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Posts Tagged ‘sales’

Sainsbury’s and Argos: Good or bad?

There has been a link between Sainsbury’s and Argos, with Sainsbury’s offering Argos concessions in some stores. But now, we’re looking at a much more significant link, with Sainsbury’s offering £1.3 billion for control of Home Retail Group’s Argos.

Many have questioned the sense of this offer, wondering what Sainsbury’s will gain from purchasing Argos, but Sainsbury’s has indicated it will boost sales, give itself access to a more advanced delivery network and Argos customers. Argos has worked hard to update its image, moving towards a more technology based catalogue and promising same day delivery in a bid to compete with companies, such as Amazon.

Online delivery is a costly business, with suggestions that retailers make losses on each delivery and hence pay customers to shop online. This move by Sainsbury’s may therefore be an investment in expanding its online delivery services and using the infrastructure that Argos already has. This will therefore help Sainsbury’s to invest in this sought after customer service, without having to invest millions into providing the infrastructure in the first place. This move may give Sainsbury’s a first mover advantage in the grocery sector, which may force other competitors to follow suit.

We could write for hours on the ins and outs of this potential deal and undoubtedly commentators will argue both for and against it. The following articles consider the good and bad sides and the future of grocery retailers in the UK.

Why does Sainsbury’s want to buy Argos? BBC News, Katie Hope (01/02/16)
Sainsbury’s agrees terms to buy Home Retail Group in £1.3bn deal The Guardian, Sean Farrell and Sarah Butler (02/02/16)
Sainsbury’s bets on Argos takeover for digital age Reuters, James Davey and Kate Holton (02/02/16)
Sainsbury’s returns with £1.3bn offer for Argos The Telegraph, Jon Yeomans and Ashley Armstrong (02/02/16)
Sainsbury’s could shut up to 200 Argos stores Sky News (12/01/16)
Sainsbury’s strikes deal to buy Home Retail Group Financial Times, Mark Vandevelde, Arash Massoudi and Josh Noble (02/02/16)

Questions

  1. What are the benefits to Sainsbury’s of taking over Argos?
  2. Why have many critics been surprised by this take-over?
  3. What is meant by a first mover advantage?
  4. Do you think that grocery retailers should diversify further or focus on their core business?
  5. Commentators suggest that delivery costs more to retailers than the price charged to consumers. Can you illustrate this using cost and revenue curves?
  6. Online delivery infrastructure is a big fixed cost for a firm. How will this change the shape of a firm’s cost curves and what impact will this have on profits following changes in market output?
  7. Do you think this take over will cause any concerns by competition authorities?
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Bridging The Gap

The Gap has been a fixture of UK High Streets for many years and has had both ups and downs. In a highly competitive market, it faces fierce rivals from other high street retailers and also from an increasingly important online presence. Same-shop sales for Gap fell in July by 7% and the brand is now finding itself in a tricky position.

Although the Gap does sell products at a variety of prices, even sales growth in its most affordable line was not sufficient to offset declines elsewhere. It’s not just the UK where this decline is observed, with 175 Gap specialty shops in America being shut down over the next year. This will inevitably mean job losses. So why is Gap struggling so much, after being such a popular brand?

Its competitors are arguably offering a very similar product, but at a lower price. Consumers, being increasingly aware of prices and having many more options to make price comparisons, are perhaps using this information to make better choices. If they don’t believe that they are getting something extra from paying a slightly higher price at Gap, then they’d prefer to get the same thing elsewhere, from somewhere like Forever 21 or H&M. Some also suggest that the product itself is out of date and with the world of high fashion being such an important part of life for many people, an out-of-date product is bad news. That, together with consumers finding more and more things that they can spend their money on, beyond clothes has led to a tricky position for the Gap.

A key part of maintaining a presence on high streets has been sales and special offers – this has been a key element in keeping customers coming, but it is certainly not a long term strategy. Research analysts have been investigating some of the key aspects of the Gap and various comments have been made, including:

“Uniformity is no longer cool… The trick now is convincing your customer that they’re getting something unique.” (Simeon Siegel), Nomura Securities.

“Of top priority is delivering more consistent and compelling product collections.” Kari Shellhorn, Gap spokeswomen.

