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?
When Kraft took over Cadbury, it was seen as a large take-over, but its size pales in comparison to the potential takeover of AstraZeneca by Pfizer. However, having made two offers for the UK drugs firm, the US company has been rejected twice, saying the terms of the offer were ‘inadequate, substantially undervalue AstraZeneca and are not a basis on which to engage with Pfizer.’
Pfizer initially made an offer of £46.61 per share, valuing the company at £58.5bn, but this latest offer increased the share price to around £50 and raised the company value to £63bn. The rejection was relatively swift and the price still too low, though analysts are suggesting that a price closer to £53 may tempt shareholders. At the moment the negotiations between these two giants remain ‘friendly’, but with this second offer being rejected by the Board, there are now concerns that the takeover could become ‘hostile’ with Pfizer going directly to shareholders. Indeed one investor has said:
We were very keen that the two boards actually get around the table and disucss the bid … I’m never very keen when companies just dismiss things and don’t allow shareholders to take a decision on it … The key thing is that these businesses get talking to each other so they can hammer out a deal.
Following the second offer, shares in AstraZeneca rose by 10p, as the debate continued as to whether such a take-over would be good or bad for British jobs.
Cadbury was seen as a jewel in the crown of British industry and the same can be said of AstraZeneca, especially with the growing importance placed on the Science sector in the UK. While Pfizer has now given the British government further assurances about protection for Britain’s science base, there are still concerns about what this take-over would mean for British jobs. Pfizer has said that 20% of the company’s workforce in research and development would work in the UK and the planned R&D base in Cambridge would still go ahead. However, asset-stripping is a phrase that has been thrown around, based on Pfizer’s previous take-overs and, based on this history, many are suggesting that any assurances made by Pfizer will be pointless. In particular, Allan Black from the GMB union said:
Similar undertakings were given by US multinationals before which have proved to be worthless.
This was echoed by Lord Sainsbury who commented that any assurances made by Pfizer would be ‘frankly meaningless’. However, Vince Cable seems more confident about the consequences for British industry and said:
We’ve now received some assurances from the company that they will strengthen the British science base, they will protect British manufacturing … We need to look at that in detail, we need to look at the small print, we need to establish that it is binding, but as far as it goes, on the basis of what we’ve seen so far, it is welcome and encouraging.
We therefore seem to have a tale of two stories. On the one hand, the assurances of a US company that British jobs and its science base will be protected, but on the other hand, suggestions that we should take Pfizer’s assurances with a pinch of salt and that any take-over could be ‘devastating’. The truth of the matter will only be known if and when the take-over goes ahead and perhaps more importantly, whether it remains friendly and co-operative or does indeed go ‘hostile’. The following articles consider this medical take-over between giants.
AstraZeneca rejects Pfizer bid as US Pharma giant courts UK government The Guardian, Julia Kollewe and Sean Farrell (2/5/14)
AstraZeneca rejects new Pfizer offer BBC News (2/5/14)
AstraZeneca Pfizer: major shareholder urges talks The Telegraph, Denise Roland (2/5/14)
AstraZeneca rejects Pfizer’s raised bid of 63 billion pounds Reuters (2/5/14)
Pfizer-AstraZeneca offer: IoD warns intervention ‘disastrous’ for Britain. The Telegraph, Louise Armitstead (2/5/14)
Pfizer enters takeover discussions with AstraZeneca, sources say Wall Street Journal (2/5/14)
Exclusive: Pfizer insider warns that takeover of AstraZeneca could be ‘devastating’ Independent, Jim Armitage and Chris Green (2/5/14)
The Cadbury deal: how it changed takeovers BBC News, Ben Morris (2/5/14)
Pfizer set to make higher bid for AstraZeneca The Guardian, Julia Kollewe (1/5/14)
The UK’s response to Pfizer’s takeover bid is incoherent and misguided The Guardian, Larry Elliott (4/5/14)
Questions
- What type of take-over would this be classified as? Explain your answer.
- What would occur if the take-over became ‘hostile’?
- Using a demand and supply diagram, explain why share prices in AstraZeneca went up by 10p on the day the second offer was made.
- How would such a take-over affect British jobs?
- Explain how this proposed take-over could (a) boost British R&D in science and (b) harm British R&D in science.
- To what extent might there be concerns from the competition authorities were this take-over to go ahead? How might such a takeover affect Pfizer’s market share and hence its ability to charge a high price?
Profits are maximised where marginal cost equals marginal revenue. And in a perfectly competitive market, where price equals marginal revenue, profits are maximised where marginal cost equals price. But what if marginal cost equals zero? Should the competitive profit-maximising firm give the product away? Or is there simply no opportunity for making a profit when there is a high degree of competition?
This is the dilemma considered in the articles linked below. According to Jeremy Rifkin, what we are seeing is the development of technologies that have indeed pushed marginal cost to zero, or close to it, in a large number of sectors of the economy. For example, information can be distributed over the Internet at little or no cost, other than the time of the distributor who is often willing to do this freely in a spirit of sharing. What many people are becoming, says Rifkin, are ‘prosumers’: producing, sharing and consuming.
Over the past decade millions of consumers have become prosumers, producing and sharing music, videos, news, and knowledge at near-zero marginal cost and nearly for free, shrinking revenues in the music, newspaper and book-publishing industries.
