Global long-term economic growth has slowed dramatically since the financial crisis of 2007–8. This can be illustrated by comparing the two 20-year periods 1988 to 2007 and 2009 to 2028 (where IMF forecasts are used for 2024 to 2028: see WEO Database under the Data link below). Over the two periods, average annual world growth fell from 3.8% to 3.1%. In advanced countries it fell from 2.9% to 1.6% and in developing countries from 4.8% to 4.3%. In the UK it fell from 2.4% to 1.2%, in the USA from 3.1% to 1.8% and in Japan from 1.9% to 0.5%.
In the UK, labour productivity growth in the production industries was 6.85% per annum from 1998 to 2006. If this growth rate had been maintained, productivity would have been 204% higher by the end of 2023 than it actually was. This is shown in the chart (click here for a PowerPoint).
The key driver of long-term economic growth is labour productivity, which can best be measured by real GDP per hour worked. This depends on three things: the amount of capital per worker, the productivity of this capital and the efficiency of workers themselves – the latter two giving total factor productivity (TFP). Productivity growth has slowed, and with it the long-term rate of economic growth.
If we are measuring growth in output per head of the population, as opposed to simple growth in output, then another important factor is the proportion of the population that works. With ageing populations, many countries are facing an increase in the proportion of people not working. In most countries, these demographic pressures are likely to increase.
A major determinant of long-term economic growth and productivity is investment. Investment has been badly affected by crises, such as the financial crisis and COVID, and by geopolitical tensions, such as the war in Ukraine and tensions between the USA and China and potential trade wars. It has also been adversely affected by government attempts to deal with rising debt caused by interventions following the financial crisis and COVID. The fiscal squeeze and, more recently higher interest rates, have dampened short-term growth and discouraged investment, thereby dampening long-term growth.
Another factor adversely affecting productivity has been a lower growth of allocative efficiency. Competition in many industries has declined as the rate of new firms entering and exiting markets has slowed. The result has been an increase in concentration and a growth in supernormal profits.
In the UK’s case, growth prospects have also been damaged by Brexit. According to Bank of England and OBR estimates, Brexit has reduced productivity by around 4% (see the blog: The costs of Brexit: a clearer picture). For many companies in the UK, Brexit has hugely increased the administrative burdens of trading with the EU. It has also reduced investment and led to a slower growth in the capital stock.
The UK’s poor productivity growth over many yeas is examined in the blog The UK’s poor productivity record.
Boosting productivity
So, how could productivity be increased and what policies could help the process?
Artificial intelligence. One important driver of productivity growth is technological advance. The rapid advance in AI and its adoption across much of industry is likely to have a dramatic effect on working practices and output. Estimates by the IMF suggest that some 40% of jobs globally and 60% in advanced countries could be affected – some replaced and others complemented and enhanced by AI. The opportunities for raising incomes are huge, but so too are the dangers of displacing workers and deepening inequality, as some higher-paid jobs are enhanced by AI, while many lower paid jobs are little affected and other jobs disappear.
AI is also likely to increase returns to capital. This may help to drive investment and further boost economic growth. However, the increased returns to capital are also likely to exacerbate inequality.
To guard against the growth of market power and its abuse, competition policies may need strengthening to ensure that the benefits of AI are widely spread and that new entrants are encouraged. Also training and retraining opportunities to allow workers to embrace AI and increase their mobility will need to be provided.
Training. And it is not just training in the use of AI that is important. Training generally is a key ingredient in encouraging productivity growth. In the UK, there has been a decline in investment in adult education and training, with a 70% reduction since the early 2000s in the number of adults undertaking publicly-funded training, and with average spending on training by employers decreasing by 27% per trainee since 2011. The Institute for Fiscal Studies identifies five main policy levers to address this: “public funding of qualifications and skills programmes, loans to learners, training subsidies, taxation of training and the regulation of training” (see link in articles below).
Competition. Another factor likely to enhance productivity is competition, both internationally and within countries. Removing trade restrictions could boost productivity growth; erecting barriers to protect inefficient domestic industry would reduce it.
Investment. Policies to encourage investment are also key to productivity growth. Private-sector investment can be encouraged by tax incentives. For example, in the UK the Annual Investment Allowance allows businesses to claim 100% of the cost of plant and machinery up to £1m in the year it is incurred. However, for tax relief to produce significant effects on investment, companies need to believe that the policy will stay and not be changed as economic circumstances or governments change.