“Whether it’s colour or print or it’s pattern, the Gap brand hasn’t been kept up to date … Until they have their product right, I think we’ll continue to see them have promotions.” Dana Telsey, Telsey Advisory Group.

The future of Gap is certainly in the balance and with an increasingly competitive market when it comes to retail, an effective strategy to maintain and increase its market share will be essential.

Why Gap is in a tight squeeze BBC News, Gianna Palmer (20/8/15)
Gap Inc sees some potential for next year but Q2 2015 remains weak Forbes, Investing, Trefis Team (24/8/15)

Questions

  1. What sort of figure would you expect Gap’s clothes to have and why?
  2. Into which market structure would you place the retail industry? What does this tell us about how a company such as Gap can hope to make profits?
  3. If you were advising Gap, what strategies would you propose as a means of boosting revenue and cutting costs?
  4. The BBC News article states that the fortunes of Gap have been hurt by a strong US dollar. Why may this be the case?
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An oligopoly price war

Oligopoly is the most complex market structure, characterised by a few large firms which dominate the industry. Typically there are high barriers to entry and prices can be very sticky. However, perhaps the most important characteristic is interdependence. With this feature of the market, oligopolies, despite being dominated by a few big firms, can be the most competitive market structure.

There are many examples of oligopolies and one of the best is the supermarket industry. Dominated by the likes of Tesco, Morrisons and Asda, competition in terms of branding, product development and quality is constant, but so is price competition. During the recession, you could hardly watch a TV programme that included advert breaks without seeing one of the big four advertising their low prices.

However, in the past few years, the supermarket industry has seen competition grow even further and the big four are now facing competition from low-cost retailers, including Aldi and Lidl. This has led to falling sales and profits for the likes of Tesco and Morrisons.

Tesco, Morrisons, Sainsbury’s and Asda have all felt the emergence of discount retailers and have seen their customer numbers fall. All have reacted with rounds of price cuts and new deals, and this price war looks set to continue. Morrisons have just announced a 14% average price cut on 135 products to match earlier changes in pricing strategies by the other main competitors. As I’m writing this during the Algeria v. South Korea match, I have just seen an advert from Sainsbury’s, promoting their milk chocolate digestive biscuits, priced at £1. The advert explicitly states that they are ‘less than Morrisons’, where the price is £1.50. This was soon followed by another from Sainsbury’s saying that the Cif bathroom spray is £1.50, which is ‘less than Tesco’, priced at £2.75. I need say no more.

So, what is it about this industry which means it is so susceptible to price wars? Are all oligopolies like this? The following articles consider the supermarket industry and the price wars that have emerged. Think about this sector in terms of oligopoly power and consider the questions that follow.

Morrisons announces another round of price cuts/a> BBC News (22/6/14)
Tesco suffers worst sales for decades The Guardian, Sarah Butler and Sean Farrell (4/6/14)
Britain’s Morrisons to cut prices on 135 products Reuters (22/6/14)
Morrisons slashes more prices by up to 41pct The Telegraph, Scott Campbell (22/6/14)
Sainsbury’s and Netto in discount store tie-up BBC News (20/6/14)
Slow to respond, Tesco now pays the price Wall Street Journal, Peter Evans and Ese Erheriene (19/6/14)
One million fewer customer visits a week at Tesco The Guardian, Sean Farrell (3/6/14)
Asda only one of big four to grow share as Lidl achieves highest ever growth Retail Week, Nicola Harrison (3/6/14)
Will Asda shoot itself in the foot with in-store cost cutting? The Grocer, Alec Mattinson (28/5/14)
Tesco sales slide at record speed as discounters pile on the pressure Independent, Simon Neville (3/6/14)
Quester: Back J Sainsbury to prove doubters wrong The Telegraph, Graham Ruddick (11/6/14)

