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Articles for the ‘Economics for Business 6e: Ch 08’ Category

The business of tennis

I am an avid tennis fan and have spent many nights and in the last 10 days had many early mornings (3am), where I have been glued to the television, watching in particular Rafael Nadal in the Australian Open. Tennis is one of the biggest sports worldwide and generates huge amounts of revenue through ticket sales, clothing and other accessories, sponsorship, television rights and many other avenues. When I came across the BBC article linked below, I thought it would make an excellent blog!

There are many aspects of tennis (and of every other sport) that can be analysed from a Business and Economics stance. With the cost of living having increased faster than wages, real disposable income for many households is at an all-time low. Furthermore, we have so many choices today in terms of what we do – the entertainment industry has never been so diverse. This means that every form of entertainment, be it sport, music, cinema, books or computer games, is in competition. And then within each of these categories, there’s further competition: do you go to the football or the tennis? Do you save up for one big event and go to nothing else, or watch the big event on TV and instead go to several other smaller events? Tennis is therefore competing in a highly competitive sporting market and a wider entertainment market. The ATP Executive Chairman and President said:

We’ve all got to understand the demands on people’s discretionary income are huge, they are being pulled in loads of different avenues – entertainment options of film, music, sport – so we just need to make sure that our market share remains and hopefully grows as well.

As we know from economic analysis, product differentiation and advertising are key and tennis is currently in a particularly great era when it comes to drawing in the fans, with four global superstars.

However, tennis and all sports are about more than just bringing in the fans to the live events. Sponsorship deals are highly lucrative for players and, in this case, for the ATP and WTA tennis tours. It is lucrative sponsorship deals which create prize money worth fighting for, which help to draw in the best players and this, in turn, helps to draw in the fans and the TV companies.

With technological development, all sports are accessible by wider audiences and tennis is making the most of the fast growth in digital media. Looking at the packaging of tour events and how best to generate revenues through TV rights is a key part of strategic development for the ATP. It goes a long way to showing how even one of the world’s most successful sporting tours is always looking at ways to innovate and adapt to changing economic and social times. Tennis is certainly a sport that has exploited all the opportunities it has had and, through successful advertising, well-organised events and fantastic players, it has created a formidable product, which can compete with any other entertainment product out there. As evidence, the following fact was observed in the Telegraph article:

A 1400 megawatt spike – equivalent to 550,000 kettles being boiled – was recorded at around 9.20pm on that day [6/7/08] as Nadal lifted the trophy. The surge is seen as an indicator of millions viewing the final and then rushing to the kitchen after it is over. The national grid felt a bigger surge after the Nadal victory even than at half time during the same year’s Champions League final between Manchester United and Chelsea.

Tennis top guns driving ATP revenues BBC News, Bill Wilson (20/1/14)
The top 20 sporting moments of the noughties: The 2008 Wimbledon Final The Telegraph, Mark Hodgkinson (14/12/09)
The global tennis industry in numbers BBC News (22/1/14)

Questions

  1. How does tennis generate its revenue?
  2. In which market structure would you place the sport of tennis?
  3. What are the key features of the ATP tour which have allowed it to become so successful? Can other sports benefit from exploiting similar things?
  4. How has technological development created more opportunities for tennis to generate increased revenues?
  5. Can game theory be applied to tennis and, if so, in what ways?
  6. Why does sponsorship of the ATP tour play such an important role in the business of tennis?
  7. How important is (a) product differentiation and (b) advertising in sport?
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Lobster for all?

Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.

You would think that larger catches would be good news for fishermen. But prices now are so low that they barely cover variable costs. Individual fishermen fish harder and longer to bring in even bigger catches to make up for the lower price. This, of course, compounds the problem and pushes the price even lower.

So what are the answers for the fishermen of Maine? One solution is to diversify their catch, but with lobster so plentiful and other fish stocks depleted, this is not easy.

Another solution is to cooperate. The Reuters article below quotes John Jordan, a lobsterman and president of Calendar Islands Maine Lobster Co.:

‘If you had an industry that actually cooperated, you wouldn’t be bringing in more product if you couldn’t sell what you already had, right?’

Restricting the catch would require lobster distributors to cooperate and set quotas for what the fishermen would be permitted to sell. But with over 5000 fishermen, this is not easy.

