The supermarket industry is a classic example of an oligopoly. A market dominated by a few large companies, which is highly competitive and requires the companies to think about the reactions of the other competitors whenever a decision is made. Throughout the credit crunch, price cutting was the order of the day, as the big four tried to maintain market share and not lose customers to the low cost Aldi and Lidl. Morrisons, however, has found itself in exactly that position and is now looking to restructure to return to profitability.
Morrisons is well known for its fresh food, but it seems that with incomes still being squeezed, even this is insufficient to keep its customers from looking for cheaper alternatives. Morrisons’ market share has been in decline and its profits or the last financial year have been non-existent. It’s been losing ground to its big competitor, Tesco and part of this is due to the fact that Morrisons was late to enter the ‘Tesco metro’ market. It remained dependent on its large supermarkets, whereas Tesco saw the opportunity to expand onto the highstreets, with smaller stores. It was also late arriving to the online shopping business and while it has now developed more sophisticated IT systems, it did lose significant ground to Tesco and its other key competitors.
Another problem is that Morrisons has found itself unable to compete with the low cost supermarkets. The prices on offer at Morrisons are certainly not low enough to compete with prices at Aldi and Lidl and Morrisons has seen many of its customers switch to these cheaper alternatives. But Morrisons is fighting back and has announced plans to cut prices on a huge range of products across its stores. The fresh food aspect of the business will still remain and the hope is that the fresh food combined with cheaper price tags will allow Morrisons to re-gain lost ground to Tesco and take back some of its lost customers from the low-cost alternatives. However, it’s not just Morrisons that has been losing customers to the budget retailers. Tesco, Sainsbury’s and Asda have all lost market share to Aldi and Lidl, but it is Morrisons that has fared the worst.
The latest news on Morrisons’ profits and overall performance, together with its promise of restructuring and price cuts worth £1 billion has caused uncertainty for shareholders and this has reduced the value of shares. However, Morrisons’ Directors have tried to restore confidence by purchasing shares themselves. With expectations of price wars breaking out, the other supermarkets have also seen significant declines in their share values, with a total of £2 billion being wiped off the value of their shares collectively. The consequences of Morrisons’ performance will certainly continue: customers are likely to benefit from lower prices in all of the big four supermarkets, but investors may lose out – at least in the short run. The impact on jobs is uncertain and will certainly depend on how investors and customers react in the coming weeks. The following articles consider this sector.
UK grocer Morrison warns on profit, threatens price war Reuters, James Davey (13/3/14)
Morrisons and the threat to mainstream supermarkets BBC News, Robert Peston (13/3/14)
Morrisons expected to sell property in response to profit drop The Guardian (9/3/14)
Morrisons restructuring sparks fears of new price war BBC News (13/3/14)
Morrisons’ dividend up while profit falls? It’s hard to believe The Guardian, Nils Pratley (13/3/14)
Morrisons boss talks tough as group slides into red The Scotsman, Scott Reid (13/3/14)
Morrisons plots price cuts after annual loss Sky News (13/3/14)
Morrisons’ declaration of £1bn price war with budget stores hammers Sainsbury and Tesco shares This is Money, Rupert Steiner (14/3/14)
Ocado on track for first profit in wake of Morrisons deal Independent, Simon Neville (14/4/14)
Questions
- What are the key characteristics of an oligopoly?
- To what extent do you think the supermarket sector is a good example of an oligopoly?
- Why is the characteristic of interdependence a key cause of the potential price war between the supermarkets?
- Why has Morrisons been affected so badly with the emergence of the budget retailers?
- By using the income an substitution effect, explain how the big four supermarkets have been affected by retailers, such as Aldi and Lidl.
- Using a demand and supply diagram, explain how the share prices of companies like Morrisons are determined. Which factors affect (a) the demand for and (b) the supply of shares?
- What do you think will happen to the number of jobs in Morrisons given the performance of the company and its future plans?
Footballers in the English Premier League are some of the most highly paid workers in the world. With unique talents and skills and hence a limited supply of labour, together with an insatiable appetite from the British public for football, we would expect to see high wages and a market ripe for investment, with high returns on offer. But, is this case?
