Global merger and acquisition deals with a combined value of £2.7 trillion ($4.06 trillion) have taken place so far this year (1 Jan to 3 Nov). This is a 38% increase on the same period in 2014 ($2.94 trillion) and even surpasses the previous record high for the same period in 2007 ($3.93 trillion) (see the chart from the Dealogic article linked below).
Measured by dollar value, October was the fifth biggest month in Mergers and Acquisitions (M&As) history with the announcement of $514bn of actual or proposed deals. These included:
|
|
| • |
the proposed £71 billion deal to acquire SABMiller (the world’s second largest brewer) by AB InBev (the world’s largest brewer); |
| • |
the $67bn takeover of network storage provider EMC by Dell (the world’s third largest computer supplier); |
| • |
the proposed deal to acquire Allergan (producer of Botox) by Pfizer (the producer of Viagra). |
Although the dollar value of M&As was extremely large in October the actual number of deals, 2177, was significantly lower than the average of 3521 over the previous 9 months.
Are these large M&As in the interests of the consumer? One advantage is that the newly combined firms may have lower average costs. Reports in the press, following the announcement of most M&As, often discuss the potential for reductions in duplicate resources and rationalisation. After the successful completion of a takeover two previously separate departments, such as finance, law or HRM, may be combined into one office. If the newly integrated department is (i) smaller than the previous two departments added together and (ii) can operate just as effectively, then average costs will fall. This is simply an example of an economy of scale.
Average costs will also decrease if x-inefficiency within the acquired business can be reduced or eliminated. X-inefficiency exists when an organisation incurs higher costs than are necessary to produce any given output. In other words it is not producing in the cheapest possible way. In a number of takeovers in the brewing industry, AB InBev has gained a fearsome reputation for minimising costs and removing any waste or slack in acquired organisations. In an interview with the Financial Times, its chief executive, Carlos Brito, stated that:
“In any company, there’s 20 per cent that lead, 70 per cent that follow and 10 per cent that do nothing. So the 10 per cent, of course, you need to get rid of.”
If any reduction in costs results in lower prices without any lessening in the quality of the good or service, then of course the customer will benefit. However, when two relatively large organisations combine, it may result in a newly merged business with considerable market power. With a fall in the price elasticity of demand for its goods and services, this bigger company may be able to increase its prices and make greater revenues.
An important responsibility of a taxpayer-funded competition authority is to make judgements about whether or not large M&As are in the public interest. For example, the Competition and Markets Authority in the UK investigates deals if the target company has a UK turnover that exceeds £70 million, or if the newly combined business has a market share that is equal to or exceeds 25 per cent. If the CMA concludes that an M&A would lead to a substantial lessening of competition in the market, then it could prohibit the deal from taking place. This has only happened on 9 occasions in the last 12 years. If competition concerns are identified, it is far more likely that CMA will allow the deal to go ahead but with certain conditions attached. This has happened 29 times in the last 12 years and the conditions are referred to as remedies.
The CMA has recently published a report (Understanding past merger remedies) that attempts to evaluate the relative success of the various remedies it has used in 13 M&A cases.
Articles
Are big mergers bad for consumers? BBC News, Daniel Thomas (30/10/15)
Mergers and acquisitions madness may be about to stop The Guardian (11/10/15)
M&A deal activity on pace for record year The Wall Street Journal, Dana Mattioli and Dan Strumpf (10/08/15) [Note: if you can’t see the full article, try clearing cookies (Ctrl+Shift+Delete)]
Global M&A Volume Surpasses $4tr in 2015 YTD Dealogic, Anthony Read (04/11/15)
M&A Volumes Weaken in October despite Megadeals Financial Times, James Fontanella-Khan and Arash Massoudi (01/11/15)
The merger of Dell and EMC is further proof that the IT industry is remaking itself The Economist (12/10/15)
Questions
- Using a cost curve diagram, explain the difference between economies of scale and x-efficiency.
- Explain why a takeover or merger might reduce the price elasticity of demand for the goods or services produced by the newly combined firm.
- Explain how the CMA determines the size of the appropriate market when calculating a firm’s market share.
- Draw a diagram to illustrate the simultaneous impact of greater market power and lower average costs that might result from a horizontal merger. Consider the impact on consumer, producer and total surplus.