Public-sector investment is also key. Good road and rail infrastructure and public transport are vital in encouraging private investment and labour mobility. And investment in health, education and training are a key part in encouraging the development of human capital. Many countries, the UK included, cut back on public-sector capital investment after the financial crisis and this has had a dampening effect on economic growth.
Regional policy. External economies of scale could be encouraged by setting up development areas in various regions. Particular industries could be attracted to specific areas, where local skilled workers, managerial expertise and shared infrastructure can benefit all the firms in the industry. These ‘agglomeration economies’ have been very limited in the UK compared with many other countries with much stronger regional economies.
Changing the aims and governance of firms. A change in corporate structure and governance could also help to drive investment and productivity. According to research by the think tank, Demos (see the B Lab UK article and the second report below), if legislation required companies to consider the social, economic and environmental impact of their business alongside profitability, this could have a dramatic effect on productivity. If businesses were required to be ‘purpose-led’, considering the interests of all their stakeholders, this supply-side reform could dramatically increase growth and well-being.
Such stakeholder-governed businesses currently outperform their peers with higher levels of investment, innovation, product development and output. They also have higher levels of staff engagement and satisfaction.
Articles
- World Must Prioritize Productivity Reforms to Revive Medium-Term Growth
IMF Blog, Nan Li and Diaa Noureldin (10/4/24)
- Why has productivity slowed down?
Oxford Martin School News, Ian Goldin, Pantelis Koutroumpis, François Lafond and Julian Winkler (18/3/24)
- How can the UK revive its ailing productivity?
Economics Observatory, Michelle Kilfoyle (14/3/24)
- With the UK creeping out of recession, here’s an economist’s brief guide to improving productivity
The Conversation, Nigel Driffield (13/3/24)
- UK economy nearly a third smaller thanks to ‘catastrophically bad’ productivity slowdown
City A.M., Chris Dorrell (12/3/24)
- Can AI help solve the UK’s public sector productivity puzzle?
City A.M., Chris Dorrell (11/3/24)
- AI Will Transform the Global Economy. Let’s Make Sure it Benefits Humanity
IMF Blog, Kristalina Georgieva (14/1/24)
- Productivity and Investment: Time to Manage the Project of Renewal
NIESR, Paul Fisher (12/3/24)
- Productivity trends using key national accounts indicators
Eurostat (15/3/24)
- New report says change to company law could add £149bn to the UK economy
B Lab UK (28/11/23)
- Investment in training and skills: Green Budget Chapter 9
Institute for Fiscal Studies, Imran Tahir (12/10/23)
Reports
Data
Questions
- Why has global productivity growth been lower since 2008 than before 2008?
- Why has the UK’s productivity growth been lower than many other advanced economies?
- How does the short-run macroeconomic environment affect long-term growth?
- Find out why Japan’s productivity growth has been so poor compared with other countries.
- What are likely to be the most effective means of increasing productivity growth?
- How may demand management policies affect the supply side of the economy?
- How may the adoption of an ESG framework by companies for setting objectives affect productivity growth?
The Competition and Markets Authority (CMA) is proposing to launch a formal Market Investigation into anti-competitive practices in the UK’s £2bn veterinary industry (for pets rather than farm animals or horses). This follows a preliminary investigation which received 56 000 responses from pet owners and vet professionals. These responses reported huge rises in bills for treatment and medicines and corresponding rises in the cost of pet insurance.
At the same time there has been a large increase in concentration in the industry. In 2013, independent vet practices accounted for 89% of the market; today, they account for only around 40%. Over the past 10 years, some 1500 of the UK’s 5000 vet practices had been acquired by six of the largest corporate groups. In many parts of the country, competition is weak; in others, it is non-existent, with just one of these large companies having a monopoly of veterinary services.
This market power has given rise to a number of issues. The CMA identifies the following:
- Of those practices checked, over 80% had no pricing information online, even for the most basic services. This makes is hard for pet owners to make decisions on treatment.
- Pet owners potentially overpay for medicines, many of which can be bought online or over the counter in pharmacies at much lower prices, with the pet owners merely needing to know the correct dosage. When medicines require a prescription, often it is not made clear to the owners that they can take a prescription elsewhere, and owners end up paying high prices to buy medicines directly from the vet practice.
- Even when there are several vet practices in a local area, they are often owned by the same company and hence there is no price competition. The corporate group often retains the original independent name when it acquires the practice and thus is is not clear to pet owners that ownership has changed. They may think there is local competition when there is not.
- Often the corporate group provides the out-of-hours service, which tends to charge very high prices for emergency services. If there is initially an independent out-of-hours service provider, it may be driven out of business by the corporate owner of day-time services only referring pet owners to its own out-of-hours service.
