When you think about John Lewis, you think of a large department store. It is a department store celebrating its 150th anniversary. Many large retailers, such as John Lewis, have expanded their product range throughout their history and have grown organically, moving into larger and more prominent locations. What’s the latest location? St Pancras station.
The idea of a click-and-collect store has grown in popularity over the past decade. With more and more people working and leading very busy lives, together with the growth of online shopping, it is the convenience of this type of purchase which has led to many retailers developing click-and-collect. Indeed, for John Lewis, 33% of its internet sales do come through click-and-collect. However, John Lewis is going a step further and its new strategy is reminiscent of companies like Tesco. If you just need to pop into Tesco to get some milk, you’re likely to go to the local Tesco express. The first mover advantage of Tesco in this market was vital.
John Lewis is unusual in that it is owned by its employees and this ownership structure has proved successful. Despite a long history, John Lewis has moved with the times and this latest strategy is further evidence of that. In today’s world, convenience is everything and that is one of the key reasons behind its new St Pancras convenience store. It will allow customers to purchase items and then collect them on their way to and from work – click-and-commute, but it will also provide customers with an easily accessible place to buy electronic equipment and a range of household goods. The retail director, Andrew Murphy said:
In the battleground of convenience, we are announcing a new way for commuters to shop with us … Customers spend a huge amount of time commuting, and our research shows that making life easier and shopping more convenient is their top priority.
This appears to be the first of many smaller convenience stores, enabling John Lewis to gain a presence in seemingly impossible places, given the normal size of such Department stores. For many people, commuting to and from work often involves waiting at transport hubs – one of the big downsides to not driving. So it seems sensible for such an established retailer to take advantage of commuters waiting for their train or plane to arrive, who have time to kill. The following articles consider this new direction for an old retailer.
John Lewis to open St Pancras convenience store BBC News (2/5/14)
John Lewis thinks small with convenience store The Guardian, Zoe Wood (2/5/14)
John Lewis to trial convenience store click-and-collect format at St Pancras Retail Week, Ben Cooper (2/5/14)
Why is click and collect proving so popular? BBC News, Phil Dorrell (2/5/14)
The rise of click and collect for online shoppers BBC News, Phil Dorrell (2/5/14)
Questions
- What are the advantages and disadvantages of the organisational and ownership structure of John Lewis?
- How would you classify this new strategy?
- How do you think this new strategy will benefit John Lewis in terms of its market share, revenue and profit?
- Is it likely that John Lewis will be able to target new customers with this new convenience store strategy?
- How important is a first-mover advantage when it comes to retail? Using game theory, can you create a game whereby there is clear first mover advantage to John Lewis?
Officials of the Club Financial Control Body (CFCB) of UEFA met on Tuesday 15th April and Wednesday 16th April to decide the fate of a number of European clubs. The job of the CFCB is to implement UEFA’s Financial Fair Play (FFP) rules. Manchester City and Paris Saint-Germain (PSG) are said to be nervously awaiting the outcome of these meetings.
UEFA’s FFP rules apply to teams who want to play in either the Champions League or the Europa League. In order to be eligible to compete in these competitions teams not only have to perform well in their domestic league they also have to obtain a license from UEFA. The application process normally takes place midway through the current season for entry into either the Champions League or Europa League for the following season.
UEFA’s FFP rules cover a broad range of issues such as requirements for clubs to pay taxes, transfer fees and players’ wages on time in order to receive a license. However it is the ‘Break Even’ requirement that has caught the attention of a number of economists. This provision limits the size of the financial losses that team can incur before they become subject to sanctions from UEFA. Some of the stated aims of the policy are to:
– Introduce more discipline and rationality in club football finances
– Encourage clubs to operate on the basis of their own revenues
– Encourage responsible spending for the long-term benefit of football
– Protect the long term viability and sustainability of European club football.
The Royal Economic Society held a special session on the potential impact of the ‘Break Even’ requirement at its annual conference in April of this year.
One key way in which the UEFA rules differ from the rules imposed in the Championship in England is that the financial performance of the clubs is judged over a 2/3 year period rather than just one. The initial assessment period is over 2 seasons – 2011-12 to 2012-13. After this the monitoring period is over 3 seasons. Teams can make an initial loss of €5 million in total over the first two year period but this can increase to a maximum permitted loss €45 million over the two years – approximately £37 million – if the team’s owner is willing to fund this loss out of their own money. Certain categories of expenditure are exempt such as the cost of building a new stadium/stand or spending on youth development and the local community.