Questions

  1. What are the key characteristics of an oligopoly?
  2. How do the above characteristics explain the conduct of firms in an oligopoly? How relevant is this to the supermarket industry?
  3. In many oligopolies, prices are sticky. Why is it that in the supermarket industry price wars break out?
  4. Is the kinked demand curve a relevant model to use when talking about the supermarket industry?
  5. What other industries fit into the category of an oligopoly? Is the kinked demand curve model relevant in these industries?
  6. Would there be an incentive for the big 4 supermarkets to collude and fix price? Explain your answer.
  7. Interdependence is the key characteristic in an oligopoly. Can this explain the behaviour of the supermarkets?
  8. Given that oligopolies are characterised by high barriers to entry, how is that Aldi and Lidl have been able to compete with them?
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The decline of luxury

Globalisation has led to an increasingly interdependent world, with companies based in one country often dependent on a market abroad. In recent years, it is the rapid growth of countries like China that has led to growth in the size of the markets for many products. With incomes rising in emerging countries, demand for many products has been growing, but in the past year, the trend for Prada has ended and seems to be reversing.

As the market in China matures and growth of demand in Europe slows, Prada has seen its shares fall by the largest margin since June last year.

Prada is a well-known luxury brand. The products it sells are relatively expensive and hence its products are likely to have an income elasticity of demand well above +1. With changes in China and Europe, Prada expects its growth in sales to January 2015 will be ‘low single-digit’ – less than the 7% figure recorded for the last financial year.

This lower growth in same-store sales is likely to continue the following year as well. Add on to this the lower-than-expected profits, which missed analysts’ forecasts, and you have a prime example of a brand that is suffering because of its customer base and the economic times.

Prada isn’t alone in suffering from economic conditions and, relative to its European counterparts, is expected to have higher growth in sales and profits in the next 12 months – at 11.5% and 14.8% respectively. This is according to a survey by Thomson Reuters.

Prada has exploited high demand by Chinese consumers, but has recently been affected by the strength of the euro. A strong euro means that the Italian-based Prada is struggling with exports, which only adds to its problems. As economic growth picks up in China and as other emerging economies begin to experience more rapid economic growth, the fortunes of this luxury-retailer may change once more. However, with volatile economic times still around in many countries, the future of many retailers selling high-end products to higher income customers will remain uncertain. The following articles consider the fortunes of Prada.

Prada shares fall sharply after China luxury warning BBC News (3/4/14)
Prada falls after forecasting slowing luxury sales growth Bloomberg, Andrew Roberts and Vinicy Chan (3/4/14)
Prada profits squeezed by weakness in Europe and crackdown in China The Guardian (2/4/14)
Prada bets on men to accelerate sales growth Reuters, Isla Binnie (2/4/14)
Prada misses full year profit forecast Independent, Laura Chesters (2/4/14)

Questions

  1. How can we define a luxury product?
  2. Explain the main factors which have led to a decline in the demand for Prada products over the past 12 months.
  3. Using a diagram, illustrate what is meant by a strong euro and how this affects export demand.
  4. What business strategies are Prada expected to adopt to reverse their fortunes?
  5. Using a diagram, explain the factors that have caused Prada share prices to decline.
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Start your engines

There’s been much talk about the UK’s economic recovery and whether or not it has begun and whether consumer spending is actually the cause. The latest sector to post positive figures is the car industry, which has seen 2013 bring in the highest level of car sales since the onset of the credit crunch.

According to the Society of Motor Manufacturers and Traders (SMMT), vehicle registrations in 2013 were 2.26 million, which represented a 10.8% increase from 2012. That’s not to say that we have returned to the heights seen pre-crisis levels, as sales still remain some way below their 2007 figure, but the data is certainly moving in the right direction. The key questions are: What’s the cause of this growth and what does it mean for the UK economy?

The economy has certainly turned a corner and perhaps consumer confidence is improving to reflect this. With consumes more optimistic about future economic prospects, more luxury items may well be purchased. During the height of the recession, many families may well have said ‘it will last’ or ‘we’ll make do’, referring to their old cars. However, this improved confidence, together with attractive finance deals may have been instrumental in convincing consumers to splash out. This is reflected in the data, which indicates that some 75% of car sales involve a finance package. One further explanation that has been offered by industry analysts is that the refunds individuals are receiving through mis-sold payment protection insurance are providing a nice contribution towards the deposit.

