Last week, I posted an article about a price discriminating tactic in operation by a few firms, whereby they were charging different prices to different consumers, depending on whether or not people could speak the language. (See Entrance this way!). Following this, I had a look around to find some other pricing strategies in practice by firms. These ranged from simple price discrimination to a well-known supermarket, which, following the failure of its till system, decided to trust consumers: estimate the value of the goods in your trolley/basket, deduct 20% and that’s the amount you pay. Also, a strategy being adopted by a number of restaurants – ‘pay what you think it’s worth!’ An advertising gimmick that increased sales.
So, what’s the best pricing strategy for a firm to adopt and which factors affect this? Is it really a rational decision to offer meals, with the possibility that the guests may only be prepared to pay 1p?!
You decide how much meals are worth, restaurants tell customers Telegraph, Nina Goswami (12/06/05)
Panera café says pay what you want Associated Press, Food Inc, Christopher Leonard (18/5/10)
Pound shop forced to close after 99p store opens across the road Daily Mail Online (12/1/09)
Low cost? Not with these extras Times Online, Richard Green (17/8/08)
Cheap hotels: budget accommodation for visits to London Telegraph (25/10/10)
Budget customers call the hotel Tune BBC News, Susannah Streeter (30/8/10)
Questions
- Is it a rational decision to trust consumers and ask them to estimate the value of what’s in their trolleys?
- Why would a restaurant offer consumers the chance to pay ‘what you think it’s worth’? Under what circumstances would this incrrease the firm’s revenue?
- What are the key factors that determine the price a firm will charge for its product?
- How can we use the case in Poole, with the new 99p shop, to analyse the model of perfect competition?
- What pricing tactic is being used by the 99p shop? How could we argue that this is an example of tacit collusion?
The market for food in the UK is highly competitive. From dining in style to a simple take-away, one of the key words when it comes to dining seems to be choice. Competitive prices and high quality are on offer, which is largely due to the sheer number of restaurants available to consumers. However, consolidation seems to be on the menu.
Nando’s is a well known restaurant and a popular eating destination on UK and Irish high streets, with more than 230 restaurants. This chicken restaurant group has made a £30 million bid for Clapham House, the company behind the Gourmet Burger Kitchen chain with 53 branches. Clapham’s shareholders were advised to accept the deal and on the 17th September 2010, it is reported that a deal was reached with Nando’s Group Holdings and its private equity owner Capricorn Ventures International. The 74 pence per share deal was met with disappointment by some analysts, who felt that the company was under-valued, despite failed attempts by Clapham House’s Board to persuade Capricorn to raise the offer price or find an alternative bidder.
The restaurant industry has suffered from the recession and especially by the weak economic recovery, so perhaps lower valuations are to be expected. Nando’s said:
‘As macroeconomic weakness has persisted in the UK, the trading environment for restaurant businesses in the UK has been difficult. This is evidenced by Clapham House’s vaolatile weekly trading performance.’
Nando’s intend to invest significantly in Clapham Houses’ businesses to reinvigorate their previous competitor. This may be essential, given the expectation that conditions in the UK will remain fragile, with consumer confidence staying low, as well as a somewhat untimely rise in VAT in January next year, which is almost certain to have an adverse effect on the restaurant business.
This take-over deal is not the first in the restaurant industry and nor is it likely to be the last, as the UK economy remains in a vulnerable state. The following articles look at this and over takeovers.
Nando’s to buy Gourmet Burger Kitchen for £30m BBC News (17/9/10)
UK restaurants serve up £50m in takeover deals Management Today, Emma Haslett (17/9/10)
Nando’s swallows Gourmet Burger Daily Mirror News, Clinton Manning (18/9/10)
GBK team plots next move after Nandos deal Telegraph, Jonathan Sibun (18/9/10)
Nando’s to buy Real Greek chain for £30m Independent, Alistair Dawber (18/9/10)
Mithcells & Butlers and Nando’s to feast on rival restaurant chains Mail Online, Ben Laurance (17/9/10)
GBK owner Clapham agrees to Nando’s offer Reuters (17/9/10)
Questions
- What type of takeover is Nando’s purchase of Clapham House?
- Why has the weak macroeconomic environment adversely affected the restaurant industry? What might be the impact of next January’s rise in VAT?
- Will Nando’s takeover (or indeed any other takeover in the restaurant industry) allow the company to prosper from the weak economic climate?
- In which type of market structure would you place the restaurant industry in the UK? Explain the characteristics of the market structure you choose and why you have placed the restaurant industry in it.
- How was the finance for the deal raised by Nando’s Holdings Group? What other sources of finance are available to firms for this purpose? What are the (a) advantages and (b) disadvantages of each?
- What other takeovers have occurred recently in the restaurant industry? What types of takeovers are they?
August is usually a quiet month for mergers and acquisitions. But not this August! As the linked Independent article below states:
Korea National Oil Corporation’s £1.87bn hostile bid for Dana Petroleum yesterday was just the latest in a surge of activity taking merger and acquisition (M&A) levels to a nine-month high.
Despite edgy economic data from the US, global deal-making has already topped $197bn (£127bn) so far this month, and is on course to beat the August record of $260bn set in 2006, according to Thomson Reuters. This week’s $89.8bn total is the highest weekly total since early November.
During the global recession of 2008/9, M&A activity slumped. In 2007, global M&As were worth $4162bn. In 2009 they were worth only $2059bn. Not only were companies cautious of acquiring other companies in a period of great economic uncertainty, but finance for deals was hard to obtain. Now, with many companies having cut costs and having much healthier balance sheets, they are in a position to bid for other companies. And banks too are much more able and willing to provide the finance to support takeovers.
