Jim Slater, who has just died at the age of 86, was a tycoon of the 1970s, probably unknown to most reader of this blog. But his legacy lives on and many will question whether the actions of the banking sector and big business today is a reflection of the lessons that were not learnt 40 years ago.
Slater was a businessman: perhaps the businessman in the 1970s, building up a company that in today’s money and the height of its success, would have been worth billions. Buying and selling companies, asset stripping and investing created Slater Walker, which shot to success and then crumbled to failure, taking with it a bailout from the Bank of England of £110 million. You might look at that figure and compare it with the bail outs of more recent times and think – peanuts. But think about how prices have changed and convert £110 million into today’s money and that’s a hefty bail out. A key question is whether the willingness of the government and Bank of England to bail out key banks and financial sector businesses has encouraged the irresponsible lending that led to the credit crunch. Was there a moral hazard? Had Slater Walker been left to fail, would the world look a slightly different place?
Perhaps a little extreme, but I wonder, if we were to look back over the past 50 to 60 years, whether we would find other cases of key businesses being bailed out, which set a precedent for other companies to grow, without necessarily taking full responsibility for it. Jim Slater will certainly leave a legacy behind him .
Jim Slater and the warning from the 1970s that we ignored BBC News, Jonty Bloom (20/11/15)
Questions
- What is meant by asset stripping?
- If a company like Slater Walker had not been bailed out, do you think the economy would have suffered?
- If Slater Walker had been left to fail, would that have changed the business model of some of our largest banks and reduced the chance of a financial crisis 40 years later?
- Do you think the concept of moral hazard is relevant here?
Deloitte recently published its 24th Annual Review of Football Finance and it contained some surprising results. Historically, most teams in the English Premier League (EPL) have made accounting losses with any increases in revenues being offset by higher wage costs. However, this report found that in 2013–14 most teams in the EPL actually made accounting profits.
The Deloitte’s review reported that the combined operating profits of clubs in the EPL increased from £82 million in 2012–13 to £614 million on 2013–14 – an enormous increase of 649%. Nearly all of the teams (19 out of 20) in the league made an operating profit while 14 also reported pre-tax profits. Dan Jones, head of Deloitte’s Sports Business Group, commented that:
“The change in club profitability in 2013–14 was more profound than anything we could have forecast.”
Why has the profitability of teams in the EPL suddenly improved so dramatically? One important factor was the significant increase in revenue. The combined income of the teams was £3.26 billion in 2013–14 – an increase of £735 million, or 29% on the previous year. Although match-day and commercial revenue both increased, the majority of this growth in income (nearly 80%) came from the sale of broadcast rights. The 2013–14 season was the first year of a new three-year contract that raised over £1.7 billion per year from the sale of these rights in both the UK and overseas.
However, clubs in the EPL have received big increases in revenue from TV deals before and still made substantial accounting losses. For example, the broadcasting contract that ran from 2010–13 generated over £1.1 billion per season – a £243 million per annum increase on the previous deal. Significantly, in the first year of this deal (2010–11), 81% of this increase in revenue went straight into higher player salaries, whereas in 2013–14 this figure was only 16%. The ratio of wages to turnover also fell from 71% in 2012–13 to 58% in 2013–14
So why did a smaller proportion of the increase in revenue go to the players compared with previous years? The explanation appears to be the impact of two new controls and regulations that were implemented by the EPL at the beginning of the 2013–14 season.
One of these has received considerable media attention and is similar to UEFA’s Financial Fair Play regulations. The Profitability and Sustainability Rules allow the clubs to make a maximum cumulative loss of £105 million over three seasons before having to face sanctions from the league. The size of the permissible loss is significantly higher than in the UEFA regulations.
The other control that has received far less attention is called Short-Term Cost Control (STCC). This regulation places limits on the extent to which clubs can increase their total wage bill. It operates from 2013–14 to 2015&ndash16: i.e. it covers the same three years as the current TV deal. For the 2013–14 season it worked in the following way.