PPI payments will certainly dry up, but as long as attractive finance packages remain, car sales should continue. A key factor affecting affordability may be interest rates. When they increase, any variable rate loans will become more expensive to service and this may act to deter consumers. However, if the car industry helps to stimulate other sectors and wages begin to increase, the overall effect may be to sustain and even further the growth of this key economic sector. The following articles consider the car industry.

UK car sales hit five-year high The Guardian, Angela Monaghan (7/1/14)
UK new car sales highest since 2007, SMTT says BBC News (7/1/14)
Car sales increased by almost 11% in 2013 Sky News (7/1/14)
UK new car sales rise to highest level since 2007 Reuters, David Milliken (7/1/14)
UK car sales up 11% in 2013, topping pre-crisis levels Wall Street Journal, Matthew Curtin and Ian Walker (7/1/14)
New car sales in UK at highest since before recession Independent, Sean O’Grady (7/1/14)
UK car sales top pre-recession levels Financial Times, Henry Foy (6/1/14)

Questions

  1. How important is the car industry in the context of the UK economy?
  2. How is the UK car industry performing relative to its Western rivals?
  3. Would a 30% single rate of income tax be equitable?
  4. Explain the way in which car sales have been affected by consumer confidence.
  5. How have finance packages helped to stimulate car sales?
  6. What are the key macroeconomic variables that are likely to affect the future performance of this key sector?
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His Master’s Voice is fading

Comet, Peacocks, Woolworths, JJB, Jessops and now HMV – they all have one thing in common. The recession has hit them so hard that they entered administration. HMV is the latest high street retailer to bring in the administrators, despite insisting that it does have a future on the UK’s high streets. With debts of £176m and huge competition from online retailers, the future of HMV is very uncertain.

Over the past decades, companies such as Amazon, ebay, LoveFilm, Netflix and apple have emerged providing very stiff competition to the last remaining high street seller of music and DVDs. People have been turning more and more to the internet to do their shopping, with cheaper prices and greater choice. The speed of delivery, which in the past may have been a disadvantage of buying from somewhere like Amazon, is now barely an obstacle and these substitute companies have created a difficult environment for high street retailers to compete in. Despite going into administration, it’s not necessarily the end of the much-loved HMV. Its Chief Executive said:

We remain convinced we can find a successful business outcomes. We want to make sure it remains on the high street … We know our customers fell the same way.

While the recession has undoubtedly affected sales at HMV, is this the main reason for its demise or are other factors more relevant? As discussed, online retailers have taken over the DVD and music industry and with downloading increasing in popularity and CD/DVDs on sale in numerous locations, including supermarket chains, HMV has felt the competitive pressure and its place on the high street has come into question. As Neil Saunders, the Managing Director of Conlumino said:

By our own figures, we forecast that by the end of 2015 some 90.4 per cent of music and film sales will be online. The bottom line is that there is no real future for physical retail in the music sector.

Further to this, prices have been forced downwards and HMV, having to pay high fixed costs to retain their place on the high streets, have been unable to compete and remain profitable. Another contributing factor could be an outdated management structure, which has not responded to the changing times. Whatever the cause, thousands of jobs have been put at risk. Even if buyers are found, some store closures by the administrators, Deloitte, seem inevitable. Customer gift vouchers have already become worthless and further losses to both workers and customers seem likely. It is thought that there will be many interested buyers and huge support from suppliers, but the former is likely to remain a relatively secretive area for some time.

This latest high street disaster will undoubtedly raise many questions. One theory about recovery from a recession looks at the need for many businesses to go under until the fittest are left and there is sufficient scope for new businesses to emerge.

Could it be that the collapse of companies such as Woolworths, HMV, Comet, Jessops and Blockbuster is an essential requirement for economic recovery? Or was the recession irrelevant for HMV? Was its collapse an inevitable consequence of the changing face of Britain’s high streets and if so, what does the future hold for the high street retailers? The following articles consider the demise of HMV.