So does this signify a continuing surge in M&A activity? Or are the August figures likely to be a ‘blip’, with fears of a double-dip recession dampening any renewed takeover fever? The articles below look at the recent cases and at the factors influencing current M&A activity.
Articles
Stock markets catch deal fever as M&A booms again Independent, Sarah Arnott (21/8/10)
BHP, Intel, RSA shatter usual August M&A lull Reuters, Quentin Webb (20/8/10)
Global M&A volume could be highest in August International Business Times, Surojit Chatterjee (21/8/10)
Mergers and acquisitions mania disrupts bankers’ summer breaks Guardian, Elena Moya (21/8/10)
Merger mania predicted as cash-rich firms stalk takeover targets Observer, Richard Wachman (22/8/10)
M&A Signal Higher Stock Prices Ahead Minyanville, Terry Woo (20/8/10)
From slowest to busiest TodayOnline (21/8/10)
Data and Reports
International
The era of globalized M&A: Winds of change Thomson Retuers and J.P.Morgan (June 2009)
Preliminary M&A Financial Press Release 2Q10 Thomson Reuters (25/6/10)
World Investment Report 2010: Annex Tables United Nations Conference on Trade and Development (UNCTAD) (see tables 9–16)
UK data
Mergers and Acquisitions involving UK companies Office for National Statistics
Mergers & Acquisitions data Office for National Statistics
Mergers and acquisitions involving UK companies: 1st Quarter 2010 Office for National Statistics (2/6/10)
Mergers and Acquisitions Tables Office for National Statistics
Questions
- Identify the reasons why firms want to take over other firms.
- Why does M&A activity tend to increase during a period of economic boom and decline during a recession?
- What is likely to happen to M&A activity over the coming months?
- Exmamine two recent mergers or acquistions and explain why the acquiring company was keen to take over the other company, or why the two companies were keen to merge. Were there any economies of scale to be gained? Would the merger increase the acquiring company’s market power?
‘eBay has declared that Britain’s small businesses have “come of age” online, after reporting that the number of its traders who are turning over £1m a year had nearly doubled over the last 12 months.’
So begins the linked article below from the Guardian. Unlike other small and medium-sized businesses (SMEs), many of which did not survive the recession, the number of successful online SMEs is increasing and their survival rates are generally high. According to eBay, some 25,000 people have set up business on its site since the recession and it is predicted that 127 will have a turnover of over £1 million in 2010 (up from 66 in 2009).
So what is it about the online environment that helps small business to develop and thrive? Does going down the e-commerce route avoid many of the pitfalls of traditional business models? And does it have any specific pitfalls of its own? Read the articles below and then attempt the questions that follow.
eBay doubles number of traders with turnover above £1m Guardian, Graeme Wearden (21/8/10)
Why e-commerce IPOs will soon be the smarter buy VentureBeat, Owen Thomas (18/8/10)
Small businesses prosper in eBay’s millionaires’ club InternetRetailing, Chloe Rigby (21/8/10)
Ecommerce technology is retail investment priority: report InternetRetailing, Chloe Rigby (13/8/10)
Move into ecommerce could transform the Scottish economy Sunday Herald, Colin Donald (22/8/10)
Small businesses ‘tend to be a risk’ to lenders BBC Today Programme (23/8/10)
Questions
- What advantages does e-commerce have for SMEs: (a) in the startup phase; (b) over the long term?
- What are meant by ‘network economies’? Does eBay offer such economies to SMEs?
- Follow the links in the above articles to study the experience of two specific online SMEs and identify the strengths and weaknesses of their business strategies.
- What considerations might an SME take into account that is currently trading on eBay or Amazon in deciding whether to set up its own website and trade directly from that?
- Why may a move into e-commerce prove particularly beneficial to the Scottish economy? Would this apply to all online SMEs or only certain types?
Russia is now ranked alongside Zimbabwe on the worldwide corruption index, despite the fact that the Russian authorities have been doing their best to tackle it. The Russian bribery ‘industry’ is worth some $300 billion per year and those who can be bought include several government officials.
The Russian economy is in much need of foreign investment, but the growing world of bribery is deterring international businesses from investing in Russia. Not only will they face the costs of building and running the business, but they are also likely to face substantial costs in trying to get the paperwork through, as IKEA found. Having said that they would never resort to bribery, IKEA had to pay $4 million for investment in local infrastructure and donate a further $1 million for local government projects just to get the 300+ permits they needed to begin construction. This then led to further bribes and a number of lawsuits. For some companies, the delays caused by not paying a bribe may actually cost more than the bribe itself.
The following webcast and articles look at the case of IKEA and the push by foreign businesses to avoid the clutches of Russian bribery.
Webcast
Russian bribes culture hits international business BBC News (14/5/10)
Articles
Foreign firms pledge not to give bribes in Russia BBC News (21/4/10)
IKEA masters rules of Russian business The Moscow Times (14/5/10)
Russians are spending twice as much on bribes Prime Time Russia (13/5/10)
Data Source
Corruption Perceptions Index 2009 Transparency International 2009
Questions
- Why is Russia in need of significant foreign investment? How would it help the economy?
- Can we classify IKEA (or any other company that uses bribery) as a risk-lover? Explain your answer.
- If a foreign firm wants to invest in Russia, which type of expansion do you think would be the easiest and the least open to bribery?
- IKEA began building without the necessary permits, but then ‘the bureaucrats took advantage of the situation’. Was IKEA operating under conditions of risk or uncertainty?
- In the article ‘IKEA masters rules of business’, Lennart Dahlgren said: “If we had waited to receive them all, we would have lost years”. What economic concept is being referred to?
- To what extent is government intervention and international co-operation needed to tackle corruption in Russia?