If teams had a wage bill of less than £52 million they faced no restrictions on their spending on players’ salaries. Only Crystal Palace (£46 million) and Hull City (£43 million) fell into this category. Unsurprisingly, the five biggest spending clubs, Man Utd, Man City, Chelsea, Arsenal and Liverpool, had much greater wage bills of £215m, £205m, £192m, £166m and £144m respectively.
Any of the 18 teams that exceeded the £52m limit would still not face sanctions if their wage bill increased by £4 million or less. For example, Stoke City’s wage bill only increased from £60m to £61m, while Tottenham Hotspur’s increased from £96m to £100m. Some clubs actually managed to reduce their total wage bill, including the champions, Manchester City, which managed to lower its from £233m to £215m.
However, there were still 12 teams with a total wage bill that was greater than £52 million in 2013–14 and which had increased by more than £4 million on the previous year. For these teams not to face any sanctions, they had to prove to the EPL that any of the increase above £4 million was either due to player contracts entered into before January 2013 or could by financed from the following two sources.
• Club Own Revenue Uplift
• Profit from player transfers
Whereas the profit from player transfers is straightforward, the ‘Club Own Revenue Uplift’ requires some explanation, as it excludes a very important part of teams’ incomes – Central Fund payments.
Some revenues earned by clubs in the EPL are referred to as ‘Central Fund payments’. These are, in effect, income payments from money that is raised centrally by the EPL on behalf of the clubs and then distributed to the teams using an agreed formula. The majority of the revenue generated under this category is from the broadcast deals, although some commercial income, such as the sponsorship of the league, also falls under this category. For some teams the money raised from Central Fund payments makes up the majority of their revenue.
‘Club Own Revenue’ in STCC calculations refers to all revenues other than those from Central Fund payments. This includes a number of income streams that the club has more direct control over. They include:
• Gate money/other match-day revenue
• Commercial deals negotiated by the individual club
• Income from playing in European competitions, including TV revenue.
The uplift refers to increases in revenue from these sources compared to 2012–13.
For example, assume a club has made no profit from its transfer dealing and did not enter into any significant player contracts prior to January 2013. If this club’s wage bill increased from £100m in 2012–13 to £110m in 2013–14 then it would have to provide evidence to show that £6m of this increase could be financed from growth in its Club Own Revenue. In other words, it would have to demonstrate how its income from gate money, commercial deals and playing in Europe was at least £6m higher in 2013–14 than it had been in 2012–13.
It will be interesting to see if (1) the profitability of the clubs continues to improve in future years and (2) the STCC regulations are extended when the new broadcast deal comes into effect in 2016–17.
The EPL Proves Cost Control Works The Judge 13 (4/6/15)
English Premier League clubs made more revenue than Spain and Italy’s clubs combined UK Business Insider, Lianna Brinded (4/6/15)
Premier League football club revenues and profits soar BBC News, Bill Wilson (4/6/15)
Deloitte Premier League list: Clubs’ revenue boom to £3.3billion as Tottenham record highest ever pre-tax profits after Gareth Bale transfer The Independent, Joanna Bourke (4/6/15)
Annual Review of Football Finance 2015 Premier League clubs generate over £3bn revenue in season of records Deloitte (4/6/15)
Premier League top of the rich list with record income of £3.26bn The Guardian, David Conn (4/6/15)
Questions
- What is the difference between an operating profit and a pre-tax profit?
- If a club reports that it is making an accounting profit, does this mean that it must be making an economic profit? Explain your answer.
- Give some examples of the economic costs of running a football club that might not be included in accounting calculations of profit.
- How is the profit/loss from player transfers calculated?
- Explain why the current rules may give teams that play in European competitions a competitive advantage.
New Look was founded in 1969 and is an iconic budget retailer found on most British high streets. In its history, it has been a family business; it has been listed on the London stock exchange; returned to a private company and then had the potential to be re-listed. Now, it is moving into South African ownership for £780 million.