Another solution is to expand the market. One way is for the distributors or other agencies to market lobster and lobster products more aggressively. For example, this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.

Jordan’s company and others are frantically seeking new ways to sneak lobster into unexpected corners of the food market, from gazpacho to puff pastries and quiche.

In the meantime, for consumers the question is whether the low prices paid to the fishermen of Maine will feed through into low prices in the fishmonger, supermarket and restaurant. So far that does not seem to be happening, as the final two articles below explain.

Webcasts
US lobster fishermen’s ‘problem of plenty’ BBC News, Jonny Dymond (5/10/13)
Maine lobstermen in a pinch over low prices, record catch: Part 1, Part 2, Part 3 Aljazeera America, Adam May (11/10/13)

Articles
Something fishy is going on in the nation’s lobster capital CNBC, Heesun Wee (1/9/13)
Booming lobster population pinches profits for Maine’s fishery Reuters, Dave Sherwood (25/8/13)
Lobster’s worth shelling out for The Observer,
Rachel Cooke (21/9/13)
Clawback The New Yorker, James Surowiecki (26/8/13)
Why The Glut Of Cheap Lobster Won’t Lower Price Of Lobster Rolls Gothamist, John Del Signore (20/7/12)

Questions

  1. Why have lobster prices paid to fishermen fallen? Illustrate your argument with a demand and supply diagram
  2. What has determined the size of the fall in prices? What is the relevance of price elasticity of demand and price elasticity of supply to your answer?
  3. How is the fallacy of composition relevant to the effects on profits of an increase in the catch by (a) just one fisherman and (b) all fishermen? What incentive does this create for individual fishermen in a competitive market?
  4. What can lobster fishermen do to restore profit margins through collaborative action?
  5. In what ways is there a conflict between economics and ecology in the lobster fishing industry?
  6. How does stored lobster affect (a) the price elasticity of supply and (b) the price volatility of lobster?
  7. How could cooperation between lobster fishermen and lobster processors and distributors benefit all those involved in the cooperation?
  8. Why may restaurants choose to maintain high prices for lobster dishes for ‘psychological reasons’? Are there any other reasons?
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What’s more important: the volume or the value of the Scotch you drink?

In the blog No accounting for trade, the rise in the UK’s balance of trade deficit was discussed. Many factors have contributed to this weakening position and no one market is to blame. But, by analysing one product and thinking about the factors that have caused its export volumes to decline, we can begin to create a picture not just of the UK economy (or more particularly Scotland!), but of the wider global economy.

Scotch whisky may not have been the drink of choice for many British adults, but look outside Great Britain and the volume consumed is quite staggering. For example, French consumers drink more Scotch whisky in one month than they drink cognac in one year. The volume of Scotch whisky exported from our shores was £4.23 billion for 2011, accounting for 90% of all sales and making its way into 200 markets. However, one problem with this product is that it is highly susceptible to the business cycle. Add to this the time required to produce the perfect Scotch (in particular the fact that it must be left to mature) and we have a market where forecasting is a nightmare.

Producers typically look to forecast demand some 10 years ahead and so getting it right is not always easy, especially when the global economy declines following a financial crisis! So what has been the impact on exports of this luxurious drink? In the past few years, it has been as key growth market for UK exports rising by 190% in value over the past decade. But in 2012 the volume of Scotch whisky exports fell by 5% to 1.19 billion bottles. What explains the decline in sales?

The biggest importer of Scotch whisky is France and its volumes were down by 25%. Part of this decline is undoubtedly the economic situation. When incomes decline, demand for normal goods also falls. Many would suggest Scotch whisky is a luxury and thus we would expect to see a relatively large decline following any given fall in income. However, another factor adding to this decline in 2012 is the increased whisky tax imposed by the French government. Rising by 15% in 2012, commentators suggest that this caused imports of Scotch whisky to rise in 2011 to avoid this tax, thus imports in 2012 took a dive. Spain is another key export market and its economic troubles are clearly a crucial factor in explaining their 20% drop in volume of Scotch whisky imported.

But, it’s not all bad news: sales to Western Europe may be down, but Eastern Europe and other growth countries/continents, such as the BRICs and Africa have developed a taste for this iconic product. Latvia and Estonia’s value of Scotch whisky imports were up by 48% and 28% respectively, as Russian demand rises and China, still growing, is another key market. Gavin Hewitt, chief executive of the Scotch Whisky Association said:

A combination of successful trade negotations, excellent marketing by producers, growing demand from mature markets, particularly the USA, and the growing middle class in emerging economies helped exports hit a record £4.3bn last year.