The article below is by Linda Yueh, the Chief Business Correspondent for BBC News, and she has looked into the football, asking why on earth buy a football club? Despite the success of the English Premier League in drawing fans, TV and commercial revenues, many teams find it difficult to break even and investing in a team is unlikely to yield much of a return (if any!). Yet, we still see successful businesspeople, especially from abroad, purchasing English football teams.
Many club owners have hugely profitable ventures in other markets and historically only invest their money when they see an opportunity for a high return. But, not in the case of football. A return is unlikely and yet they still invest. So, with positive returns unlikely, what is it about this market that attracts investors? The article by Linda Yueh considers this question.
Article
Why on earth buy a football club? BBC News, Linda Yueh (27/2/14)
Report
Annual Review of Football Finance – Highlights Deloitte, Sports Business Group June 2013
Questions
- How can the returns to investment be measured?
- How can a company’s operating profit be calculated?
- Using a labour market diagram, explain why footballers are paid such a high wage.
- Is it monetary or non-monetary factors that seem to explain why businessmen invest in football clubs?
- Why are English football clubs typically unprofitable? Should they be?
- Which factors can explain the growing financial inequality between clubs in the Premier League and in the divisions below? Is there an argument for government involvement to regulate football?
In the blog Effects of raising the minimum
wage, the policy of an above-inflation rise in the minimum wage was discussed, as this had been advocated by political leaders. Over the past 5 years, the minimum wage has fallen in real terms, but from October 2014, the national minimum wage will increase 19p per hour and this rise will be the first time since 2008 when the increase will be higher than inflation.
The National Minimum Wage is a rate applied to most workers in the UK and is their minimum hourly entitlement. For adults over the age of 21, it will be increased by just over 3% to £6.50. Rises will also occur for 18-20 year olds, though their increase will be lower at 10p and will take the hourly wage to £5.13 an hour, representing a 2% rise. 
Those aged 16 and 17 will also see a 2% rise, taking their wage up by 7p to £3.79. With inflation currently at 1.9% (as measured by the CPI), these rises outstrip inflation, representing a real increase in the minimum wage. Undoubtedly this is good news for workers receiving the minimum wage, and it is thought that millions of workers will benefit.
Vince Cable said:
The recommendations I have accepted today mean that low-paid workers will enjoy the biggest cash increase in their take home pay since 2008…This will benefit over one million workers on national minimum wage and marks the start of a welcome new phase in minimum wage policy.
While this rise has been praised, there are still suggestions that this minimum wage is too low and does not represent a ‘living wage’. The General Secretary of Unison said:
Across the country people are struggling to make ends meet. The sooner we move to a Living Wage the better. The real winners today will again be payday loan sharks who prey on working people, unable to bridge the financial gap between what they earn and what their families need to survive.
(Click here for a PowerPoint of the above chart.)
The Chancellor eventually wants to increase the minimum wage to £7 per hour, but there will undoubtedly be an impact on businesses of such a rise. Is it also possible that with the national minimum wage being pushed up, unemployment may become a problem once more?
Market wages are determined by the interaction of the demand and supply of labour and when they are in equilibrium, the only unemployment in the economy will be equilibrium unemployment, namely frictional or structural. However, when the wage rate is forced above the equilibrium wage rate, disequilibrium unemployment may develop. At a wage above the equilibrium the supply of labour will exceed the demand for labour and the excess is unemployment.
By increasing the national minimum wage, firms will face higher labour costs and this may discourage them from taking on new workers, but may also force them into laying off existing workers. The impact of the minimum wage on unemployment doesn’t seem to be as pronounced as labour market models suggest, so perhaps the increase in the minimum wage will help the lowest paid families and we won’t observe any adverse effect on businesses and employment. The following articles consider this story.
National minimum wage to rise to £6.50 The Guardian, Rowena Mason (12/3/14)
Minimum wage up to £6.50 an hour BBC News (12/3/14)
Minium wage to increase by 3% to £6.50 an hour Independent, Maria Tadeo (12/3/14)
Minimum wage rise confirmed Fresh Business Thinking, Daniel Hunter (12/3/14)
Ministers approve minimum wage rise London Evening Standard (12/3/14)
Government to accept proposed 3% minimum wage rise The Guardian, Rowena Mason (4/3/14)
Londoners do not believe minimum wage is enough to live on in the capital The Guardian, Press Association (9/3/14)
Minimum wage: The Low Pay Commission backs a 3% increase BBC News (26/2/14)
Questions
- Using a diagram, illustrate the impact of raising the national minimum wage in an otherwise perfectly competitive labour market.