- What is the difference between a structural and a behavioural remedy?
This rather strange question has been central to a storm that has been brewing between various celebrity chefs, including Jamie Oliver and Hugh Fearnley-Whittingstall, and the supermarkets. Supermarkets say that consumers don’t want irregular shaped vegetables, such as carrots, parsnips and potatoes. ‘Nonsense’, say their critics.
At the centre of the storm are the farmers, who find a large proportion of their vegetables are rejected by the supermarkets. And these are vegetables which are not damaged or bad – simply not of the required shape. Although these rejected vegetables have been described as ‘wonky’, in fact many are not wonky at all, but simply a little too large or too small, or too short or too long. Most of these vegetables are simply wasted – ploughed back into the ground, or at best used for animal feed.
And it’s not just shape; it’s colour too. Many producers of apples find a large proportion being rejected because they are too red or not red enough.
But do consumers really want standardised fruit vegetables? Are the supermarkets correct? Are they responding to demand? Or are they attempting to manipulate demand?
Supermarkets claim that they are just responding to what consumers want. Their critics say that they are setting ludicrously rigid cosmetic standards which are of little concern to consumers. As Hugh Fearnley-Whittingstall states:
‘It’s only when you see the process of selection on the farm, how it has been honed and intensified, it just looks mad. There are many factory line systems where you have people looking for faults on the production line; in this system you’re looking for the good ones.
What we’re asking supermarkets to do is to relax their cosmetic standards for the vegetables that all get bagged up and sold together. It’s about slipping a few more of the not-so-perfect ones into the bag.’
In return, consumers must be prepared to let the supermarkets know that they are against these cosmetic standards and are perfectly happy to buy slightly more irregular fruit and vegetables. Indeed, this is beginning to happen through social media. 
The pressure group 38 degrees has already taken up the cause.
But perhaps consumers ‘voting with their feet’ is what will change supermarkets’ behaviour. With the rise of small independent greengrocers, many from Eastern Europe, there is now intense competition in the fruit and vegetables market in many towns and cities. Perhaps supermarkets will be forced to sell slightly less cosmetically ‘perfect’ produce at a lower price to meet this competition.
Videos
Hugh’s War on Waste Episode 1 BBC on YouTube, Hugh Fearnley-Whittingstall (2/11/15)
Hugh’s War on Waste Episode 2 BBC on YouTube, Hugh Fearnley-Whittingstall (9/11/15)
Articles
Hugh Fearnley-Whittingstall rejects Morrisons’ ‘pathetic’ wonky veg trial The Guardian, Adam Vaughan (9/11/15)
Jamie Oliver leads drive to buy misshapen fruit and vegetables The Guardian, Rebecca Smithers (1/1/15)
Hugh Fearnley-Whittingstall’s war over wonky parsnips The Telegraph, Patrick Foster (30/10/15)
Asda extends ‘wonky’ fruit and veg range Resource, Edward Perchard (4/11/15)
Wearne’s last farmer shares memories and laments loss of farming community in Langport area Western Gazette, WGD Mumby (8/11/15)
Viewpoint: The rejected vegetables that aren’t even wonky BBC News Magazine (28/10/15)
Viewpoint: The supermarkets’ guilty secret about unsold food BBC News Magazine (6/11/15)
Questions
- What market failures are there is the market for fresh fruit and vegetables?
- Supermarkets are oligopsonists in the wholesale market for fruit and vegetables. What is the implication of this for (a) farmers; (b) consumers?
- Is there anything that (a) consumers and (b) the government can do to stop the waste of fruit and vegetables grown for supermarkets?
- How might supermarkets estimate the demand for fresh fruit and vegetables and its price elasticity?
- What can supermarkets do with unsold food? What incentives are there for supermarkets not to throw it away but to make good use of it?
- Could appropriate marketing persuade people to be less concerned about the appearance of fruit and vegetables? What form might this marketing take?
Obesity is on the rise, especially in children. With all the attendant health problems, concern is growing and various policies have been proposed to try to tackle the problem. One such policy is a sugar tax. This could be either a universal tax on sugar in food products or a tax just on soft drinks, many of which are very high in sugar – typically about seven teaspoons in a can or individual bottle.