Manchester City made a total financial loss of £149 million over the last two seasons, far in excess of the permitted £37million, but these losses are falling which may count in their favour. They made losses of £97.9 million in 2012 and £51.6 million in 2013. Also some of the club’s expenditure will have been on some of the exempted categories so that the actual losses subject to FFP will be lower. Chelsea made a profit of £1.4million in 2011-12 and a loss of £49.4million in 2012-13. Although the losses over the two seasons were greater than £37 million, once adjustments were made for exempted expenditures the club was within the maximum permitted loss so was not subject to a full investigation.
In order to implement its FFP regulations UEFA created the Club Financial Control Body (CFCB). The CFCB has two departments – an investigatory chamber and an adjudicatory chamber. The investigatory chamber does the bulk of the work by investigating the accounts of all the 237 clubs that play in UEFA competitions. It was initially reported that the accounts of 76 clubs were being investigated in some detail because it was thought that they might have failed to meet FFP guidelines. However after further investigations in February it was reported that this number had fallen to below 20 teams. The investigatory panel met on Tuesday 15th April and Wednesday 16th April in order to make its final decisions which will be announced May 5th. The body can choose from one of the four following options in each case:
– Dismiss the case
– Agree a settlement with the club – effectively putting it on probation
– Reprimand and fine the club up to €100,000
– Refer the club to the CFCB adjudicatory chamber
The last option is the most serious as the adjudicatory chamber has the power to issue more serious penalties such as
– A deduction of points from the group stages of UEFA competitions.
– Withholding of revenues from UEFA competitions.
– Restrictions on the number of players that a club can register for participation in UEFA competitions.
– Disqualification from future UEFA competitions.
One issue that concerned UEFA was the possibility that very wealthy team owners might try to artificially inflate the revenues their club’s generate so as to circumvent the rules and make it look as if the team was meeting the FFP guidelines. In particular deals might be struck between other organisations that the club owner has an interest in and the football club at rates far in excess of the normal market level. For example some concerns have been expressed about the nature of the back-dated sponsorship deal of £167 million/year signed by PSG with the Qatar Tourism Authority. PSG are owned by Qatar Sport Investment which itself is a joint venture between the Qatari government and the Qatari Olympic Committee. The CFCB have said that they will analyse these types of deals and adjust club accounts if necessary so that they reflect true market rates.
May 5th could prove to be a very significant day for some of the biggest and most wealthy clubs in Europe.
Webcast
The Economics of “Financial Fair Play” (FFP) in European Soccer (EJ Special Session) Royal Economic Society (7/4/14)
Articles
UEFA probes ‘fewer than 20’ clubs over financial fair play rules Sky Sports, (14/4/14)
Manchester City confident of satisfying Uefa financial fair play rules The Guardian (15/4/14)
Uefa’s Financial Fair Play rules explained The Telegraph (15/4/14)
Man City sweating over sanctions as UEFA prepare to rule over excessive spending Daily Mail (15/4/14)
How Bosman’s lawyer is plotting another football revolution BBC Sport (2/10/13)
Manchester City await fate as Uefa’s financial rules kick in BBC Sport (16/4/14)
Manchester City and Paris Saint-Germain face financial fair play fate The Guardian (14/4/14) .
Questions
- In standard economic theory it is assumed that both consumers and producers act rationally. What precisely does this mean?
- One of the stated aims of UEFA FFP is to ‘introduce more discipline and rationality in club football finances’. Why might the owners of a football club act in an irrational way?
- Consider some of the advantages and disadvantages of assessing the financial performance of a team over 3 years as opposed to 1 year.
- One of the major arguments made against the UEFA FFP rules is that they will lead to a ‘fossilisation’ of the existing market i.e. the current top clubs are more likely to maintain their leadership. Explain the logic of this argument in more detail.
- Which of the possible sanctions for breaking FFP regulations do you think would hit the clubs the hardest in terms of the revenue they would lose? i.e. Which of the sanctions would they most like to avoid?
As Leicester City celebrated promotion to the English Premier League (EPL) last Saturday (5th April) it also became the first club in England that will probably have to pay a new Financial Fair Play (FFP) Tax. This tax is not paid to the government, but is effectively a fine imposed by the English Football League (EFL) on teams who break FFP regulations.
On Tuesday 8th April 2014 representatives from all the Championship clubs met with officials from the English Football League (EFL) in order to discuss the implementation of FFP. It had been reported in February that a number of teams were unhappy about the implementation of the FFP rules and were threatening to take legal action against the league. Unsurprisingly, one of these clubs was rumoured to be Leicester City.