- How does your answer to question 1 change, if the market is now a monopsony?
- To what extent is elasticity relevant when analysing the effects of the national minimum wage on unemployment?
- How might an increase in the national minimum wage affect public finances?
- Why is an above-inflation increase in the national minimum wage so important?
- What is meant by a Living Wage?
- What do you think the impact on business and the macroeconomy would be if the minimum wage were raised to a ‘Living Wage’?
Many people are attracted to work in the private sector, with expectations of greater opportunities for promotion, more variation in work and higher salaries. However, according to the Office for National Statistics, it may be that the oft-talked-of pay differential is actually in the opposite direction. Data from the ONS suggests that public sector workers are paid 14.5% more on average than those working in the private sector.
As is the case with the price of a good, the price of labour (that is, the wage rate) is determined by the forces of demand and supply. Many factors influence the wages that individuals are paid and traditional theory leads us to expect higher wages in sectors where there are many firms competing for labour. With the government acting as a monopsony employer, it has the power to force down wages below what we would expect to see in a perfectly competitive labour market. However, the ONS data suggests the opposite. What factors can explain this wage differential?
Jobs in the public sector, on average, require a higher degree of skills. There tend to be entry qualifications, such as possessing a university degree. While this is the case for many private-sector jobs as well, on average it is a greater requirement in the public sector. The skills required therefore help to push up the wages that public-sector workers can demand. Another explanation could be the size of public-sector employers, which allows them to offer higher wages. When the skills, location, job specifications etc. were taken into account, the 14.5% average hourly earnings differential declined to between just 2.2% and 3.1%, still in favour of public-sector workers. It then reversed to give private-sector workers the pay edge, once the size of the employer was taken out.
Further analysis of the data also showed that, while it may pay to be in the public sector when you’re starting out on your career, it pays to be in the private sector as you move up the career ladder. Workers in the bottom 5% of earners will do better in the public sector, while those in the top 5% of earners benefit from private-sector employment. The ONS said:
Looking at the top 5%, in the public sector earnings are greater than £31.49 per hour, while in the private sector, the top 5% earn more than £33.63 per hour… The top 1% of earners in the private sector, at more than £60.21 per hour, earns considerably more than the top 1% of earners in the public sector, at more than £49.65 per hour.
The data from the ONS thus suggest a reversal in the trend of average public-sector pay being higher than private sector pay, once all the relevant factors are taken into account.
This will naturally add to debates about living standards, which are likely to take on a stronger political slant as the next election approaches. It is obviously partly down to the public-sector pay freeze that we saw in 2010 and also to a reversal, at least in part, of the previous trend from 2008, where public-sector pay 
had been growing faster than private-sector pay. However, depending on the paper you read or the person you listen to, they will offer very different views as to who gets paid more. All you need to do in this case is look at the titles of the newspaper articles written by the Independent and The Telegraph! Whatever the explanation, these new data provide a wealth of information about relative prospects for pay for everyone.
Data
Public and Private Sector Earnings Office for National Statistics (March 2014)
Annual Survey of Hours and Earnings, 2013 Provisional Results Office for National Statistics (December 2013)
Articles
Austerity bites as private sector pay rises above the public sector for the first time since 2010 Independent, Ben Chu (10/3/14)
Public sector workers still better paid despite the cuts The Telegraph, John Bingham (10/3/14)
Public sector hourly pay outstrips private sector pay BBC News (10/3/14)
Public sector workers are biggest losers in UK’s post-recession earnings squeeze The Guardian, Larry Elliott (11/3/14)
New figures go against right-wing claims that public sector workers are grossly overpaid Independent, Ben Chu (10/3/14)
Public sector pay sees biggest shrink on 2010, figures suggest LocalGov, Thomas Bridge (11/3/14)
Public sector staff £2.12 an hour better off The Scotsman, David Maddox (11/3/14)
Questions
- Illustrate the way in which wages are determined in a perfectly competitive labour market.
- Why does monopsony power tend to push wages down?