90% of New Look will now be owned by Christo Wiese who controls Brait and who has been linked with other take-overs of British retailers in recent years. The remaining 10% will remain in the hands of the founding family. The company has been struggling for some time and in 2010 did have plans to relist the company on the London Stock Exchange. However, volatile market conditions meant that this never occurred and the two private equity firms, Apax and Permira, appeared very eager to sell. New Look’s Chairman, Paul Mason, said:
“This is an ideal outcome for New Look. The Brait team demonstrated to us that they have the long-term vision to help Anders and the team grow this brand.”
It is not yet clear what this move will mean for the retailer, New Look, but with an estimated £1 billion debt, it is expected that changes will have to be made. 
It is certainly an attractive investment opportunity and New Look does have a history of high rates of growth, despite its current debt. Furthermore, the debt levels are likely to have helped Mr. Wiese obtain a deal for New Look. Fashion retailing is a highly competitive market, but demand always appears to be growing. It is still relatively ‘new’ news, so we will have to wait to see what this means for the number of stores we see on the high streets and the number of jobs lost or created. The following articles consider this new New Look.
South African tycoon buys New Look fashion retailer BBC News (15/5/15)
South African tycoon enters UK retail fray with New Look purchase Financial Times, Andrea Felsted, Clare Barrett and Joseph Cotterill (15/5/15)
New Look snapped up by South African tycoon The Guardian, Sean Farrell (15/5/15)
New Look sold to South African billionaire for £780m The Telegraph, Elizabeth Anderson and Andrew Trotman (15/5/15)
Questions
- Why might a company become listed on the London stock exchange?
- How would volatile economic circumstances affect a company’s decision to become listed on the stock market?
- What do you think this purchase will mean for the number of New Look stores on British high streets? Do you think there will be job losses or jobs created by this purchase?
- How do you think the level of New Look’s debt affected Christo Wiese’s decision to purchase New Look?
- Which factors are likely to affect a firm’s decision to take-over or purchase another firm?
Economics is about choices. But how can people be persuaded to make healthy choices, or socially responsible or environmentally friendly choices? Behavioural economists have studied how people can be ‘nudged’ into changing their behaviour. One version of nudge theory is ‘fun theory’. This studies how people can be persuaded into doing desirable things by making it fun to do so.
I came across the first video below a couple of days ago. It looks at a highly successful experiment at the Odenplan underground station in Stockholm to persuade people to make the healthy choice of using the stairs rather than the escalator. It made doing so fun. The stairs were turned into a musical keyboard, complete with sound. Each stair plays a piano note corresponding to its piano key each time someone treads on it. As you go up the stairs you play an ascending scale.
After installing the musical staircase, 66% more people than normal chose the stairs over the escalator.
The fun theory initiative is sponsored by Volkswagen. The Fun Theory website is ‘dedicated to the thought that something as simple as fun is the easiest way to change people’s behaviour for the better. Be it for yourself, for the environment, or for something entirely different, the only thing that matters is that it’s change for the better.’
VW held a competition in 2009 to encourage people to invent fun products designed to change people’s behaviour. There were over 700 entries and you can see them listed on the site. The 13 finalists included the musical staircase, traffic lights with quiz questions on the red, a Connect Four beer crate, fun tram tickets (giving entry to an instant-win lottery), a pinball exercise machine, a speed camera lottery where a winner is chosen from those abiding by the speed limit, a jukebox rubbish bin (which plays when people add rubbish), a one-armed vending machine, a fun doormat, car safety belts linked to a car’s entertainment system, car safety belt with a gaming screen which turns on when buckled, a bottle bank arcade system and the world’s deepest bin (or at least one which sounds as if it is). The winner was the speed camera lottery.
The fun theory site
Thefuntheory.com
Fun theory videos
Piano Staircase – Odenplan, Stockholm (on Vimeo)
The Speed Camera Lottery (on VIMP.com, Kevin Richardson)
Garbage Jukebox (on YouTube)
The World’s Deepest Bin (on Vimeo)
Bottle Bank Arcade (on YouTube)
Questions
- Does fun theory rely on rational choices?