- The corporate owners may similarly provide other services, such as specialist referral centres, diagnostic labs, animal hospitals and crematoria. By referring pets only to those services owned by itself, this crowds out independents and provides a barrier to the entry of new independents into these parts of the industry.
- Large corporate groups have the incentive to act in ways which may further reduce competition and choice and drive up their profits. They may, for example, invest in advanced equipment, allowing them to provide more sophisticated but high-cost treatment. Simpler, lower-cost treatments may not be offered to pet owners.
- The higher prices in the industry have led to large rises in the cost of pet insurance. These higher insurance costs are made worse by vets steering owners with pet insurance to choosing more expensive treatments for their pets than those without insurance. The Association of British Insurers notes that there has been a large rise in claims attributable to an increasing provision of higher-cost treatments.
- The industry suffers from acute staff shortages, which cuts down on the availability of services and allows practices to push up prices.
- Regulation by the Royal College of Veterinary Surgeons (RCVS) is weak in the area of competition and pricing.
The CMA’s formal investigation will examine the structure of the veterinary industry and the behaviour of the firms in the industry. As the CMA states:
In a well-functioning market, we would expect a range of suppliers to be able to inform consumers of their services and, in turn, consumers would act on the information they receive.
Market failures in the veterinary industry
The CMA’s concerns suggest that the market is not sufficiently competitive, with vet companies holding significant market power. This leads to higher prices for a range of vet services. However, the CMA’s analysis suggests that market failures in the industry extend beyond the simple question of market power and lack of competition.
A crucial market failure is asymmetry of information. The veterinary companies have much better information than pet owners. This is a classic principal–agent problem. The agent, in this case the vet (or vet company), has much better information than the principal, in this case the pet owner. This information can be used to the interests of the vet company, with pet owners being persuaded to purchase more extensive and expensive treatments than they might otherwise choose if they were better informed.
The principal–agent problem also arises in the context of the dependant nature of pets. They are the ones receiving the treatment and, in this context, are the principals. Their owners are the ones acquiring the treatment for them and hence are the pets’ agents. The question is whether the owners will always do the best thing for their pets. This raises philosophical questions of animal rights and whether owners should be required to protect the interests of their pets.
Another information issue is the short-term perspective of many pet owners. They may purchase a young and healthy pet and assume that it will remain so. However, as the pet gets older, it is likely to face increasing health issues, with correspondingly increasing vet bills. But many owners do not consider such future bills when they purchase the pet. They suffer from what behavioural economists call ‘irrational exuberance’. Such exuberance may also occur when the owner of a sick pet is offered expensive treatment. They may over-optimistically assume that the treatment will be totally successful and that their pet will not need further treatment.
Vets cite another information asymmetry. This concerns the costs they face in providing treatment. Many owners are unaware of these costs – costs that include rent, business rates, heating and lighting, staff costs, equipment costs, consumables (such as syringes, dressings, surgical gowns, antiseptic and gloves), VAT, and so on. Many of these costs have risen substantially in recent months and are reflected in the prices pet owners are charged. With people experiencing free health care for themselves from the NHS (or other national provider), this may make them feel that the price of pet health care is excessive.
Then there is the issue of inequality. Pets provide great benefits to many owners and contribute to owners’ well-being. If people on low incomes cannot afford high vet bills, they may either have to forgo having a pet, with the benefits it brings, or incur high vet bills that they ill afford or simply go without treatment for their pets.
Finally, there are the external costs that arise when people abandon their pets with various health conditions. This has been a growing problem, with many people buying pets during lockdown when they worked from home, only to abandon them later when they have had to go back to the office or other workplace. The costs of treating or putting down such pets are born by charities or local authorities.
The CMA is consulting on its proposal to begin a formal Market Investigation. This closes on 11 April. If, in the light of its consultation, the Market Investigation goes ahead, the CMA will later report on its findings and may require the veterinary industry to adopt various measures. These could require vet groups to provide better information to owners, including what lower-cost treatments are available. But given the oligopolistic nature of the industry, it is unlikely to lead to significant reductions in vets bills.