- Why does working for a large company suggest that you will earn a higher wage on average?
- Using the concept of marginal revenue product of labour, explain the way in which higher skills help to push up wages.
- How significant are public-sector pay freezes in explaining the differential between public- and private-sector pay?
- Why is there a difference between the bottom and top 5% of earners? How does this impact on whether it is more profitable to work in the public or private sector?
Business performance is always affected by the economy and we can always look at the economic theory to explain why profits rise and fall. Some companies prosper during recession, whereas others decline and the key is to understand the economics behind the data. This blog takes a look at the performance of a variety of companies and asks you to think about the economic theory behind it.
The world of betting has grown significantly and the profits of companies in this market, while certainly linked to economic performance, is also dependent on sport results. Paddy Power has announced pre-tax profits of €141m for 2013, an increase from €139.2m, despite sporting results causing profit performance to fall. On the part of football clubs, Liverpool FC saw a loss emerge for the 2012-2013 financial year, whereas Newcastle’s profits rose by 900% to £9.9m. What factors can explain the vastly different performance (off and on the pitch) of these two clubs?
In the USA, Radio Shack has been forced to close 1100 stores. This is, in part, as a response to a change in the way we are shopping. More and more consumers are purchasing goods online and Radio Shack is therefore experiencing growing competition from online retailers. Sales fell by 10% last year and even during the fourth quarter sales continued to decline.
Companies based in the largest economy in Europe have also experienced declines in performance, showing that a strong performing country doesn’t imply the same for companies operating in it. RWE, Germany’s biggest energy provider, has not made a loss since 1949. However, in 2013, this company posted its first annual loss in over 60 years: a loss of £2.28bn. With energy being in constant demand and criticism being levelled at UK energy providers for the high profits they’re making, the economics behind these data is important.
In better news for a company, Thorntons has boasted a significant increase in pre-tax profits, with much of this due to strong trading in the months leading up to Christmas and a sensible business strategy, involving selling more in supermarkets. Thorntons has cut its number of stores, but its profitable position has been saved by a good business strategy and this is going to lead to significant investment by the company.
Another strong performance was recorded by Berkshire Hathaway, an investment firm run by Warren Buffett. The company made a profit of £11.6bn in 2013, a significant increase on its 2012 performance. It is the insurance, rail and energy parts of the business that have contributed to the big increase in profits.
These are just some recent examples of data on business performance and your job is to think about the economic theory that can be used to explain the varying performance of different companies.
Liverpool announce annual loss of £50m in new club accounts Guardian, David Conn (4/3/14)
Thorntons makes biggest manufacturing investment for 25 years Telegraph, Natalie Thomas (3/3/14)
Thorntons cashes in on the snowman Independent, Simon Neville (3/3/14)
Warren Buffett’s Berkshire Hathaway sees record profit BBC News (2/3/14)
Newcastle says ‘player trading’ helped increase profits to £9.9m BBC Sport (25/2/14)
RWE posts first annual net loss for over 60 years BBC News (4/3/14)
UK among RWE woes as it posts first annual loss since 1949 The Telegraph, Denise Roland (4/3/14)
Germany’s RWE slides into €2.8bn net loss for 2013 Financial Times, Jeevan Vasagar (4/3/14)
John Menzies profits hit by drop in magazine sales BBC News (4/3/14)
Fresnillo profits drop as gold prices and production falls The Telegraph, Olivia Goldhill (4/3/14)
Glencore 2013 profit rises 20% as copper production gains Bloomberg, Jesse Riseborough (4/3/14)
Questions
- In each of the cases above, explain the economic theory that can be used to explain the performance of the respective company.
- To what extent is a change in the market structure of an industry a contributing factor to the change in company performance?
- To what extent do you think a company’s performance is dependent on the performance of the economy in which it operates?
- Are the profits of a company a good measure of success? What else could be used?
The supermarket industry is a classic example of an oligopoly. A market dominated by a few large companies, which is highly competitive and requires the companies to think about the reactions of the other competitors whenever a decision is made. Throughout the credit crunch, price cutting was the order of the day, as the big four tried to maintain market share and not lose customers to the low cost Aldi and Lidl. Morrisons, however, has found itself in exactly that position and is now looking to restructure to return to profitability.