Currently the issue is being considered by the UK’s Parliamentary Health Select Committee. Jamie Oliver, the TV chef and restaurateur, argued strongly before the committee in favour of a sugar tax on fizzy drinks. He has already imposed a levy on soft drinks with added sugar in his restaurants. He maintained that it was not just the higher price from a sugar tax that would deter consumption of such drinks, but it would send out an important message that too much sugar is bad for you.
Two days later, Dr Alison Tedstone appeared before the committee. She is chief nutritionist at Public Health England. PHE has been carrying out research into obesity and ways of tackling it. It has reviewed two types of evidence: experimental data on the effects of imposing higher prices on products with added sugar; and the effects of policies pursued in other countries. She stated to the committee that ‘universally all the evidence shows that the tax does decrease consumption’ and that ‘the higher the tax increase, the greater the effect’.
The government was not planning to publish the report at this stage, but under considerable pressure agreed to its publication.
The articles look at the prospects for a sugar tax, its likely effects if one were introduced and at the politics of the situation, which are likely to result in such a tax being rejected.
Videos and audio podcasts
Can you be trusted to eat less sugar? BBC News, Hugh Pym (22/10/15)
‘Introduce sugar tax’, health officials tell government Channel 4 News, Victoria Macdonald (22/10/15)
Jamie Oliver: ‘Bold’ sugar tax to beat childhood obesity BBC News, Hugh Pym (19/10/15)
Be bold on sugar tax, Jamie Oliver says BBC News, Nick Triggle (19/10/15)
Health scientists’ links with sugar industry queried BBC News, Dominic Hughes (12/2/15)
Mexico’s soda tax is starting to change some habits, say health advocates PRI’s The World on YouTube, Jill Replogle (2/12/14)
Articles
Jeremy Hunt told sugar tax would cut childhood obesity as review Government tried to suppress is published Independent, Charlie Cooper (20/10/15)
Sugar tax could help solve Britain’s obesity crisis, expert tells MPs The Guardian, Ben Quinn (21/10/15)
Jamie Oliver ‘expects kicking’ over sugar tax The Guardian, Jessica Elgot (22/10/15)
Sugar tax, fat fines and gold coins: new ways cities are tackling obesity The Guardian, Sarah Johnson (22/10/15)
Sugar tax and offers ban ‘would work’ BBC News (22/10/15)
Public Health England tells UK government: Sugar taxes do work FoodNavigator.com, Niamh Michail (21/10/15)
Childhood Obesity Partially Down To The Coco Pops Monkey, Sugar Tax Report Claims Huffington Post, Sarah Ann Harris (21/10/15)
Health officials back a sugar tax – and want the Coco Pops monkey banned The Telegraph, Laura Donnelly (20/10/15)
Jeremy Hunt embroiled in row over sugar tax report The Telegraph, Laura Donnelly (11/10/15)
Revealed: ‘Sugar tax report’ which was suppressed by Government The Telegraph, Laura Donnelly (22/10/15)
Public Health England obesity report: the key points The Guardian, James Meikle (22/10/15)
Cameron says no to sugar tax Mail Online, Jason Groves and Daniel Martin (21/10/15)
Sugar tax: Former health minister backs levy to prevent NHS ‘obesity crisis’ Independent, Charlie Cooper (21/10/15)
Journal articles and reports
Sugar Reduction: The evidence for action Public Health England, Dr Alison Tedstone, Victoria Targett, Dr Rachel Allen and staff at PHE (22/10/15)
Effects of a fizzy drink tax on obesity rates estimated NHS CHoices (1/11/13)
Overall and income specific effect on prevalence of overweight and obesity of 20% sugar sweetened drink tax in UK: econometric and comparative risk assessment modelling study British Medical Journal, Adam D M Briggs, Oliver T Mytton, Ariane Kehlbacher, Richard Tiffin, Mike Rayner and Peter Scarborough (2013;347:f6189)
Perspectives: Time for a sugary drinks tax in the UK? Journal of Public Health, Oliver Mytton (29/5/14)
Sugar reduction: Responding to the challenge Public Health England, Dr Alison Tedstone, Ms Sally Anderson and Dr Rachel Allen and staff at PHE (June 2014)
Questions
- What factors are driving the current high consumption of sugar?