Furthermore, while the volume of exports worldwide did fall, the value of these exports rose to £4.27 billion, a growth of 1%. This suggests that although we are exporting fewer bottles, the bottles that we are exporting are more expensive ones. Clearly some people have not felt the impact of the recession. For Scotland and the wider UK, these declining figures are concerning, but given the cyclical nature of the demand, as the world economy slowly begins to recover, sales are likely to follow suit. Gavin Hewitt continued his comments above, saying:

We are contributing massively to the Government’s wish for an export-led recovery. There is confidence in the future of the industry, illustrated by the £2bn capital investment that Scotch whisky producers have committed over the next three to four years.

The following articles consider the rise and fall of this drink and its role as a key export market across the world.

Scottish whisky industry puts export hope in new market BBC News (2/4/13)
Scotch whisky sales on the slide The Guardian, Simon Neville (2/4/13)
Growth stalls for Scotch whisky exports BBC News (2/4/13)
Scotch whisky accounts for 25pc of UK’s food and drink exports The Telegraph, Auslan Cramb (2/4/13)
Whisky sales fall but value of exports hits new high Herald Scotland (3/4/13)
Scotch whisky exports rise to record value The Telegraph, Auslan Cramb (2/4/13)
Scotch whisky exports hit by falling demand in France The Grocer, Vince Bamford (2/4/13)
New markets save Scotch from impact of austerity Independent, Tom Bawden (2/4/13)
Scotch exports hit by falling demand Financial Times, Hannah Kichler (2/4/13)

Questions

  1. Which is the better measure of an industry’s performance: the value or the volume of goods sold?
  2. Why would you expect volumes of Scotch sold to decline during an economic downturn?
  3. When a higher tax was imposed on Scotch whisky in France, why did volumes fall? Use a demand and supply diagram to illustrate the impact of the tax.
  4. What type of figure would you expect Scotch whisky to have for income elasticity of demand? Does it vary for different people?
  5. Why is forecasting demand for Scotch so difficult? What techniques might be used?
  6. Why does demand for Scotch whisky remain high and even rising in many emerging markets?
  7. Is the market for Scotch whisky exports a good indication of the interdependence of countries across the world?
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A good or bad call?

The high street has changed significantly over the past 50 years and is likely to continue to do so over the next 50 years. Much of these changes have occurred as a result of technological developments. However, one thing that has remained largely unchanged is the telephone box. Although there are fewer of them, with the majority of people owning a mobile phone, city centre high streets still have their fair share of phone boxes.

With tastes constantly changing, products and services come in and out of fashion. But with technology constantly developing, products and services that were once needed have become obsolete, replaced by their more advanced substitutes. We’ve seen e-commerce develop, such that long-standing high street retailers have faced closure and the development of mobile phones and other communication devices have meant that the once essential phone box is now rather redundant. At least, in its traditional function. The Mayor of New York, Michael Bloomberg said:

New York is the most dynamic city in the world, and while technology has changed all around us, the city’s payphones have remained mostly the same for decades.

If we were to place the phone box on the product life cycle, it has certainly reached maturity and in many developed countries, even decline. But can extension strategies be used to create a new function for the phone box?

This is certainly happening in New York, where a reinvent challenge has been launched to help phone boxes adapt to technological innovation. Suggestions include using them as information sources, phone chargers, weather monitors and advertising boards. In the UK, phone boxes have even been fitted with defibrillators and are the first port of call for saving lives. But would this be enough to reinvent the phone box, whose numbers have fallen in New York from 35,000 to only 11,000?

Some say that the phone box is no longer relevant and while the idea of a ‘community hub’ remains appealing, the cost of maintaining them can be rather high. For others, the phone box is still essential, especially for those on lower incomes, who perhaps cannot afford what some people see as a necessity: a mobile phone. Are phone boxes, therefore, a means of ensuring access to communication for all socioeconomic groups? Also, perhaps for all age groups? As technology and tastes continue to change over the coming decades, the phone box will go in one of two directions: a revival or obsolescence. The following articles consider this.

