Examination of Witnesses (Questions 140-159)|
6 JUNE 2007
Q140 Mr Love: You only operate a
Christmas scheme, do you, okay. Can you give us some indication
of how much of your income derives from the interest that you
receive from the savings scheme?
Mr Stewart: In terms of our net
income, if we look, for example, at the year ending March 2006,
we earned a net margin of about 1.5% on our turnover, and just
over a third of that was interest income. So it is a substantial
part of our net income.
Q141 Mr Love: It is about a third
of your net income?
Mr Stewart: Yes.
Q142 Mr Love: You talked earlier
on about the formation of a Trust and we are pleased to hear that
you have now concluded an agreement. Will the setting up of that
Trust affect the interest payments? What will be the cost to you
of setting up this Trust arrangement?
Mr Houghton: Effectively there
will be a cost associated with running the working capital and
the timing of it because cash will be held in trust when you could
be using it for running and paying bills as we go through. But
we see that as a cost to the business and it is not significantly
prohibitive for us to do that.
Q143 Mr Love: To offset that additional
cost to you will that lead to any additional cost to the consumer,
Mr Houghton: We do not anticipate
that being the case. We are keen to provide a service. We need
to be price competitive; we are selling vouchers on low margin,
there is not much scope to actually charge a customer £101,
for instance, for £100 worth of vouchers. So we see that
being taken up in efficiencies and not passed on, if at all possible.
Chairman: John Thurso.
Q144 John Thurso: Can I ask first
about regulation? Can I take it that you agree that businesses
such as yours, which have fairly comprehensive pre-payments from
the customers, should have some sort of protection and regulation?
Mr Houghton: We support regulation.
We think it needs to be fair and not over burdensome. Having said
that, we are actually embedding the FSA principles into our business.
Q145 John Thurso: That brings me
on to my next question, which is in your discussions with the
government have you discussed any other forms of regulation or
what might be done other than Trust Accounts?
Mr Houghton: No, we have really
only discussed Trust Accounts at this point in time, although
we have looked at FSA regulation for certain activities of the
Q146 John Thurso: Do you think you
would you be able to continue in business if you were subject
to FSA regulation or do you think that would be too burdensome?
Mr Houghton: Yes. We already sell
insurances to the database on a small basis so we operate under
a partial FSA regulation. But in terms of the operating structure
and the corporate governance associated with it we believe that
we could operate.
Q147 John Thurso: I do not want to
put words into your mouth, but would it be fair to say that you
need customers who are confident in you
Mr Houghton: Absolutely.
Q148 John Thurso: --- and therefore
a good regulatory framework is actually a necessary part of you
Mr Houghton: That is why we are
keen to get these Trust Accounts in place.
Q149 John Thurso: Therefore, you
are actually pretty relaxed about it being under the FSA ambit?
Mr Houghton: Fairly relaxed, yes.
Q150 John Thurso: Okay, that is great;
that answers that one. Just on competition, the Office of Fair
Trading is now investigating the competition implications of the
merger between Park Group and Home Farm Hampers. Do you think
you have an unusually dominant position in the market?
Mr Houghton: I think when you
look at our business we actually trade in quite a wide market,
and although people have chosen to focus on the fact that we are
a savings scheme. When you look at this catalogue the products
on sale in the catalogue are available anywhere in the high street;
you can buy them by mail order, you can buy them over the Internet,
in the majority of cases, or they are easily substitutable. You
can also save in banks, building societies, credit unions, you
can go to Tesco's and buy stampsyou can buy most of the
products that we have in here in Tesco's. We have Sainsbury's,
Iceland, Woolworth's, Argos, all with Christmas savings schemes.
So the actual market that we are in is quite wide and we really
have to be conscious of the products that are out there to make
sure that we are offering value for money. Therefore, in terms
of Home Farm we do not believe that there has been any impact
detrimentally on competition because Home Farm was going to be
closed anyway and we did not want that to happen; and people can
easily, if they are not satisfied with our product, go elsewhere,
and that is evidenced by the fact that our orders this year are
30% just about below what they were last year. Clearly, these
customers will celebrate Christmas this year coming and have clearly
substituted our offering for something else. We do not know what
Q151 John Thurso: Do you think that
is a follow on from Farepak?