- Other than through having fun, how else may people be nudged into changing their behaviour?
- Go through some of the entries to the Fun Theory Award and choose three that you particularly like. Explain why.
- Invent your own fun theory product. You might do this by discussing it groups and perhaps having a group competition.
Since the Global Financial Crisis, and especially since 2010, there has been a significant decline in the volume of commercial freight carried by aircraft. Whilst regional and national economies have been hit by fiscal problems, credit snarl-ups and twitchy consumer demand, increases in the price of crude oil (until recently) have compounded air freight cost increases, leading to substitution towards the main alternatives.
Whilst some multinational businesses have shifted production back ‘on-shore’, there has been unprecedented growth in sea freight. In the latter case there are, of course, both ‘winners’ and ‘losers’. As the world’s seas and oceans become more and more congested, one of the distinct losers is a large species which shares the water with commercial maritime transport: the whale.
A recent ‘Sharing the Planet’ documentary on BBC Radio 4, highlighted the plight of whales in the world’s open waters. Since the imposition of controls upon the whaling industry, whale numbers had stabilised and even increased. However, the past five years has seen the most significant threat coming from the eerily clinical-sounding ‘ship strike’: that is, unintended incidents of ships hitting and either injuring or killing whales. In particular, the Blue Whale and the Right Whale have been most affected – the Right Whale was almost driven to extinction by ship strikes in the North Atlantic region.
International action is driving a regulatory approach which aims to intervene, for example, to impose speed restrictions in known waters where whales congregate. But this isn’t a universal solution. Even where it is applied, enforcement is tricky and there is industry resistance as already slow shipping freight delivery times are further extended, thus challenging producers under pressure to respond rapidly to changing consumer demand in the world of ecommerce.
But where is the link to the movie Frozen? Well, this year’s top-selling range of toys are tie-ins to Disney’s wintery animated blockbuster. Excess demand for some of the tie-in merchandising has led to 
short supply in toy stores and carefully planned production and shipping plans junked. Panicked creation of extra capacity in off-shore production has had to be complemented by the contracting of air freighting options – the lead times are too long to get last-minute products to distributors and retailers in time. Whilst someone has to bear the increased financial cost, the whale might therefore become – at least temporarily – a beneficiary.
But the message is clear: globalised production and distribution involve a complex web of trade-offs. 
Where negative externalities hit those without a global voice, this adds weight to the continued efforts towards sustainability and the full costing of production and exchange. Whales are a ‘flagship species’ in diverse ecological systems. The planet cannot afford to lose them. And so, whilst your gift purchases this festive season may have been made possible by products having been air-freighted rather than being sent by yet another ship, don't rest on your laurels. Consider this variant on a traditional injunction: whales are for life, and not just for Christmas.
Guest post by Simon Blake, University of Warwick
Books and articles
Nature in the Balance: The Economics of Biodiversity Oxford Dieter Helm and Cameron Hepburn (eds) (2014)
Frozen dolls sell out Express Sarah Ann Harris (9/12/14)
Biodiversity Finance and Economics Tread Softly November 2014
Information
EU Business and Biodiversity Platform EC Environment DG
Whales & Dolphins (cetaceans) World Wildlife Fund
Questions
- Why might UK-based businesses be concerned with the plight of whales in the world’s seas and oceans?
- In what ways might shipping firms – and the manufacturers who contract their services – be regarded as ‘good’ businesses?
- Using the concept of externalities, how would you account for the impacts of global commerce upon whales?
- How could you conduct a scientific evaluation of the trade-offs involved?
- Can damage to one species by the actions of business ever be offset by ‘making good’ through corporate action elsewhere?
Jim Slater, who has just died at the age of 86, was a tycoon of the 1970s, probably unknown to most reader of this blog. But his legacy lives on and many will question whether the actions of the banking sector and big business today is a reflection of the lessons that were not learnt 40 years ago.