New York phone boxes get new lease of life BBC News, Michael Millar (22/3/13)
Phone box in Ashwell is fitted with defibrillator to help save lives Rutland and Stamford Mercury (23/3/13)
Red Rutland phone box becomes 2000th life-saving hub ITV News, Pete Bearn (20/3/13)
The trashing of the iconic red phone box is one bad call Telegraph, Cristina Odone (11/3/13)

Questions

  1. Draw out the product life cycle. What examples of products and services can you find that fit in each stage?
  2. What are extension strategies? How do they help products that are in decline?
  3. When deciding whether or not to keep a phone box, what factors will be considered?
  4. How can phone boxes help to tackle inequality, especially of access?
  5. Are there any other products or services that fit into the decline stage? Which ones have had extension strategies applied and which have not?
  6. Do all products and services eventually enter the decline stage of the product life cycle? Can you think of any that haven’t? What has enabled them to survive?
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Advertising’s role in the economy

Adverts are increasingly diverse, ranging from families using various products and promoting their qualities, to a gorilla drumming, a horse dancing and a monkey drinking tea! But, how important is advertising to a product’s brand. Does it have a positive effect on sales and profitability?

The key role of advertising is to sell more products and many firms spend a huge amount on advertising campaigns. Indeed, over £16bn was spent on advertising in 2012. Given that the economy is still vulnerable and many firms have seen their sales and profits decline, this is a huge amount. Procter & Gamble spent over £200 million, British Sky Broadcasting spent £145 million and Tesco spent £114 million in 2011.

Advertising increases consumer awareness of the product and its features, but also actively aims to persuade people to purchase the product. By differentiating the product through adverts a company aims to shift the demand curve to the right and also make it more inelastic, by persuading customers that there are no (or few) close substitutes.

Since the start of the economic downturn in 2008, advertising expenditure has fallen, as companies have seen a decline in their budgets. From a high of £18.61 billion in 2004, the Advertising Association found that it fell to £14.20 billion in 2009 at constant 2008 prices. In the last few years, advertising expenditure has remained at around £14.5 billion. But, is cutting back on advertising a sensible strategy during a recession? Of course budgets are tight for both firms and consumers, but many suggest that media-savvy firms would actually benefit from maintaining their advertising. By doing so firms could take advantage of weaker competitors by increasing their market share and establishing their brand image in the long run.

It’s also important to consider another link between economic growth and advertising. Research suggests that advertising can be an important factor for economic growth. A three-year study undertaken by the Advertising Association and Deloitte, commencing in January 2013 suggests that for every £1 spent on advertising in the UK, £6 is generated for the wider economy. Based on these predictions, the estimated £16bn that was spent on ad campaigns in 2011 added over £100 billion to the UK’s GDP.

So, perhaps encouraging more advertising is the answer to the UK’s economic dilemma. This is certainly the opinion of Matt Barwell, the consumer marketing and innovation director of Diageo Western Europe, who said:

People fundamentally believe in advertising but a lot of the conversation focuses on negative elements. People rarely get the opportunity to talk about the positive role advertising plays in terms of wealth creation, exports and the social benefits that it provides. These are all things that many of us take for granted.

If private firms can therefore be encouraged to boost their marketing campaigns, jobs may be created, demand for products will rise and with the help of the multiplier, the economy may strengthen. Advertising has both pros and cons and opinions differ on what makes a good advert. But, whatever your opinion of the role of advertising, it is certainly an important aspect of any economy. The following articles take a view of advertising.

Articles
Could we advertise ourselves out of recession? Marketing Week, Lucy Tesseras (31/1/13)
Advertising in times of recession: A question of value The Open University, Tom Farrell (13/3/09)
Recession spending on advertising and R&D Penn State, Smeal College of Business
Nothing to shout about The Economist (30/7/09)
UK’s payday lenders face restrictions on advertising Reuters (6/3/13)
Value claims improve advertising effectiveness in recessionary times Com Score, Diane Wilson (17/9/13)
Advertising in a bad economy About Advertising, Apryl Duncan
Advertising worth £100bn to UK economy The Telegraph, Graham Ruddick (31/1/13)
Can advertising be the motor that gets the struggling UK economy out of first gear? More about advertising (26/2/13)
Adverts ‘worth £100bn to UK’ Independent, Giddeon Spanier (30/1/13)