In April 2012, 21 out of the 24 clubs in the Championship agreed on a set of new FFP regulations. These rules place a limit on the size of any financial losses that a team can incur in a given season before punishments, such as a tax, are imposed on them. The English Football League (EFL) stated that the aim of the FFP regulations was to
reduce the levels of losses being incurred at some clubs and, over time, establish a league of financially self-sustaining professional football clubs.
Under the agreed set of rules, all teams in the Championship have to provide a set of annual accounts by 1st December for the previous season: i.e. the first reporting period was in December 2012, when clubs had to submit accounts for 2011–12. No penalties were applied for the first two reporting periods as teams were given time to adjust to the new FFP framework. However sanctions come into effect for the 2013–14 season.
For the 2013–14 season the FFP rules set a threshold of £3 million as the size of the pre-tax financial losses that a team can incur before having to face any sanctions. If a team incurs a pre-tax loss of greater than £3 million but less than £8 million then punishments from the league can be avoided if the team’s owner invests enough money into the club so that the loss is effectively limited to £3 million: i.e. if the club reports a loss of £7 million then the owner would have to invest a minimum of £4 million of his/her own cash to avoid any sanctions.
The club is not allowed to finance the loss by borrowing or adding to the level of the team’s debt. If the owner cannot/refuses to make the investment or the pre-tax loss is greater than £8 million then the team is subject to one of two possible sanctions depending on whether it is promoted or not.
First, if the club is not promoted to the EPL, then it is subject to a transfer ban from the 1st January 2015: i.e. it will be unable to sign new players at the start of the transfer window. The ban remains in place until the club is able to submit financial information that clearly shows that it is meeting the FFP guidelines.
Second, if the club is promoted to the EPL then instead of a transfer embargo it has to pay the FFP Tax. The amount of tax the firm has to pay to the league depends on the size of the financial loss it has incurred. The larger the loss, the greater the tax it has to pay. The marginal rate of tax also increases with the size of the loss.
In order to help illustrate how the tax works it is useful to take a simple example. Leicester city reported a pre-tax loss of £34 million in 2012–13. If the club managed to reduce its pre-tax losses to £15 million in 2013–14 then, given its promotion, it would be subject to the tax. If we also assume that the owners are willing and able to invest £5 million of their own money into the club then the rate of tax the team would have to pay is based on the size of its losses over £8 million in the following way:
1% on losses between £8,000,001 and £8,100,000
20% on losses between £8,100,001 and £8,500,000
40% on losses between £8,500,001 and £9,000,000
60% on losses between £9,000,001 and £13,000,000
80% on losses between £13,000,001 and £18,000,000
100% on any losses over £18,000,000
Therefore with a loss of £15 million the FFP tax that Leicester would have to pay is £4,281,000 (£1,000 + £80,000 + £200,000 + £2.4million + £1.6million). If the club instead made a pre-tax financial loss of £30,000 in the 2013–14 season, then the FFP tax it would have to pay increases to £18,681,000 (£1,000 + £80,000 + £200,000 + £2.4million + £4 million + £12 million).
It was originally agreed that the revenue generated from the FFP tax would be shared equally by the teams in the Championship who managed to meet the FFP regulations. However the EPL objected to this provision and the money will now be donated to charity by the EFL.
Based on the financial results reported in 2012–13, about half the clubs in the Championship would be subject to either a transfer ban or FFP tax in January 2015. It was reported in the press in February that a number of clubs had instructed the solicitors, Brabners, to write to the EFL threatening legal action.
One particular concern was the ability of the clubs in the Championship subject to FFP rules to compete with teams relegated from the EPL. When the original FFP regulations were agreed, the teams relegated from the EPL received parachute payments of £48 million over a 4-year period. Following the record-breaking TV deal to broadcast EPL games, the payments were increased to £59 million for the 2013–14 season.
Following the meeting on Tuesday 8th April a spokesman from the EFL said
Considerable progress was achieved on potential improvements to the current regulations following a constructive debate between the clubs.
It will be interesting to see what changes are finally agreed and the implications they will have for the competitive balance of the league.