Articles
- UK competition watchdog plans probe into veterinary market
Financial Times, Suzi Ring and Oliver Ralph (12/3/24)
- Vet prices: Investigation over concerns pet owners are being overcharged
Sky News (12/3/24)
- UK watchdog plans formal investigation into vet pricing
The Guardian, Kalyeena Makortoff (12/3/24)
- ‘Eye-watering’ vet bills at chain-owned surgeries prompt UK watchdog review
The Guardian, Kalyeena Makortoff (7/9/23)
- Warning pet owners could be overpaying for medicine
BBC News, Lora Jones & Jim Connolly (12/3/24)
- I own a vet practice, owners complain about the spiralling costs of treatments, but I only make 5 -10% profit – here’s our expenditure breakdown
Mail Online, Alanah Khosla (14/3/24)
- Vets bills around the world: As big-name veterinary practices come under pressure for charging pet owners ‘eyewatering’ care costs, how do fees in Britain compare to other countries?
Mail Online, Rory Tingle, Dan Grennan and Katherine Lawton (13/3/24)
CMA documents
Questions
- How would you establish whether there is an abuse of market power in the veterinary industry?
- Explain what is meant by the principal–agent problem. Give some other examples both in economic and non-economic relationships.
- What market advantages do large vet companies have over independent vet practices?
- How might pet insurance lead to (a) adverse selection; (b) moral hazard? Explain. How might (i) insurance companies and (ii) vets help to tackle adverse selection and moral hazard?
- Find out what powers the CMA has to enforce its rulings.
- Search for vet prices and compare the prices charged by at least three vet practices. How would you account for the differences or similarities in prices?
Climate change is not just an environmental challenge: its socioeconomic impacts are profound and far-reaching, touching every aspect of society. From agriculture to health, from urban infrastructure to coastal communities, the effects of climate change are evident and escalating.
The far-reaching effects
In agriculture, rising temperatures, more intense and frequent heatwaves and changing precipitation patterns pose significant threats to food security.1, 2 Crop yields decline as extreme weather events become more frequent and unpredictable, leading to increased food prices and economic instability. Smallholder farmers, who often lack the resources to adapt, are particularly vulnerable, exacerbating rural poverty and food insecurity.3
Coastal communities face the dual threats of sea-level rise and more intense storms.4 Erosion and inundation damage homes, infrastructure and livelihoods, displacing populations and disrupting local economies. The loss of coastal ecosystems further compounds these challenges, reducing natural defences against storm surges and exacerbating the impacts of climate-related disasters.
Health systems strain under the burden of climate-change-induced heatwaves, air pollution and the spread of vector-borne diseases.5, 6 Heat-related illnesses increase as temperatures rise, particularly affecting vulnerable populations such as the elderly and outdoor workers. Air pollution exacerbates respiratory conditions, leading to higher healthcare costs and decreased productivity. Vector-borne diseases, such as malaria and dengue fever, expand into new regions, placing additional strain on already overburdened health systems.
Displacement due to climate-related disasters amplifies social inequalities and challenges urban planning and infrastructure.7 Vulnerable communities, often located in low-lying areas or informal settlements, bear the brunt of climate impacts, facing the loss of homes, livelihoods and community cohesion. Inadequate housing and infrastructure increase the risks associated with extreme weather events, perpetuating cycles of poverty and vulnerability.
Furthermore, climate change exacerbates existing socioeconomic disparities, disproportionately affecting marginalised and vulnerable populations. Indigenous communities, women, children and people living in poverty are often the hardest hit, lacking access to resources, information, and adaptive capacity.8
Policy responses
Addressing the socioeconomic impacts of climate change requires co-ordinated action across sectors and scales. Policy interventions, such as investment in climate-resilient infrastructure and the promotion of sustainable agriculture practices, are essential for building resilience and reducing vulnerability. Community-led initiatives that prioritise local knowledge and empower marginalised groups are also critical for fostering adaptive capacity and promoting social equity.
To address these challenges, projects like CROSSEU, the new €5 million Horizon Europe project (that I have the pleasure to be part of), play a crucial role in enhancing our understanding of these impacts and developing actionable strategies for resilience and adaptation. One of the key contributions of CROSSEU lies in its development of a Decision Support System (DSS) that integrates tools, measures, and policy options to address these risks in a cross-sectoral and cross-regional perspective. This DSS will support (and hopefully improve) decision-making processes at various levels, from local to EU-wide, and facilitate the adoption of evidence-based policies and measures to enhance resilience and mitigate the impacts of climate change.