- How is the concept of price elasticity of demand relevant to the effectiveness of imposing a sugar tax?
- What would determine the incidence of such a tax between food and drink manufacturers and consumers?
- Would such a tax be progressive, regressive or neutral? Explain.
- What other policies could be pursued to discourage the consumption of sugar? Discuss their likely effectiveness and compare them with a sugar tax.
- What externalities are involved in sugar consumption? How would you set about measuring them? Should a sugar tax be set at a rate that internalises the estimated externalities?
- Examine the objections to imposing a sugar tax.
The Gap has been a fixture of UK High Streets for many years and has had both ups and downs. In a highly competitive market, it faces fierce rivals from other high street retailers and also from an increasingly important online presence. Same-shop sales for Gap fell in July by 7% and the brand is now finding itself in a tricky position.
Although the Gap does sell products at a variety of prices, even sales growth in its most affordable line was not sufficient to offset declines elsewhere. It’s not just the UK where this decline is observed, with 175 Gap specialty shops in America being shut down over the next year. This will inevitably mean job losses. So why is Gap struggling so much, after being such a popular brand?
Its competitors are arguably offering a very similar product, but at a lower price. Consumers, being increasingly aware of prices and having many more options to make price comparisons, are perhaps using this information to make better choices. If they don’t believe that they are getting something extra from paying a slightly higher price at Gap, then they’d prefer to get the same thing elsewhere, from somewhere like Forever 21 or H&M. Some also suggest that the product itself is out of date and with the world of high fashion being such an important part of life for many people, an out-of-date product is bad news. That, together with consumers finding more and more things that they can spend their money on, beyond clothes has led to a tricky position for the Gap.
A key part of maintaining a presence on high streets has been sales and special offers – this has been a key element in keeping customers coming, but it is certainly not a long term strategy. Research analysts have been investigating some of the key aspects of the Gap and various comments have been made, including:
“Uniformity is no longer cool… The trick now is convincing your customer that they’re getting something unique.” (Simeon Siegel), Nomura Securities.
“Of top priority is delivering more consistent and compelling product collections.” Kari Shellhorn, Gap spokeswomen.
“Whether it’s colour or print or it’s pattern, the Gap brand hasn’t been kept up to date … Until they have their product right, I think we’ll continue to see them have promotions.” Dana Telsey, Telsey Advisory Group.
The future of Gap is certainly in the balance and with an increasingly competitive market when it comes to retail, an effective strategy to maintain and increase its market share will be essential.
Why Gap is in a tight squeeze BBC News, Gianna Palmer (20/8/15)
Gap Inc sees some potential for next year but Q2 2015 remains weak Forbes, Investing, Trefis Team (24/8/15)
Questions
- What sort of figure would you expect Gap’s clothes to have and why?
- Into which market structure would you place the retail industry? What does this tell us about how a company such as Gap can hope to make profits?
- If you were advising Gap, what strategies would you propose as a means of boosting revenue and cutting costs?
- The BBC News article states that the fortunes of Gap have been hurt by a strong US dollar. Why may this be the case?
For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).
Commenting on this action, Which? executive director, Richard Lloyd said:
“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.
We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”
The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:
|
|
| • |
recommending the quality and accessibility of information for consumers is improved |
| • |
encouraging businesses in the market to self-regulate |
| • |
making recommendations to government to change the legislation or public policy |
| • |
taking competition or consumer enforcement action |
| • |
instigating a market investigation or market study |
| • |
a clean bill of health |
Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.
What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.
Videos
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)
Articles
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)
Press release
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)
CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)
Questions
- Give examples of supermarket offers that are misleading.
- Why are supermarkets able to ‘get away with’ misleading offers?
- How can behavioural economics help to explain consumer behaviour in supermarkets?
- Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
Global merger and acquisition deals with a combined value of £2.7 trillion ($4.06 trillion) have taken place so far this year (1 Jan to 3 Nov). This is a 38% increase on the same period in 2014 ($2.94 trillion) and even surpasses the previous record high for the same period in 2007 ($3.93 trillion) (see the chart from the Dealogic article linked below).
