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A Missed Opportunity —
Even Investors Deserve Transparency

We view this report as something of a missed opportunity. We work hard to understand Fresh & Easy and so value every contribution. It cost real money to do this research, and spending just a little more and being a little more transparent with its own clients in explaining the study would have provided a much more valuable and actionable piece of research. Instead we are left with questions and some real limitations.

Mr. Dolan is focused on us purely as journalists. In that capacity, we would have probably argued that any document so widely distributed and highly publicized would ultimately fall into our hands, as this one did, and so he should have had that “sit down” with us so that he could at least attempt to influence how the report was positioned in our coverage. But when we read the report, we read it as if we were one of Mr. Dolan’s investors, and we look for the things that we need to properly analyze the claims and conclusions the research provides.

On the question side, there is a real lack of transparency in the report that makes one wonder if there is more here than meets the eye. The Financial Times made a big point of saying that Execution Research has “no corporate relationship with Tesco.” That is an awkward circumlocution — why qualify the phrase with the word corporate? Does it mean that the principals, board members or executives have such connections personally? Could someone important, perhaps a big client of Execution Research, own a big chunk of Tesco stock and have an interest in touting it a bit? We just don’t know.

It does seem rather odd that an investment bank in London would have discovered a fantastic success that has eluded virtually all US retail experts who have studied the matter.

Now we actually wouldn’t care if the report was paid for completely by Tesco. Funding does not change the answers of consumers; however, it does give the sponsor a chance to stilt the questions, select the audience, etc. So, whether Tesco or a big investor urged Execution to do this research or if Execution did it all on its own volition, we are more concerned with seeing the methodology, with reading the survey, etc., than we are with who wrote the check.

If, however, the researcher is not going to disclose its survey and other details of its methodology, one is going to focus on the motivations of the sponsors. To do this, one has to go far beyond whether Tesco is paying for it — many people have an incentive to want Tesco’s stock price up, other than Tesco management.

The Financial Times was quite generous to call Execution Research a “boutique research house.” That is like calling the analysts who work for Goldman Sachs, JP Morgan or Citi “large research houses.”

Execution Research is part of Execution Limited, which is not a research company at all, but an institutional stockbroker. It does research papers, such as this one on Tesco, and makes them available to its clients. So, in effect, the clients pay for the research by giving Execution Limited trades to conduct.

In addition, they will do bespoke — or proprietary custom — research when a client asks and pays.

Note that Mr. Dolan specifically is concerned because he doesn’t want to “…compromise our relationships with Tesco…” and the obvious point, the very fact that Tesco gave permission to bother its customers in the stores, raises the question of whether Tesco was seriously worried about a negative outcome to this research.

If you work with investment bankers, you quickly learn that although they often claim independence, most feel a desperate need to maintain access to top corporate management. Of course, there are exceptions. But few and far between are those that have the ability to come up with earnings projections from the outside; they rely, instead, on “guidance” from the corporations. If management stops talking to them, they are in big trouble.

Even in this example, we are told that Execution does a lot of survey work, but the methodology it uses in this case is dependent on Tesco’s permission. If this report had been labeled “Catastrophe for Tesco,” and its publication caused a 20% drop in Tesco share price, would Tesco give permission for the next survey? Would another corporate CEO allow Execution’s researchers on its property?

Now we hasten to add that this doesn’t mean anyone is producing fraudulent research. There are many things that can be done short of that step. For example, the decision to survey only Fresh & Easy shoppers as opposed to the total market, including those who have rejected Fresh & Easy, guarantees a more favorable report than if one surveys the total market.

It is also possible to just not publish a report if it is going to be too negative.

In any case, this awkward denial of a “corporate” relationship with Tesco makes us wonder about personal relationships. And the fact that, as Mr. Dolan acknowledged in our interview, Execution is concerned to “…compromise our relationships with Tesco…” makes us concerned that the whole project was not designed solely to uncover the truth but, rather, was designed in a way more likely to generate a positive spin.

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