Articles
Why Championship clubs are crying foul over financial fair play The Guardian (26/2/14)
Wage bills result in big losses at Leicester City and Nottingham Forest The Guardian (5/3/14)
Financial fair play: Championship clubs make progress on talks BBC Sport (10/4/14)
Financial Fair Play in the Football League The Football League (25/4/12)
Loss leaders – Financial Fair Play Rules When Saturday Comes (25/4/12)
Richard Scudamore: financial fair play rules unsustainable in present form The Guardian (14/3/14)
Questions
- To what extent do you think that the implementation of the FFP regulations will either increase or decrease the competitive balance of the Championship?
- An article in the magazine ‘When Saturday Comes’ made the following statement “Last season’s champions, QPR, lost £25.4m and would have been handed a ‘tax’ of at least £17.4m based on 2013-14 thresholds”. Explain why this statement is not accurate. What mistake has the author made when trying to calculate the level of FFP tax payable?
- Nottingham Forest reported pre-tax financial losses of £17 million in 2012-13. If they made the same losses in 2013-14 and were promoted to the EPL, calculate how much FFP tax they would have to pay under current regulations.
- To what extent do you think that the money generated by the FFP tax should be equally distributed between the teams in the Championship who meet the FFP regulations.
- Why do you think team owners might need regulations to restrict the level of losses that they can make. Why might sport be different from other sectors?
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?
The UK energy industry (electricity and gas) is an oligopoly. There are six large suppliers: the ‘Big Six’. These are British Gas (Centrica, UK), EDF Energy (EDF, France), E.ON UK (E.ON, Germany), npower (RWE, Germany), Scottish Power (Iberdrola, Spain) and SSE (SSE Group, UK). The Big Six supply around 73% of the total UK market and around 90% of the domestic market.
Energy suppliers buy wholesale gas and electricity and sell it to customers. The industry has a considerable degree of vertical integration, with the energy suppliers also being involved in both generation and local distribution (long-distance distribution through the familiar pylons is by National Grid). There is also considerable horizontal integration, with energy suppliers supplying both electricity and gas and offering ‘dual-fuel’ deals, whereby customers get a discount by buying both fuels from the same supplier.
Smaller suppliers have complained about substantial barriers to entry in the industry. In particular, they normally have to buy wholesale from one of the Big Six. Lack of transparency concerning their costs and internal transfer prices by the Big Six has led to suspicions that they are charging more to independent suppliers than to themselves.
Under new regulations announced by Ofgem, the industry regulator, the Big Six will have to post the prices at which they will trade wholesale power two years in advance and must trade fairly with independent suppliers or face financial penalties. In addition, ‘a range of measures will make the annual statements of the large companies more robust, useful and accessible.’ According to the Ofgem Press Release:
From 31 March new rules come into force meaning the six largest suppliers and the largest independent generators will have to trade fairly with independent suppliers in the wholesale market, or face financial penalties. The six largest suppliers will also have to publish the price at which they will trade wholesale power up to two years in advance. These prices must be published daily in two one-hour windows, giving independent suppliers and generators the opportunity and products they need to trade and compete effectively.
But will these measures be enough to break down the barriers to entry in the industry and make the market genuinely competitive? The following articles look at the issue.
Articles
Boost for small energy firms as Big Six are ordered to trade fairly on wholesale markets or face multi-million pound fines This is Money, Rachel Rickard Straus (26/2/14)
Energy firms told to trade fairly with smaller rivals BBC News, Rachel Fletcher (26/2/14)
Ofgem ramps up scrutiny of Big Six accounts The Telegraph, Denise Roland (26/2/14)
‘Big six’ told to trade fairly – will it make a difference? Channel 4 News, Emma Maxwell (26/2/14)
Energy regulator Ofgem forces trading rules on ‘big six’ suppliers Financial Times, Andy Sharman (26/2/14)
Information
Ofgem tears down barriers to competition to bear down as hard as possible on energy prices Ofgem Press Release (26/2/14)
The energy market explained Energy UK
Gas Ofgem
Electricity Ofgem
Energy in the United Kingdom Wikipedia
Big Six Energy Suppliers (UK) Wikipedia
Questions
- Describe the structure of the UK energy industry.
- What are the barriers to the entry of new energy suppliers and generators in the UK?
- To what extent is vertical integration in the electricity generation and supply industry in the interests of consumers?
- To what extent is horizontal integration in the electricity and gas markets in the interests of consumers?
- How will requiring the six largest energy suppliers to post their wholesale prices for the next 24 months increase competition in the energy market?
- Is greater transparency about the revenues, costs and profits of energy suppliers likely to make the market more competitive?
- Identify and discuss other measures which Ofgem could introduce to make the energy market more competitive.