HMV: a visual history BBC News (15/1/13)
Chief executive says ‘HMV still has a place on the high street’, as customers are told their gift vouchers are worthless Independent, James Thompson (15/1/13)
Potential buyers circle stricken HMV Financial Times, Andrea Felsted (15/1/13)
HMV and independents to urged to work together to save in-store music market BBC News, Clive Lindsay (15/1/13)
HMV record chain was besest by digital downloads and cheap DVDs The Guardian (15/1/13)
The death of traditional retailers like HMV started when we caught on to one-click and the joy of owning DVDs wore thin Independent, Grace Dent (15/1/13)
HMV shoppers: ‘I’m disappointed, but it’s understandable why they went bust The Guardian, James Brilliant (15/1/13)
HMV: Record labels could take HMV back to its 1920 roots The Telegraph, Graham Ruddick (15/1/13)
HMV’s future seen as handful of stores and website Reuters, Neil Maidment and James Davey (15/1/13)
HMV leaves social gap in high street BBC News, Robert Plummer (15/1/13)
Is there good news in HMV’s collapse? BBC News, Robert Peston (15/1/13)
Is it game over for UK retail? The Guardian, Larry Elliott (18/1/13)
High Street retailers: Who has been hit hardest? BBC News (16/1/13)

Questions

  1. What are the main reasons behind the collapse of HMV?
  2. Use a diagram to illustrate the impact the companies such as Amazon and Tesco have had on costs and prices in the entertainment industry.
  3. Has the value we place on owning DVDs truly changed or have other factors led to larger purchases of online entertainment?
  4. Why is online retail providing such steep competition to high street retailers?
  5. Explain why it can be argued that economic recovery will only take place after a certain number of businesses have gone into administration.
  6. To what extent do you think HMV’s collapse is due to its failure to adapt to changing social circumstances?
  7. Briefly outline the wider economic implications of the collapse of a company such as HMV. Think about managers, employees, suppliers, customers and other competitors, as well as other high street retailers.
  8. In which market structure would you place the entertainment industry? Explain your answer. Has this contributed to the demise of HMV?
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Temperature down; spending up

With the winter fast approaching, consumers have already begun to stock up on warmer clothes. This has contributed towards consumer spending increasing faster in September than it has in the past 3 years. According to Visa Europe’s UK expenditure index, sales in August increased by 1.2pc, but in September they rose month-on-month by 3pc.

But whilst sales on the high-street increased, sales on-line and over the telephone declined. It seems that the recent decrease in temperature is just what the retail sector ordered, as people took to the high streets.

Furthermore, recent improvements in consumer income, together with lower inflation and rising employment have all contributed towards a growth in spending. However, as consumer confidence remains at a relatively low level, it is unlikely that the winter will bring much of a change to growth in the economy. The Chief Economist at Markit said:

However, consumer confidence remains historically low as uncertainty about the economy and job security persists, suggesting that the bounce in spending seen in the third quarter could be as good as it gets for the foreseeable future.

Although the lower temperature has caused a boost in consumption, once people have made their ‘investment’ in warmer clothes, retail spending may once again decline. Hence the above comment by Markit, which suggests that further sustained increases in consumer spending may still be some way off.

The following few articles look at the latest data on retail spending.

UK consumer spending ‘rose in September’ BBC News (5/10/12)
Consumer spending increases by 3pc The Telegraph (5/10/12)
Consumer spending increases by 3% The Press Association (5/10/12)
UK retail sales: what the analysts say Guardian (20/9/12)
Online sales and wet weather boost John Lewis Scotsman, Peter Ranscombe (5/10/12)

Questions

  1. Which factors typically affect consumer spending?
  2. Using a diagram, illustrate the impact of this increase in consumption on national output and the price level.
  3. Is it possible that a multiplier effect may occur with the August and September rise in retail sales?
  4. Why is consumer confidence remaining low? Which components of aggregate demand does it affect?
  5. Explain why (a) lower inflation, (b) the colder weather and (c) rising employment have caused consumer spending to rise.
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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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Car sales to drive the economy?

With tight incomes, the first things that families tend to cut back on are the more luxury items. Extensions to houses are delayed, interior refurbishments are put off and the old car that was going to be traded in becomes something you can live with for another few years.

Car sales have been adversely affected during the recession, but data for May 2012 show a positive turn. Manufacturers have said that car sales are up by 7.9% compared with May last year. According to the Society of Motor Manufacturers and Traders (SMTT), much of the increased demand has come from private sales, where the increase has been over 14%.