Would you like to know more about CROSSEU? Follow our journey and be informed of our publications and events in our new webpage: https://crosseu.eu/9
Articles/References
- Global food security under climate change
Proceedings of the National Academy of Sciences, Josef Schmidhuber and Francesco N Tubiello (11/12/2007)
- Reducing risks to food security from climate change
Global Food Security, Bruce M Campbell et al. (2016: 11, pp 34–43)
- The value-add of tailored seasonal forecast information for industry decision making
Climate, Clare Mary Goodess et al (16/10/2022)
- Assessing climate change impacts, sea level rise and storm surge risk in port cities: a case study on Copenhagen
Climatic change, Stéphane Hallegatte, Nicola Ranger, Olivier Mestre, Patrice Dumas, Jan Corfee-Morlot, Celine Herweijer and Robert Muir Wood (7/12/2010)
- Health risks of climate change: An assessment of uncertainties and its implications for adaptation policies
Environmental Health, J Arjan Wardekker, Arie de Jong, Leendert van Bree, Wim C Turkenburg and Jeroen P van der Sluijs (19/9/2012)
- Climate Change and Temperature-related Mortality: Implications for Health-related Climate Policy
Biomedical and Environmental Sciences, Tong Shi Lu, Jorn Olsen and Patrick L Kinney (2021: 34(5) pp 379–86 )
- Climate Change, Inequality, and Human Migration
IZA Discussion Paper No. 12623, Michał Burzyński, Christoph Deuster, Frédéric Docquier and Jaime de Melo (23/9/2019)
- The trap of climate change-induced “natural” disasters and inequality
Global Environmental Change, Federica Cappelli, Valeria Costantini and Davide Consoli (30/7/2021)
- Cross-sectoral Framework for Socio-Economic Resilience to Climate Change and Extreme Events in Europe
UEA Research Project, Nicholas Vasilakos, Katie Jenkins and Rachel Warren
Questions
- How do the socioeconomic impacts of climate change differ between rural and urban communities? What factors contribute to these disparities, and how can policies address them effectively?
- In what ways do vulnerable populations, such as indigenous communities and those living in poverty, bear the brunt of climate change impacts? How can we ensure that climate adaptation strategies prioritise their needs and promote social equity?
- The blog mentions the importance of community-led initiatives in building resilience to climate change. What examples of successful community-based adaptation projects can you identify, and what lessons can be learned from their implementation?
- How can governments and organisations collaborate to address the socioeconomic impacts of climate change while also promoting economic growth and development? What role do cross-sectoral partnerships play in building resilience and fostering sustainable practices?
On 12 February, it was announced that The Body Shop UK was entering administration. With 199 shops across the country, if this leads to the collapse of the business, some 2000 jobs will be lost. The business has been struggling since 2020 and poor sales this last Christmas led the new owners, the pan-European alternative investment firm, Aurelius, to appoint administrators.
This could potentially begin an insolvency process that could result in the closure of some or all of the shops. This would spell the end of an iconic brand that, since its founding in 1976, has been associated with natural, ethically sourced and environmentally friendly products. Aurelius has already sold The Body Shop business in most of mainland Europe and in parts of Asia to an unnamed buyer. It is unclear what will happen to the approximately 2800 stores and 8000 employees in 70 countries outside the UK.
Origins of The Body Shop1
The Body Shop was founded in 1976 and shot to fame in the 1980s. It stood for environmental awareness and an ethical approach to business. But its success had as much to do with what it sold as what it stood for. It sold natural cosmetics – Raspberry Ripple Bathing Bubbles and Camomile Shampoo – products that proved immensely popular with consumers.
Its profits increased from a little over £1m in 1985 (€1.7m) to approximately £65m (€77.5m) in 2012. Although profits then slipped, falling to €65.3m in 2014 and €54.8m in 2015, its profit growth in new markets over that same period was 12.4%.
Sales revenue, meanwhile, grew even more dramatically, from £4.9m in 1985 to approximately €967.2m in 2015. By 2015, Body Shop International had over 3100 stores, operating in 61 countries.
What made this success so remarkable is that The Body Shop did virtually no advertising. Its promotion stemmed largely from the activities and environmental campaigning of its founder, Anita Roddick, and the company’s uncompromising claim that it sold only ‘green’ products and conducted its business operations with high ethical standards. It actively supported green causes such as saving whales and protecting rainforests, and it refused to allow its products to be tested on animals. Perhaps most surprising in the world of big business at the time was its high-profile initiative ‘trade not aid’, whereby it claimed to pay ‘fair’ prices for its ingredients, especially those supplied by people in developing countries who were open to exploitation by large companies.
The growth strategy of The Body Shop focused upon developing a distinctive and highly innovative product range, and at the same time identifying these products with major social issues of the day, such as the environment and animal rights.
Its initial expansion was based on a process of franchising, where individuals opened Body Shops which were then supplied by the company with its range of just 19 products. Then, in 1984 the company went public. Following its flotation, the share price rose from just 5p to a high of 370p in 1992.
