensure fairness then, if things are going to chop and change, and people are going to behave unpredictably, even maliciously?

Here let’s draw upon some common sense. While resolving a cake dispute, a parent friend of mine uses a trick. She lets one child slice the cake, and the other children pick the slices first. The resulting dynamic is fascinating and instructive. Stretched to a cofounder negotiation, one of the tests of fairness would be, if you were doing all that any given cofounder is doing, would you be happy with the share she is getting?

It is also important to understand that fairness must be perceived and seen as fairness by all parties. And that perfect fairness is an asymptotic goal, albeit one worth working towards.

In a later column, we shall discuss embedding these negotiations into formal agreements and what it means for the startup.

Empathy as luxury?

“Empathy is luxury. Think about it. If you have the time to read about other points of view, you have the luxury of time, that you can spend on reading other perspectives and build empathy.”, said my interlocutor, an entrepreneur building a platform for contrarian views. I am paraphrasing a bit but we had been talking about how to break the filter bubble that the liberal metropolitan elite inhabit. Better people than I are already exploring how the word “elite” came to be associated pejoratively with liberal, metropolitan persons.

Research evidence from the USA and the UK however shows us that the poor, who do not have spare time since more time spent working is more money, are more charitable and more community minded. In other words, the poor display more empathy. How can empathy be a “luxury” then?

I believe in the essentialness of empathy though I arrive at it from another perspective.

I see myself as a part of a whole, whether that whole be our neighbourhood or the planet. As such my being empathetic is nothing more than my honouring my self.

She wasn’t convinced.

Further expounding on how I got to this framing of this world, I found that it may have come from imbibing some of the Hinduistic philosophical and cultural values amidst which I grew up in India. The idea of the unity of the macro- and the microcosms of our being is embedded in Aham Brahmasmi, “I am the infinite reality”. The idea is also embedded in the greeting Namaste, “I bow to the divine in you”. The idea of consequentiality of our actions naturally follows, often stated controversially in the western world as “Karma is a bitch”.

It is trivially evident that neither business nor humanity can act as if their shared linkages and connectivity do not matter, and as if they can thrive or even survive without one another.

Both spiritually and rationally, empathy is therefore not a luxury in my view.

The idea of luxury as empathy however appeals to me. More on which, later.

On fancy job titles

This article is the fourth in the Startup Series on FirstPost’s Tech2 section and first appeared on Oct the 19th, 2016.

In one of my corporate venturing roles with a large Indian conglomerate, I served as the country manager of a European country. That was also the job title on my card and in my email signature file. The important sounding title was not just about sitting in a fancy office overlooking Zurich lake. I made a lot of calls and set up my meetings with prospective clients for business development purposes. I also went daily to the post office to collect our mail, printed and sent and filed my own faxes, made coffee and washed my own coffee cup, took out our recycling, and did a whole bunch of administrative work that people in large companies do not even think about or farm out to secretaries and assistants.

It was, after all, a new and small operation albeit with a BigCo parent company.

Startups are no different. In the early days of a startup, founders do everything from washing cups to taking and making calls to filing papers to paying bills. They do VAT returns, meet account filing deadlines, minute board meetings, keep an eye on the cash in the bank and so on. They pack products and take those packages to the post office for mailing. They also go out and represent the company to customers, partners, vendors, media and financiers. There is nobody else to talk about the brand, the company, the product but the founders who created the business. In other words, early days are when the startup founders are always selling, trying to sell or fulfilling orders.

Is there a need for startup founders have important sounding titles? Some even argue over them!

Titles serve a purpose.

Titles are useful in signalling to customers, partners, vendors and other third parties about the roles of the individuals they are dealing with. Giving such comfort and confidence is an outward facing utility of titles. Yo can go the ego-boosting heavy title route, or take a leaf from Craig Newmark’s book. He is the founder of Craigslist and calls himself “customer service rep”.

Inside the startup, roles and titles can help start a useful and essential conversation about allocation of responsibilities as the early rapid growth forces functional specialisation within the founding team. The CEO should ensure there is enough cash, that the company is heading in the right direction, and that there are enough people on the team — or from vendors and partners — to do what is necessary. The COO’s role may be defined by the context often spanning revenue ownership, supply chain, operations and other processes. The CMO takes charge of all marketing and communications with an aim to establish the brand as well as drive inbound inquiries and sales.

Then there are the future employees. As founders, you sell the vision to future employees so they consider working with you. Some of these employees then actually want big corporate-sounding titles e.g. VP. In an early stage and relatively flat organisation, a title such as VP may mean little. But what it can do is catalyse the thought process required to develop an organisational structure that will support future growth including growing numbers of employees, their roles and their career trajectories.

I am no fan of hierarchical organisations but equally the evidence from holacracy as implemented by Zappos and others following their lead, and from self management structures as implemented by Buffer is mixed. So, for now, even for startups, organisation design for growth remains an active challenge on the table. Titles are not essential but they could bring much needed clarity as jobs evolve away from the traditional functional bases of design to other philosophies including customer at the centre of the organisation.

During my country manager stint, I had several meetings with big-cheese type persons in prospective client organisations. It was not uncommon, when I turned up, to be asked by the gatekeeper to the said big-cheese, “Wo ist der Geschaeftsfuehrer?” (Where is the boss?).

I was, after all, a petite and young Indian woman, turning up to meet an important man in their company!

Handing over my card with a smile, I would reply, “Ich bin die Geschaeftsfuehrerin, bitte.” (I am the boss, please!).

The big title? It always worked.