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Connect Group’s (LSE:CNCT) Smiths News produces profits and lots of cash flow year after year because it is a duopolist (alongside Menzies) delivering newspapers and magazines to shops. The duopolists tend to stick to their own territories when allocating their vans – it is pointless having two rivals vans passing each other in rural Norfolk for example, so either SN or M will take that contract.
A barrier deterring entry to the newspaper distribution business: A potential entrant would have to win five-year contracts from the major publishers on operating margins of around 3% and then organise a fleet of vans, with drivers and sorting depots. All the while, SN and M, with their efficiencies and experience, will be breathing down their necks and constantly undercutting on price.
Connect’s Dawson Media Direct, DMD, which supplies printed and digital media to airlines and travel points in the UK and worldwide, has recently suffered after losing contracts because some airlines switched to electronic newspapers.
In the year to the end of August DMD’s revenue and income, for the first time, are subsumed within Smiths News numbers. This is to be expected given that DMD is now quite small and engaged in media distribution.
Smiths News
Smiths News has a declining turnover because the volume of newspapers and magazines bought in the UK has fallen and is expected to continue to fall. Offsetting this are cover price rises, but nonetheless SN’s revenue has dropped by 3% – 5% per year – see table. This pattern has severely disturbed Mr Market – why buy into a business with falling sales?
The pattern of sales also bothered Connect’s leadership team over the past decade. It bothered them so much they thought it a good idea to go out and spend vast amounts of shareholders’ money generated by the cash cow that is SN on a series of expensive acquisitions. Most of these failed, usually because too much was paid and then the businesses were run badly.
Clearly, the old team should not have worried so much about the declining revenue numbers. The operating managers, who concentrated on getting the basics right, were able to offset the falling revenue by finding around £5m of cost savings each year. This resulted in annual operating profit stabilising around £30m – £40m. The MCap of Connect is £0.151 x 246m shares = £37m.
The team of managers appointed 18 months ago immediately recognised the importance of aiming for excellence in the existing business, going for continuous improvement and constantly bearing down on cost as the best strategy – do the ordinary extraordinarily well, as Buffett says.
Figures for Smiths News
In the year which ended 31st August, under the leadership of Jonathan Bunting, a SN lifer, adjusted operating profit was up 12.1% despite revenue falling by 4.3%. Jonathan’s team squeezed out another £6.5m productivity improvements. And they did that without upsetting employees – see Indeed.com for comments from employees and former employees on how SN is run.
Gary Kennedy, Chairman, said in a brokers’ briefing (https://webcasting.buchanan.uk.com/broadcast/5d9f430234a3cf1389e7d1b0) that SN’s KPIs on service, efficiency and productivity are good. He went on, it “continues to be an extremely well managed business, a very predictable business”.
| £m to Aug | 2019 | 2018 | 2017 | 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||
| Connect News Revenue | 1,303 (includes DMD’s 24) | 1,335 | 1,384 | 1,444 | 1,479 | 1,525 | 1,529 | 1,571 | ||||||||
| Connect News. Adjusted operating profit | 43.6 (includes DMD’s 2.6) | 35.9 | 40.4 | 40.0 | 41.4 | 42.9 | 40.0 | 39 | ||||||||
| Connect News Statutory operating profit | 36.3 (includes DMD’s 2.6) | 25.0 | 36.1 | 34.1 | 23.2 | 40.8 | n |
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The problem with sn is warehouse managers only think about making thereselves look good and no intrest in selling newspapers we have a warehouse manager who has not been seen in the warehouse for over 4 years workers paid for jobs they dont do nobody checks its just a slow death
Hi,
Thank you for writing. It’s really good to hear from someone who understands the position on the ground. Do you think it is this bad in depots across the country or do you have a particularly poor bunch.
Glen