In the 1990s, however, sales growth was less rapid. By 1998, earnings had collapsed by 90% and the share price fell to 117p. Shareholders forced Anita Roddick to step down as Chief Executive, but for a while she and her husband remained as co-chairs. In 2002, they stepped down as co-chairs, by which time profits had fallen to £20.4m. In 2003 she was awarded in knighthood and became Dame Anita Roddick. Sales then grew rapidly from 2004 to 2006 from €553m to €709m.
Acquisition of The Body Shop by L’Oréal
A dramatic event, however, occurred in 2006 when The Body Shop was sold to the French cosmetics giant, L’Oréal, which was 26% owned by Nestlé, The event resulted in the magazine Ethical Consumer downgrading The Body Shop’s ethical rating from 11 out of 20 to a mere 2.5 and calling for a boycott of the company. Three weeks after the sale, the daily BrandIndex recorded an 11 point drop in The Body Shop’s consumer satisfaction rating from 25 to 14.
There were several reasons for this. L’Oréal’s animal-testing policies conflicted with those of The Body Shop and L’Oréal was accused of being involved in price-fixing with other French perfume houses. L’Oréal’s part-owner, Nestlé, was also subject to various criticisms for ethical misconduct, including promoting formula milk rather than breast milk to mothers with babies in developing countries and using slave labour in cocoa farms in West Africa.
Anita Roddick, however, believed that, by taking over The Body Shop, L’Oréal would develop a more ethical approach to business. Indeed, it did publicly recognise that it needed to develop its ethical and environmental policies.
L’Oréal adopted a new Code of Business Ethics in 2007 and gained some external accreditation for its approach to sustainability and ethics. It was ranked as one of the world’s 100 most ethical companies by Ethisphere in 2007 and, in 2016, it was again part of this list for the seventh time.
L’Oréal set itself three targets as part of its environmental strategy (2005–15), including a 50% reduction in greenhouse gas emissions, water consumption and waste per finished product unit. It made a donation of $1.2m to the US Environment Protection Agency to help bring an end to animal testing and, in March 2013, it announced a ‘total ban on the sale in Europe of any cosmetic product that was tested on animals or containing an ingredient that was tested on animals after this date.’ It also promised that ‘By 2020, we will innovate so that 100% of products have an environmental or social benefit.’
Sadly, Anita Roddick died in 2007 and so was not able to witness these changes.
L’Oréal also looked to inject greater finance into the company aimed at improving the marketing of products. In autumn 2006 a transactional website was launched and there have been larger press marketing campaigns. Profits continued to rise in 2006 and 2007, but fell back quite dramatically from €64m in 2007 to €36m in 2008 as recession hit the high streets. They fell by a further 8% in 2009, but significant growth was seen in the following three years: 2010, up 20.3% to €65.3m; 2011, up 4.3% to €68.1m; 2012, up 13.8% to €77.5m.
From L’Oréal to Natura to Aurelius to ?
From 2013, the financial performance of The Body Shop deteriorated. Profits fell by 38% in 2016 to just €34m, with sales falling by 5%. In June 2017, L’Oréal announced that it had agreed to sell The Body Shop for €1bn (£877m) to Natura Cosmeticos, the largest Brazilian cosmetics business. Natura was awarded ‘B Corp’ status in 2014 as it met certain standards for environmental performance, accountability and transparency. In 2019, The Body Shop was separately certified as a B Corp.
Initial indications for The Body Shop under its new owners seemed good, with net revenue rising by 36% in 2018 and 6.3% in 2019. 2020 saw strong growth in sales, with a rise in online sales more than offsetting the effect of store closures during the pandemic. Its market share peaked in 2020 at 1.4%. However, with the cost-of-living crisis following the pandemic and the Russian invasion of Ukraine, many consumers switched to cheaper brands and cheaper outlets, such as Boots and Superdrug, sacrificing environmental and ethical concerns in favour of value for money. As a result, The Body Shop’s market share fell, dropping to 0.8% in 2022 and not picking up in 2023.
This prompted Natura to sell the business to Aurelius. Aurelius hoped to revitalise The Body Shop by promoting its core values and through partnerships or concessions with major retailers, such as John Lewis or Next. However, as we saw above, after a poor Christmas and a weaker capital base and higher cost commitments than initially thought by Aurelius, the new owner filed to put The Body Shop into administration.