Mr Houghton: Absolutely. There
has been a reduction in confidence in our customer base as a result
Q152 John Thurso: Can I just ask
one last question? Which do you regard as your core competencethe
management of the money or the sourcing and supply of goods?
Mr Houghton: I guess it is both.
Gary can speak for himself, but it looks like an easy job and
I can assure you that it is not. We manage the relationship with
our customers through a customer care team; we have fairly sophisticated
computer systems to control and predict what our requirements
are for stock and plan the production process; we use probably
about 100 carriers to distribute nationwide from the Scottish
Islands down to the Channel Islands to Northern Ireland, so it
is quite a complicated business. There is a lot of skill associated
with choosing the right products, offering the right service to
the customers, make sure that our team is trained properly; then
we have a treasury function that takes no risk with the money
and places it in highly rated banks and building societies for
fixed terms to maximise
Q153 John Thurso: The point here
is that if you regard your core competence as being that as trading
in the products the financial side is merely a way that enables
you to access the market you have chosen, whereas if your core
competence is actually being a saver then the products are there
to enable you to take money out. There is quite an important distinction
between the two.
Mr Houghton: We do both because
our treasury function, we have gone out and looked at using brokers
and professionals to earn interest on the money and benchmark
ourselves against those and we actually achieve a comparable if
not better rates on occasions than those people, so we are pretty
skilled in the managing of cash.
Chairman: Jim Cousins.
Q154 Jim Cousins: You have just pointed
out to us that the Trust Accounts have been set up this week and
Mr Houghton: I think the Trust
Accounts will take time to set up. The Trust vehicle, the Trust
company is being established now.
Q155 Jim Cousins: When do you anticipate
the actual accounts themselves will be set up
Mr Houghton: We are hoping that
everything will be up and running by the end of June, but that
means that we have to get bank accounts set up, we have to get
the legal documentation completed, so as I have said we are aiming
to get it done as quickly as possible and we hope that we would
be able to get it done by the end of June.
Q156 Jim Cousins: I am grateful to
you for that but the OFT Christmas saving campaign of course will
have been launched before that has all been finalised. That is
plainly the case, is it not?
Mr Houghton: We are not party
to the OFT campaign.
Q157 Jim Cousins: No. Have you been
consulted about it?
Mr Houghton: Personally, no.
Q158 Jim Cousins: How relevant do
you think it is to launch a campaign now, in June, in the lead-up
to advise people for Christmas 2007 bearing in mind that the Trust
Accounts themselves will not be available until the end of June
and presumably cannot be referred to in the campaign.
Mr Houghton: What we did, we created
bank accounts in separate subsidiaries outside the group banking
pool during December, when this issue first arose, and we are
continuing to operate those until the Trust Accounts are actually
in place. The relevance of advertising Christmas now I guess most
people's minds will not be on Christmas but it will set the seed
and start people thinking about what can they do for next Christmas.
Timing wise I do not know; I do not know if Gary has any views
Mr Woods: My view is that we have
not been consulted at all so I do not really know what the plans
or the time table are for this particular campaign. However, we
do start our recruitment campaign in October for Christmas 2008,
so anything that restores confidence or helps to restore confidence
and gives the general public more awareness we support.
Q159 Jim Cousins: Just to pick up
one point because you do mention it in your submission to the
Committee, perfectly properly, which is that the Farepak problem
was that the holding company had borrowed against the assets in
the Farepak operation, which in itself was a sound operation.
Presumably the Trust Accounts are free of any securitisation or
loan operation that you operate yourself?
Mr Houghton: We intend them to
be totally separate. In fact, there will be a separate legal entity.
That is what we have done with the process that we did in December,
which was to put them into separate legal entities, but the Trust
Accounts will be controlled and cash released by third party trustees
and that will be supervised by the Christmas Pre-payment Association
by monitoring and reviewing what actually goes on.
Chairman: Brooks Newmark.