You’ve probably heard of Groupon. If you join its emailing list, the company will send you daily details of deals in your area that it has negotiated with local retailers. If you want to take advantage of any particular deal, you sign up for it online and if enough people do so to reach a minimum number agreed with the retailer, Groupon will bill your credit card. You then download the voucher and use it to purchase you discounted item or service. Discounts are often substantial – 50% or more.
But are these deals as good as they seem? On 2 December, the UK’s Advertising Standards Authority took the decision to refer Groupon UK to the Office of Fair Trading, following 48 breaches of the advertising code of practice in eleven months. It referred complaints about Groupon’s:
• Failure to conduct promotions fairly, such as not making clear significant terms and conditions
• Failure to provide evidence that offers are available
• Exaggeration of savings claims
And it was not just consumers who had complained. Many retailers found that so many people signed up for certain deals and the discounts were so great, with Groupon often charging the retailer half the discounted price, that retailers made substantial losses on the deals. One example was a cupcake maker, Rachel Brown, who runs the Need a Cake bakery in Reading, Berkshire. She had to bake so many extra cupcakes below cost that profits for the year were wiped out.
So what is the nature of this market failure and how appropriate are the competition authorities for dealing with it? The following webcasts and articles look at the issues. They also consider the growing problems Groupon faces in the market from new competitors.
It has not been good news recently for Groupon and it’s hardly surprising that, following Groupon’s flotation on the Nasdaq stock exchange in the USA last month, and an initial surge in the share price, its shares have since fallen by over 40%.
Webcasts
Groupon investigated by OFT Channel 4 News on YouTube, Benjamin Cohen (2/12/11)
Time to Jump Off Groupon Bandwagon? Newsy (24/11/11)
Articles
Groupon to be investigated by Office of Fair Trading Guardian, Mark Sweney (2/12/11)
OFT launches investigation into Groupon advertisements BBC News (2/12/11)
UK regulator launches Groupon probe Financial Times, Michael Stothard (2/12/11)
Groupon investigated by UK advertising authorities ZDNet, Eileen Brown (5/12/11)
Deal with it: Groupon ponders its future Independent, Stephen Foley (6/12/11)
Groupon’s Business Model Doomed To Fail Seeking Alpha, Mazen Abdallah (5/12/11)
Small Businesses Hate Groupon LiveOutLoud, Loral Langemeier
Competition authorities sites
ASA refers complaints about Groupon to OFT Advertising Standards Authority (2/12/11)
Investigation into the trading practices of MyCityDeal Limited (trading as Groupon UK) Office for Fair Trading (2/12/11)
Questions
- What market failings are there in the discount voucher market?
- What to retailers gain from dealing with companies such as Groupon?
- Do small businesses have anyone other than themselves to blame if they make a loss from doing a deal with Groupon?
- What should be the role of the competition authorities in the discount voucher market?
- Is Groupon’s business model ‘doomed to failure’ and if so why?
- Does Groupon have a ‘first-mover advantage’?
- Are there any barriers to entry of new firms into the discount voucher market? If so, what are they? What are the implications of your answer for the future of Groupon?
This autumn has been one of the mildest on record. Whilst this may be very nice for most of us, certain industries have been suffering. For example, gas and electricity consumption is down as people delay turning on their heating. One sector particularly badly hit has been clothing. Sales of winter clothes are substantially down and many retailers are longing for colder weather to boost their sales.
Of course, this is not helped by consumer incomes. With inflation at around 5% and average (pre-tax) weekly earnings currently rising by less than 2%, real incomes are falling. In fact over the year, even nominal disposable incomes are down 2.1%, given the rise in national insurance and income tax. And the problem of falling incomes is compounded by worries over the future state of the economy – whether it will go back into recession, with further falls in real income and rises in unemployment.
It’s no wonder that retailers are longing for some cold weather and for their customers to return from the seaside or their garden barbecues to the shopping malls. Look out for the ‘sales’ signs: they’re beginning to spring up as desperate retailers seek to attract wary customers.
Webcast
Retailers slash prices in Christmas build-up BBC News, Tim Muffett (25/11/11)
Articles
Winter woes: warm weather means shoppers aren’t buying as much Guardian, Zoe Wood (21/11/11)
Shoppers urged to be savvy as Christmas sales last for weeks The Telegraph, Victoria Ward (21/11/11)
Data
Earnings tables: Labour Market Statistics ONS (November 2011)
Personal Income and Wealth ONS
Price Indices and Inflation ONS
Personal Inflation Calculator (PIC) ONS
Questions
- Identify the determinants of demand for winter clothing.
- How responsive is demand likely to be to these determinants (a) over a period of a few weeks; (b) over a period of a few months?
- What factors should a retailer take into account when deciding whether to make pre-Christmas discounts?
- Assume that you are employed but are afraid of losing your job in a few months’ time. How would this affect your consumption of (a) seasonal goods; (b) durable goods; (c) day-to-day goods?
- What longer-term strategies could retailers adopt if they predict tough trading conditions over the next two or three years?
In the blog Has Merlin lost his magic, the issue of banks failing to meet their lending targets as set by the government was considered. Small businesses have been finding it difficult to obtain bank loans to help their business grow. Vince Cable has gone so far as to say: ‘There is a serious problem with lending to good, small companies.’ As a result of this, new sources of finance are being sought and one innovative approach has come to the forefront: crowd funding. People group together by pooling their money and investing in ideas or businesses. The attraction is that it doesn’t require huge amounts of cash, but with enough potential investors, significant amounts of finance can be raised. The following BBC News article looks at this innovative approach to financing a business.