Report
Advertising Pays – How advertising fuels the UK economy Advertising Association & Deloitte (30/1/13)
Advertising Pays – How advertising fuels the UK economy: Accompanying video presentation Advertising Association & Deloitte: on YouTube (30/1/13)

Questions

  1. What is the role of advertising?
  2. Using a demand and supply diagram, illustrate and explain the role of advertising.
  3. During a recession, why would you expect advertising expenditure to fall? What impact would you expect this to have in your diagram from question 1?
  4. How might firms that sustain their advertising expenditure during a downturn benefit?
  5. Explain the link between advertising and the economy.
  6. Why could a higher level of advertising boost economic growth?
  7. Are there any negative externalities from advertising?
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Money can’t buy me love

Australia is a rich country. It is one of the few to have avoided a recession. This has been the result partly of successful macroeconomic policies, but largely of the huge mining boom, with Australia exporting minerals to China and other fast growing Asian economies.

But has this growth brought happiness? Are Australians having to work harder and harder to pay for their high standard of living? Indeed, do higher incomes generally result in greater happiness? The following articles explore this issue, both in an Australian context and more broadly. They look at some recent evidence.

For example, in one study, Canadian, Chinese, Indian, and Japanese university students were asked what they held to be most important for assessing the worth of their lives. The crucial finding was that although higher incomes may be a contributing factor to increased happiness and well-being, especially for poorer people, other factors are more important. These include developing fulfilling personal relationships, whether with partners, family members or friends; gaining knowledge and wisdom; having enjoyable hobbies; having financial security (as opposed to higher incomes); having a worthwhile career; living a moral life; helping other people.

The question then arises whether our economic systems and incentives are geared towards achieving these outcomes. Or are we encouraged to consume more and more and to seek higher and higher incomes to feed our addiction to consumption?

Is there an information problem here? Do many individuals perceive that money will buy them happiness, whereas, in reality, money can’t buy them love?

Articles
Australia: Where the good life comes at a price BBC News Magazine, Madeleine Morris (24/2/13)
Australia has the know-how to boost wellbeing Sydney Morning Herald, Matt Wade (8/9/12)
Money can’t buy you the good life Independent, Roger Dobson (24/2/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being The Atlantic, Derek Thompson (10/1/13)
The fact is, the richer you are, the happier you are The Telegraph, Allister Heath (5/2/13)
Money buys happiness? I wouldn’t bank on it The Telegraph, Christopher Howse (6/2/13)
Who Says Wealth Doesn’t Buy Happiness? The Wealthy Do CNBC, Robert Frank (4/2/13)
More Proof That Money Can’t Buy Happiness Business Insider, Aimee Groth (28/1/13)
Money Changes Everything The New York Times, Adam Davidson (5/2/13)
Why are the Chinese so sad? Maclean’s (Canada), Mitch Moxley (4/2/13)

Reports
First World Happiness Report Launched at the United Nations The Earth Institute, Columbia University (2/4/12)
World Happiness Report The Earth Institute, Columbia University, John Helliwell, Richard Layard and Jeffrey Sachs (eds.) (2/4/12)
Well-being evidence for policy: A review New Economics Foundation, Laura Stoll, Juliet Michaelson and Charles Seaford (3/4/12)

Questions

  1. Distinguish between necessary and sufficient conditions. Is higher income a necessary or sufficient condition (or both or neither) for an increase in happiness? Does a person’s circumstances affect the answer to this question?
  2. Explain what is meant by ‘rational behaviour’ at the margin in the traditional economic sense?
  3. If a person always behaved rationally, would they be happier than if they did not? Explain.
  4. Explain how information asymmetry between the two or more parties involved in a transaction may make people worse off, rather than better off, even though they were behaving rationally.
  5. Explain what is meant by diminishing returns to income.
  6. Do richer countries get happier as they get richer?
  7. How would you set about measuring happiness?
  8. What do you understand by the term ‘hedonic elevation and decline’? Does this provide an accurate description of you own purchasing behaviour? If so, explain whether or not you would like to change this behaviour.
  9. When people make economic decisions, these are normally made with bounded rationality. How may this affect the desirability of the outcomes of the decisions?
  10. In explaining bankers’ behaviour, Christopher Howse (author of the second Telegraph article above) states: ‘It’s the power game that keeps them happy, not the money itself. When I say “keeps them happy” I mean “feeds their addiction”. It is a negative kind of satisfaction. A morning spent without the distraction of making big bucks is a morning left exposed to the empty horror of being a little rational animal on the bare surface of the Earth lost in space.’ Do you agree? Explain why or why not.
  11. When people are addicted to something, would doing more of it be classed as irrational? Explain.
  12. Why are the Chinese so sad?
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Anyone want to take a bite out of Apple?