What will come of the administration process remains to be seen. Perhaps some of the more profitable stores will be saved; perhaps there will be an expansion of the online business; perhaps partnerships will be sought with major retailers. We shall see.
1 Some of this section is based on Case Study 9.3 from Economics (11th edition).
Videos
Articles
- Aurelius Acquires Iconic Global Beauty Brand and Retailer, The Body Shop
Aurelius news (14/11/23)
- Back to the future? What’s next for the Body Shop brand
Marketing Week, Niamh Carroll (14/11/23)
- The Body Shop appoints administrators for UK business
Financial Times, Laura Onita and Will Louch (13/2/24)
- The Body Shop set to appoint administrators for UK arm
Financial Times, Laura Onita (10/2/24)
- The Body Shop collapses into administration in UK
The Guardian, Sarah Butler and Rob Davies (13/2/24)
- The Body Shop UK in administration – what went wrong?
Sky News, James Sillars (13/2/24)
- Body Shop UK jobs and stores at risk in race to save firm
BBC News (13/2/24)
- From cult status to closure fears — what happened to The Body Shop?
CBC News, Natalie Stechyson (12/2/24)
- Headed for administration, why did The Body Shop fail?
Startups, Richard Parris (12/2/24)
- Comment: The Body Shop’s woes hit just as it should be at its most relevant
TheIndustry.beauty, Lauretta Roberts (13/2/24)
- The collapse of The Body Shop shows that ‘ethical’ branding is not a free pass to commercial success
The Conversation, Kokho Jason Sit (15/2/24)
Questions
- What assumptions did The Body Shop made about the ‘rational consumer’?
- How would you describe the aims of The Body Shop (a) in the early days under Anita Roddick; (b) under L’Oréal; (c) under Aurelius?
- How has The Body Shop’s economic performance been affected by its attitudes towards ethical issues?
- What has Lush done right that The Body Shop has not?
- What will the administrators seek to do?
- Find out what has happened to The Body Shop outlets in mainland Europe?
The traditional theory of the firm assumes that firms are profit maximisers. Although, in practice, decision-makers in firms are driven by a range of motives and objectives, profit remains a key objective for most firms – if not maximising profit, at least trying to achieve profit growth so as to satisfy shareholders, retain confidence in the company and prevent the share price from falling. After all, if the company is profitable, it is easier to fund investment, either from ploughed-back profit, borrowing or new share issue. And greater investment will help to drive profits in the future.
But does the pursuit of profit and shareholder value as the number-one objective actually lead to higher profit? It could be that a prime focus on other things such as consumer satisfaction, product design and value, innovation, safety, worker involvement and the local community could lead to greater long-term profit than an aggressive policy of marketing, cost cutting and financial rejigging – three of the commonest approaches to achieving greater profits.
Boeing disasters
In 2018 and 2019 there were two fatal crashes involving the new 737 MAX-8 aircraft. On 29 October 2018, Indonesia’s Lion Air Flight 610 crashed into the Java Sea; all 189 people on board died. On 10 March 2019, Ethiopian Airlines Flight 302 similarly crashed; all 157 people on board died. Both disasters were the result of a faulty automatic manoeuvring system. The company and its CEO, Dennis Muilenburg, knew about issues with the system, but preferred to keep planes flying while they sought to fix the issue. Grounding them would have cost the company money. But taking this gamble led to two fatal crashes. This damaged the company’s reputation and cost it billions of dollars.
The US Securities and Exchange Commission (SEC) investigated the cases and found that the company had made false statements about the plane’s safety and had put ‘profits before people’. But putting profits first ended up in a huge fall in profits, with the 737 MAX grounded for 20 months.
Since the crashes there have been several other issues with various critical systems, including stabilisation, engines, flight control systems, hydraulics and wiring. In December 2023, Boeing asked airlines to inspect its 737 MAX planes for a potential loose bolt in the rudder control system.
On 5 January 2024, Alaska Airlines Flight 1282 experienced an emergency. A window panel on the 737 MAX-9 aircraft, which replaced an unused emergency exit door, blew out and the cabin depressurised. Fortunately the plane was still climbing and had reached only just under 5000m – less than half of the cruising altitude of over 11 500m. The plane rapidly descended and safely returned to Portland International Airport without loss of life. Had the incident occurred at cruising altitude, the rush of air out of the plane would have been much greater. Passengers would be less likely to be wearing their seat belts and several people could have been sucked out.
The Federal Aviation Administration (FAA) temporarily grounded 171 MAX-9s for inspections. It found that several planes had loose bolts holding the panels in place and could potentially have suffered similar blow outs.
Profits rather than safety?