Small firms seek crowd funding BBC News, Catherine Burne (27/5/11)
Questions
- What is the attraction of crowd funding?
- Are there any risks of this method of finance to the investors and to the firm seeking investment?
- What are the disadvantages of crowd funding relative to something like investment from a venture capitalist?
- How important is the size of the firm when it comes to the viability of crowd funding?
We frequently hear about two companies merging with each other, whether for certainty, market share or economies of scale. However, in this case, we’re looking at a de-merging of one company to create two companies. Foster’s will be split to create two stand-alone companies.
With Foster’s retaining its beer business, a new company called Treasury Wine Estates will take over its ailing wine division. This split comes after 99% of investors cast their votes in favour of the split. The future profitability of this demerger is uncertain and how the stocks of the two separate companies trade in the coming months will give a clear indication of whether or not this divorce is the right move.
Foster’s votes to split beer and wine business Telegraph, Richard Fletcher and Jonathan Sibun (29/4/11)
Investors agree to split Foster’s into beer, wine units BBC News (29/4/11)
Two halves: Foster’s to split its beer and wine operations Mail Online (29/4/11)
Foster’s wine-beer demerger to clarify divisions’ value The Australian (30/4/11)
Questions
- What type of de-merger could we call this?
- How do you think the share prices of the 2 separated companies will fare following the de-merger?
- How concentrated is the beer and wine market? What effect will the de-merger have?
- In the BBC News article, Donald Williams says ‘The wine business needs a better pricing environment before it is likely to perform.’ What does this mean?
- Why has the wine division been a financial drain for so long?
Are we heading for ‘perfect storm’ in commodity production and prices? Certainly the prices of many commodities have soared in recent months. These include the prices of foodstuffs such as dairy products, cooking oils and cereals, crude oil, cotton, metals and many other raw materials. The overall world commodity price index has risen by 28% in the past 12 months. The following are some examples of specific commodities:
Price rises in the 12 months to February 2011
• Wheat 62%
• Maize 59%
• Coffee 70%
• Beef 39%
• Sugar 46%
• Palm kernal oil 142%
• Soybean oil 50%
• All food price index 32%
• Crude oil 20%
• Cotton 132%
• Fine wool 55%
• Softwood timber 25%
• Iron ore 78%
• Copper 29%
• Tin 55%
• All metals index 58%
• Rubber 79%.
The problems are both short term and long term, and on both the demand and supply sides; and the effects will be at micro, macro and global levels. Some hard choices lie ahead.
The following webcast, articles and reports explore both the current position and look into the future to ask whether rising commodity prices are likely to continue or even accelerate.
The first link is to a BBC World Debate which considers the following issues: “Is scarcity of natural resources a serious challenge for developing and advanced economies? How great is the risk that scarcity might lead to conflict, both within and between nations? Might a scramble for resources lead to a retreat from globalisation and to greater protectionism?”
Webcast
World Debate: Resources BBC World Debate, Louise Arbour, President and CEO, International Crisis Group; James Cameron, Global Agenda Council on Climate Change; He Yafei, Ambassador and Permanent Representative of China to the UN; Malini Mehra, Founder and CEO, Centre for Social Markets; Kevin Rudd, Minister of Foreign Affairs, Australia (19/1/11)
Articles
Global Food Prices Continue to Rise Reuters, Steve Savage (7/3/11)
The 2011 oil shock The Economist (3/3/11)
Global Food Prices Will Probably Be Sustained at Record This Year, UN Says Bloomberg, Supunnabul Suwannaki (9/3/11)
Food prices to stay high as oil costs, weather weigh livemint.com, Apornrath Phoonphongphiphat (9/3/11)
‘Perfect storm’ threatens agriculture in developing nations Manila Bulletin, Lilybeth G. Ison (9/3/11)
IMF sees no immediate respite from high food prices Commodity Online (7/3/11)
Drought, supply, speculation drive world food prices to record high NZ Catholic (8/3/11)
The Factors Affecting Global Food Prices Seeking Alpha, David Hunkar (7/3/11)
World food prices climb to record as UN sounds alarm on further shortages FnBnews (India), Rudy Ruitenberg (9/3/11)
Food crisis: It’s a moral issue for all of us New Straits Times (Malaysia), Rueben Dudley (8/3/11)
Oil prices: Green light from the black stuff Guardian (5/3/11)
Cotton hits $2 a pound Guardian, Terry Macalister (17/2/11)
Supermarkets are raising prices faster than inflation, says UBS The Telegraph, Philip Aldrick (1/3/11)
What next for commodity prices? BBC News, Jamie Robertson (5/5/11)
Reports
FAO Cereal Supply and Demand BriefFood & Agriculture Organization, United Nations (March 2011)
Rising Prices on the Menu Finance & Development (IMF), Thomas Helbling and Shaun Roache (March 2011)
Data
Commodity prices Index Mundi
Commodities Financial Times, market data
Questions
- Identify the various factors that are causing rises in commodity prices. In each case state whether they are supply-side or demand-side factors.
- How can the price elasticity of demand and supply, the income elasticity of demand and the cross-price elasticity of demand be used to analyse the magnitude of the price rises?
- To what extent are rising food prices the result of (a) short-term (i.e. reversible) factors; (b) long-term trends?
- Why are food prices in the shops rising faster in the UK than in many other countries?
- To what extent is the future of food security and prices and moral issues?
- Why may current oil price rises become an opportunity for the future?
- What might be the respective roles be of government, business and consumers in responding to natural resource constraints?