What was once confined to a limited number of industries – music, photography, news, publishing and entertainment – is now spreading.
A new economic paradigm – the collaborative commons – has leaped onto the world stage as a powerful challenger to the capitalist market.
A growing legion of prosumers is producing and sharing information, not only knowledge, news and entertainment, but also renewable energy, 3D printed products and online college courses at near-zero marginal cost on the collaborative commons. They are even sharing cars, homes, clothes and tools, entirely bypassing the conventional capitalist market.
So is a collaborative commons a new paradigm that can replace capitalism in a large number of sectors? Are we gradually becoming sharers? And elsewhere, are we becoming swappers?
Articles
Capitalism is making way for the age of free The Guardian, Jeremy Rifkin (31/3/14)
The End of the Capitalist Era, and What Comes Next Huffington Post, Jeremy Rifkin (1/4/14)
Has the Post-Capitalist Economy Finally Arrived? Working Knowledge, James Heskett (2/4/14)
Questions
- In what aspects of your life are you a prosumer? Is this type of behaviour typical of what has always gone on in families and society?
- If marginal cost is zero, why may average cost be well above zero? Illustrate with a diagram.
- Could a monopolist make a profit if marginal cost was zero? Again, illustrate with a diagram.
- Is it desirable for there to be temporary monopoly profits for inventors of new products and services?
- What is meant by a ‘collaborative commons’? Do you participate in such a commons and, if so, how and why?
- Should tweets and Facebook posts be regarded as output?
- What is meant by an internet-of-things infrastructure?
- What are the incentives for authors to contribute to Wikipedia?
- Could marginal cost ever be zero for new physical products?
- Think about the things you buy in the supermarket. Could any of these be produced at zero marginal cost?
- How can capitalists make profits as ‘aggregators of network services and solutions’?
- Provide a critique of Rifkin’s arguments.
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?
Business performance is always affected by the economy and we can always look at the economic theory to explain why profits rise and fall. Some companies prosper during recession, whereas others decline and the key is to understand the economics behind the data. This blog takes a look at the performance of a variety of companies and asks you to think about the economic theory behind it.
The world of betting has grown significantly and the profits of companies in this market, while certainly linked to economic performance, is also dependent on sport results. Paddy Power has announced pre-tax profits of €141m for 2013, an increase from €139.2m, despite sporting results causing profit performance to fall. On the part of football clubs, Liverpool FC saw a loss emerge for the 2012-2013 financial year, whereas Newcastle’s profits rose by 900% to £9.9m. What factors can explain the vastly different performance (off and on the pitch) of these two clubs?
In the USA, Radio Shack has been forced to close 1100 stores. This is, in part, as a response to a change in the way we are shopping. More and more consumers are purchasing goods online and Radio Shack is therefore experiencing growing competition from online retailers. Sales fell by 10% last year and even during the fourth quarter sales continued to decline.
Companies based in the largest economy in Europe have also experienced declines in performance, showing that a strong performing country doesn’t imply the same for companies operating in it. RWE, Germany’s biggest energy provider, has not made a loss since 1949. However, in 2013, this company posted its first annual loss in over 60 years: a loss of £2.28bn. With energy being in constant demand and criticism being levelled at UK energy providers for the high profits they’re making, the economics behind these data is important.
In better news for a company, Thorntons has boasted a significant increase in pre-tax profits, with much of this due to strong trading in the months leading up to Christmas and a sensible business strategy, involving selling more in supermarkets. Thorntons has cut its number of stores, but its profitable position has been saved by a good business strategy and this is going to lead to significant investment by the company.
Another strong performance was recorded by Berkshire Hathaway, an investment firm run by Warren Buffett. The company made a profit of £11.6bn in 2013, a significant increase on its 2012 performance. It is the insurance, rail and energy parts of the business that have contributed to the big increase in profits.
These are just some recent examples of data on business performance and your job is to think about the economic theory that can be used to explain the varying performance of different companies.
Liverpool announce annual loss of £50m in new club accounts Guardian, David Conn (4/3/14)
Thorntons makes biggest manufacturing investment for 25 years Telegraph, Natalie Thomas (3/3/14)
Thorntons cashes in on the snowman Independent, Simon Neville (3/3/14)
Warren Buffett’s Berkshire Hathaway sees record profit BBC News (2/3/14)
Newcastle says ‘player trading’ helped increase profits to £9.9m BBC Sport (25/2/14)
RWE posts first annual net loss for over 60 years BBC News (4/3/14)
UK among RWE woes as it posts first annual loss since 1949 The Telegraph, Denise Roland (4/3/14)
Germany’s RWE slides into €2.8bn net loss for 2013 Financial Times, Jeevan Vasagar (4/3/14)
John Menzies profits hit by drop in magazine sales BBC News (4/3/14)
Fresnillo profits drop as gold prices and production falls The Telegraph, Olivia Goldhill (4/3/14)
Glencore 2013 profit rises 20% as copper production gains Bloomberg, Jesse Riseborough (4/3/14)
Questions
- In each of the cases above, explain the economic theory that can be used to explain the performance of the respective company.
- To what extent is a change in the market structure of an industry a contributing factor to the change in company performance?
- To what extent do you think a company’s performance is dependent on the performance of the economy in which it operates?
- Are the profits of a company a good measure of success? What else could be used?