The technology sector is highly complex and is led by Apple. However, as the tablet market is continuing to grow, it is becoming increasingly competitive with other firms such as Samsung gaining market share. Although both firms sell many products, it is the growing tablet market which is one of the keys to their continued growth.

Tablet PCs have seen a growth in the final quarter of 2012 to a high of 52.5 million units, according to IDC. Although Apple, leading the market, has seen a growth in its sales, its market share has declined to 43.6%. Over the same period, Samsung has increased its market share from 7.3% to 15.1%. While it is still a huge margin behind Apple in the tablet PC market, Samsung’s increase in sales from 2.2 million to 7.9 million is impressive and if such a trend were to continue, it would certainly cause Apple to take note.

It’s not just these two firms trying to take advantage of this growing industry. Microsoft has recently launched a new tablet PC and although its reception was less than spectacular, it is expected that Microsoft will become a key competitor in the long run. There are many factors driving the growth in this market and the war over market share is surely only just beginning. The chart shows the 75.3% growth in sales in just one year. (Click here for a PowerPoint of the chart.)

A Research Director at IDC said:

We expected a very strong fourth quarter, and the market didn’t disappoint…New product launches from the category’s top vendors, as well as new entrant Microsoft, led to a surge in consumer interest and very robust shipments totals during the holiday season’

Apple has been so dominant in this sector that other companies until recently have had little success in gaining market share. However, with companies such as Samsung and ASUS now making in-roads, competition is likely to become fierce. There are already concerns that Apple’s best days are behind it and its share price reflects this. People are now less willing to pay a premium price for an Apple product, as the innovations of its competitors have now caught up with those of the leading brand name. The following articles consider this growing market.

Samsung gain tablet market share as Apple lead narrows BBC News (1/2/13)
Apple snatches US lead from Samsung Financial Times, Tim Bradshaw (1/2/13)
Apple revenues miss expectations despite high sales figures BBC News (24/1/13)
Samsung eats into Apple sales in the tablet market Mirror, Ruki Sayid (1/2/13)
MacWorld’s Apple celebration opens amid fears of tech giant’s decline Guardian, Rory Carroll (31/1/13)
Samsung’s tablet sales soar as Apple’s grip on market loosens Daily News and Analysis, Richard Blagden (2/2/13)
Samsung takes a nibble out of Apple’s tablet lead InfoWorld, Ted Samson(31/1/13)
Tablet Sales up 75% as Samsung and Asus Gain on Apple Interational Business Times, Edward Smith (31/1/13)

Questions

  1. Which factors are behind this exceptional growth in the tablet PC market?
  2. Using the Boston matrix, where do you think tablet PCs fit in terms of market size and market growth?
  3. Where would you place this market in terms of the product life cycle?
  4. What does the product life cycle say about the degree of competition, the impact on pricing on profits etc. in the phase that you placed the tablet PC market in your answer to question 3?
  5. Why have Apple’s shares fallen recently? Do you think this will be the new trend?
  6. Microsoft’s new tablet didn’t attract huge sales. What explanation was given for this? Use a diagram to help answer this question.
  7. Tablet PCs are relatively expensive, yet sales of them have increased significantly over the past few years. What explanation is there for this, given that we have been (and still are) in tough financial times?
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Higher tea prices brewing?

Six of the major tea producing countries – India, Kenya, Sri Lanka, Indonesia, Rwanda and Malawi – have formed an International Tea Producers’ Forum (ITPF). Together these countries produce slightly more than the world’s tea. The hope of the members of the new ITPF is that their cartel will allow them to increase the price of tea to the growers and to create greater price stability.

According to the Assam Tribune article below:

ITPF’s main objectives include – safeguarding the interests of the tea-producing countries, evolving collective solutions for the problems facing the producers, providing technical cooperation, sharing of technology and expertise by the member countries, undertaking market studies and research projects to address any specific issues concerning tea in general or any variety of tea, among others.