Critics have claimed that the corporate culture at Boeing prioritised profit over safety. This was made worse in 2001 when company headquarters moved from Seattle to Chicago but production remained at Seattle. The culture at headquarters became sharply focused on financial success. Boeing was under intense competition from Airbus, which announced its more fuel-efficient version of the A320, the A320neo, in 2010, with launch planned for 2015. Boeing’s more fuel-efficient version of the 737, the 737 MAX, was announced in 2011, scheduled for first delivery in 2017. Since then, Boeing has been keen to get the 737 MAX to customers as quickly as possible. Also, Boeing has sought to cut manufacturing costs to keep prices competitive with Airbus.
Despite warnings from some Boeing employees that this competition was leading to corners being cut that compromised safety, Boeing management continued to push for more rapid and cheaper production to fight the competition from Airbus.
The aircraft industry is regulated in the USA by the Federal Aviation Administration (FAA). In 2020, the House Committee on Transportation and Infrastructure produced a detailed report on the industry. It found that the FAA delegated too much safety certification work to Boeing. This was a case of regulatory capture. It was also accused of sharing the goal of promoting the production of US-based Boeing in its competition with European-based Airbus.
Effects on profits
But rather than a focus on profit leading to greater profits, safety issues have led to groundings of 737s, a fall in sales and a fall in profits. The first chart shows deliveries of 737s slightly lagging A320s from 2010 to 2018. Since then deliveries of 737s have fallen well behind A320s. In terms of orders for all planes, Boeing was ahead of Airbus in 2018 (893 compared with 747). Since then, Boeing has significantly lagged behind Airbus and in 2019 and 2020 cancellations exceeded new orders. The January 2024 incident and subsequent groundings are likely to erode confidence, orders and profits even further.
As you can see from the second chart, profits fell substantially in 2019, and with COVID fell again in 2020. They have not recovered to previous levels since. Depending on how the market responds to the issue of loose panel bolts on the MAX-9, profits could well fall again in 2024. There will almost certainly be a further erosion of confidence and probably of orders.
The Boeing story is a salutary lesson in how not to achieve long-term profit. A focus on design, quality and reliability may be a better means to achieving long-term profit growth than trying to appeal to shareholders by increasing short-term profits through aggressive cost cutting and hoping that this will not affect quality.
Video and audio
Articles
- ‘All those agencies failed us’: inside the terrifying downfall of Boeing
The Guardian, Charles Bramesco (22/2/22)
- A terrifying 10 minute flight adds to years of Boeing’s quality control problems
CNN, Chris Isidore (8/1/24)
- When A Company Prioritizes Profit Over People: Boeing CEO Tells Congress That Safety Is ‘Not Our Business Model’
Forbes, Jack Kelly (30/10/19)
- ‘Boeing played Russian roulette with people’s lives’
BBC News, Theo Leggett and Tom Burridge (November 2020)
- 737 Max: Boeing refutes new safety concerns
BBC News, Theo Leggett (26/11/21)
- 737 Max: Boeing to pay $200m over charges it misled investors
BBC News, Monica Miller (23/9/22)
- Boeing’s mid-flight blowout a big problem for company
BBC News, Theo Leggett (8/1/24)
- Boeing: US regulator to increase oversight of firm after blowout
BBC News (12/1/24)
- Boeing’s 737 Max Is a Saga of Capitalism Gone Awry
International New York Times, via Deccan Herald, David Gelles (24/11/20)
- Boeing and a dramatic change of direction
johnkay.com, John Kay (10/12/03)
- Congressional report faults Boeing, FAA for 737 Max failures, just as regulators close in on recertification
CNBC, Leslie Josephs (16/9/20)
- Boeing 737 Max: The FAA wanted a safe plane – but didn’t want to hurt America’s biggest exporter either
The Conversation, Susan Webb Yackee and Simon F Haeder (22/3/19)
- Boeing needs to get real: the 737 Max should probably be scrapped
The Conversation, ManMohan S Sodhi (12/1/24)
- Boeing: How much trouble is the company in?
BBC News, Theo Leggett (17/3/24)
Information
Questions
- Why is the pursuit of long-run profit likely to result in different decisions from the pursuit of short-run profit?
- How has Airbus’s strategy differed from that of Boeing?
- How would you summarise Boeing management’s attitude towards risk?
- Is it important to locate senior management of a company at its manufacturing base?
- What is regulatory capture? Is it fair to say that the FAA was captured by Boeing?
- Should Boeing scrap the 737 MAX and design a new narrow-body plane?