This data may not be the answer to the economic troubles, but it is perhaps an indication that confidence is beginning to return. However, should things go from bad to worse in the eurozone, it isn’t hard to see data for the coming months showing the opposite trend. One other key piece of information to take from this data is the growth in the sales of lower-emissions vehicles. Sales of these were up 31.8% in May 2012 compared to the same time last year. Jonathan Visscher from SMMT said:

‘The green sector is growing fast…Every car manufacturer is going to have a hybrid model on its lists by the end of this year, even Ferrari.’

The continuing upward trend in car sales is by no means guaranteed to continue, especially with things like the expected rise in fuel duty later this year and the ongoing crisis in the eurozone, with Spanish banks potentially looking for help via a bail-out in the not too distant future. The following articles consider the acceleration in car sales.

UK sees biggest annual rise in car sales for nearly 2 years Reuters (8/6/12)
New car sales accelerate ahead Press Association (8/6/12)
UK new car sales accelerated in May, say manufacturers BBC News (8/6/12)
New car sales accelerate ahead Independent, Peter Woodman (8/6/12)
Car registrations accelerate in May Financial Times, John Reed (8/6/12)

Questions

  1. How would you define a luxury good? What is the relationship with income?
  2. How could an increase in car sales benefit the economy? How could the multiplier effect have an impact?
  3. Which factors have contributed towards the growth in low-emissions cars?
  4. Sales of low-emissions cars have significantly increased. However, why is this increase
  5. What are some of the key things that can help to bring a recession to an end? Into which general category would you place this increase in car sales?
  6. Fuel duty is expected to rise later this year. How might this affect the number of new car registrations? What does your answer tell you about the cross elasticity of demand?
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Saving for a rainy day

Weather has already been partly blamed for poor economic growth, in particular in December 2010 and January 2011. April 2012 is no different – the wettest April on record is said to have caused the worst performance in sales since March 2011.

Like-for-like sales fell by 3.3%, mainly through lower demand for clothes and shoes. Supermarkets saw an increased demand for warmer food items with the colder weather and demand for home products also increased, with analysts suggesting that people decided to re-decorate their houses rather than venture outside! This was further supported by sales of gardening equipment, which also fell. However, the weather is not always bad – in March, sales were higher than expected, with the unusually warm weather, but unfortunately for growth statistics, the boost in sales in March has been more than offset by the decline in sales in April. Furthermore, there are concerns that the March ‘heat-wave’ may have encouraged consumers to do their summer shopping already and hence summer sales may suffer.

The retail data for April 2012 must be considered carefully, as comparing this month’s sales with the same period last year will be very misleading. Last April, the UK was hit with the Royal Wedding, which did boost sales of many products – underlying sales growth was recorded at 5.2% for the month. However, whilst April sales for 2012 could hardly hope to compete with April sales for 2011, the downward trend is undoubtedly going to cause concern for the government. Helen Dickinson, Head of Retail at KPMG said:

“While May will certainly be brighter than April, the health of the retail sector continues on a downward trajectory.”

Whether or not sales do continue their downward trend depends on many factors, including government policy measures to boost growth and cut unemployment. However, one other variable that may influence the trend is the weather. Here’s hoping that the sun shines and people begin to spend!

Weaker retail sales, job surveys raise risk of longer slump Reuters, Olesya Dmitracova (9/5/12)
Wettest April ‘hits retail sales’ BBC News (9/5/12)
Retail sales slide in wettest April on record Telegraph (9/5/12)
April showers wash out retail sales Financial Times, Sarah O’Connor (9/5/12)
Retail sales slip back 1 per cent as fashion stores weather April showers Independent, James Thompson (9/5/12)

Questions

  1. Use a demand and supply diagram to illustrate the effects of the weather on equilibrium price and output.
  2. What other factors besides the weather affect retail sales?
  3. What government policy measures could be implemented to try to boost the retail sector?
  4. From the information you are told are there any sectors that surprise you in terms of whether sales have risen or fallen? Explain your answer in each case.
  5. With sales in April falling, what is the implication for a firm’s profits? What steps might a firm take in a bid to boost sales?
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