And according to the article from Sri Lanka’s Daily News:

Chairman of the Planters’ Association of Ceylon, which represents the interests of 23 Regional Plantation Companies, Lalith Obeyesekere said this was a landmark occasion. Sri Lanka particularly looks to the forum to provide long-term sustainability to the tea industry in maintaining price stability and quality standards, among the other objectives set out in the mandate… The Planters’ Association said they were confident that Sri Lanka could use the ITPF to re-look at the industry in order that local tea producers realize their full potential.

Sri Lanka’s plantation industries minister Mahinda Samarasinghe said:

The bulk of production is in the hands of smallholders. So there’s a need to increase their incomes. Price stability is definitely important.

The main aim of the ITPF over the longer term is likely to be to raise tea prices. The chart shows international tea prices from 1983 to the present day. As you can see, they have fluctuated considerably. Note that these are prices in nominal terms and hence do not take inflation into account. Click here for a PowerPoint of the chart.

But if the main aim is to increase prices to tea growers, how could this be achieved? One objective of the ITPF is to stimulate demand for tea by ‘promoting tea consumption through generic promotional campaigns’. The aim would be to encourage people to switch from coffee and soft drinks.

But to take advantage of its market power, the cartel might also want to reduce tea production, thereby pushing up the price. This, of course, would be more feasible if it had a larger than 50% share of the market.

Although production quotas are not currently part of the agreement, these are likely to be considered at future meetings, especially if the three other large producers – China, Vietnam and Iran – can be persuaded to join.

China, with some 38% of the market, is the world’s largest tea producer. Although it sent an observer to the meeting (as did Iran), it was not one of the signatories. If it could be persuaded to join the cartel, this would increase its power. Nevertheless, China specialises in different types of tea, mainly green teas, and is not the world’s biggest exporter – that is Kenya.

Articles
Tea nations join forces Radio New Zealand (25/1/13)
International Tea Producers’ Forum formed Assam Tribune, Ajit Patowary (23/1/13)
Planters’ Association upbeat on newly formed International Tea Producer’s Forum Daily News (Sri Lanka) (26/1/13)
Leaf Lobby: Sri Lanka hosts tea producer forum Lanka Business Online (24/1/13)
‘Tea cartel’ formed by biggest producing nation BBC News (23/1/13)
Tea producers brew up plan to raise prices Emirates 24/7 (23/1/13)

Data
Tea Monthly Price – US cents per Kilogram Index Mundi

Questions

  1. What are the stated aims of the newly formed ITPF? How realistic are they?
  2. What conditions are necessary for a cartel to be successful in raising prices over the long term?
  3. With reference to the chart, what can you say about the real price of tea over the period 1983 to 2013?
  4. To what extent are these conditions met by the ITPF?
  5. Why may a rise in tea prices in the supermarkets not result in a rise in prices to tea growers?
  6. How may tea growers benefit from the ITPF even if the Forum does not result directly in a rise in prices to growers?
  7. How can game theory help to explain the possible behaviour of members of a cartel and producers outside the cartel?
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This will give Tesco some food for thought

After weak Christmas trading, Tesco issued a profit warning – its first in 20 years. Following this, their shares fell in value by some £5bn, but this was met with an announcement of the creation of 20,000 jobs in the coming years, as part of a project to train staff, improve existing stores and open new ones. Yet, Tesco has reported another quarter of falling sales.

Trading times have been challenging and the fact that the UK’s biggest supermarket is struggling is only further evidence to support this. In the 13 weeks to the 26th May 2012, Tesco reported a decline in like-for-like sales of 1.5%. Although much of the £1bn investment in Tesco is yet to be spent, the fact that sales have fallen for a full year must be of concern, not only to its Chief Executive, but also to analysts considering the economic future for the UK.

Consumer confidence remains low and together with tight budgets, shoppers are continuing to be very cautious of any unnecessary spending. Part of Tesco’s recent drive to drum up sales has been better customer service and a continuing promotion war with the other supermarkets. This particular sector is highly competitive and money-off coupons and other such promotions plays a huge part in the competitive process. Whilst low prices are obviously crucial, this is one sector where non-price competition can be just as important.

Although Tesco sales in the UK have been nothing to shout about – the Chief Executive said their sales performance was ‘steady’ – its total global sales did increase by 2.2%. The Chief Executive, Mr Clarke said:

‘Internationally, like-for-like sales growth proved resilient, despite slowing economic growth in China…Against the backdrop of continued uncertainty in the eurozone, it is pleasing to see that our businesses have largely sustained their performance.’

A boost for UK sales did come with the Jubilee weekend and with the Olympics just round the corner, Tesco will be hoping for a stronger end to the year than their beginning. The following articles consider Tesco’s sales and the relative performance of the rest of the sector.

Tesco’s quarterly sales hit by ‘challenging’ trading BBC News (11/6/12)
Tesco UK arm notches up one year of falling sales Guardian, Zoe Wood (11/6/12)
Tesco upbeat despite new sales dip Independent, Peter Cripps (11/6/12)
Tesco sales seen lower in first quarter Reuters, James Davey(11/6/12)
The Week Ahead: Tesco set to admit it is losing ground to rivals Independent, Toby Green (11/6/12)
Tesco’s performance in the UK forecast to slip again Telegraph, Harry Wallop (10/6/12)
Tesco: What the analysts say Retail Week, Alex Lawson (11/6/12)
Supermarkets issue trading updates The Press Association (9/6/12)
The Week Ahead: Supermarkets prepare to give City food for thought Scotsman, Martin Flanagan (11/6/12)
Asda’s sales growth accelerates Reuters, James Davey (17/5/12)
Asda sales increase helped by Tesco Telegraph, Harry Wallop (18/5/12)
Tesco v. Sainsbury’s in trading update battle Manchester Evening News (11/6/12)
Sainsbury’s out-trades Tesco on UK food sales Independent, James Thompson (10/6/12)

Questions

  1. Using some examples, explain what is meant by non-price competition.
  2. Why has Tesco been losing ground to its competitors?
  3. Given the products that Tesco sells (largely necessities), why have sales been falling, despite household’s tight budgets?
  4. Into which market structure would you place the supermarket sector? Explain your answer by considering each of the assumptions behind the market structure you choose.
  5. Why have Tesco’s rivals been gaining ground on Tesco?
  6. How might this latest sales data affect Tesco’s share prices?
  7. Based on what the analysts are saying about the food sector, can we deduce anything about the future of the UK economy in the coming months?
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No such thing as bad publicity?

The trendy US fashion retailer Abercrombie & Fitch entered the UK in 2007 with the opening of a flagship store close to Savile Row in London. Located in the upmarket Mayfair area of London, Savile Row is famous for its traditional men’s tailors.

Recently Abercrombie & Fitch decided to go one step further by opening a childrenswear store directly on Savile Row. This move upset the local retailers and was met with protests.

This was just the latest in a history of controversy surrounding Abercrombie & Fitch which has included a product boycott and a lawsuit concerning employment issues. Should all this bad publicity be a concern for the company?

We expect tastes to be one of the key determinants of demand. If taste for a company’s product declines, its demand curve shifts to the left. This means it can sell less at any given price and consequently will have a knock-on effect on profits. Somewhat surprisingly, therefore, the PR expert, Mark Borkowski, quoted in the Guardian article above, suggests that all this adverse publicity may have in fact helped the company because:

“…the focus is on the brand. They’ve got a very keen identity of who they are, what they want, who they want to consume their products, and they’ve stuck to it.”

It is also clear that the company is very aware of the importance of protecting its brand – even going as far as paying television actors NOT to wear their clothes! Abercrombie & Fitch has also been reluctant to cut its prices during the current recession, perhaps because of a fear of harming its brand.

Abercrombie & Fitch with its ‘crappy clothes’ threatens staid Savile Row Observer, Euan Ferguson (11/03/12)
Savile Row cannot live in the past Guardian, Charlie Porter (24/04/12)
Sorry chaps, Abercrombie & Fitch simply doesn’t fit Savile Row Guardian, Gustav Temple (24/04/12)
Savile unrest … the tailors who want to stop Abercrombie & Fitch London Evening Standard, Josh Sims (27/04/12)

Questions

  1. What are the distinctive features of the Abercrombie & Fitch brand?
  2. What are the key features of competition in this industry?
  3. Why might Abercrombie & Fitch be keen to open up a store on Savile Row?
  4. Why might the local tailors object to Abercrombie & Fitch opening a store nearby?
  5. Why do you think negative publicity appears to have little effect on Abercrombie & Fitch?
  6. Why do you think television coverage could harm the Abercrombie & Fitch brand?
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