Rising costs of cloth and a rise in VAT could mean that clothes prices are set to rise. Does this spell the end of cheap fashion from the likes of Primark and H&M? Or can they absorb the cost increases?
The following articles look at the causes of the rise in costs of clothing and what the cheap fashion chains can do about it.
Articles
Primark follows fashion rivals as it warns of rising costs Guardian, David Teather and Zoe Wood (13/9/10)
Primark warns on costs as growth slows Telegraph, James Hall (14/9/10)
Is this the end of cheap clothes era? Price of cotton has rocketed because of floods, Primark warns Mail Online, Sean Poulter (14/9/10)
Fashion chains far from cheerful about future of cheap chic Observer, Zoe Wood, David Teather and Julia Finch (19/9/10)
Data
Commodity prices (including cotton) Index Mundi
Cotton futures BBC Business: Commodities
Questions
- Why have cotton prices been rising? Illustrate your arguments with a demand and supply diagram.
- Would you expect a rise in the price of cotton of 45% to lead to a rise in the price of cotton clothes of 45%, or of more than 45% or of less than 45%? Explain.
- For what other reasons are the prices of clothing rising?
- How did the process of globalisation keep the price of clothing down?
- Next’s chief executive, Lord (Simon) Wolfson said that if prices of Next’s clothes go up 8% then the number of units sold will fall by 10%. What is the value of the price elasticity of demand that he is assuming?
- Why is the ‘Fairtrade system so important’?
- “Some retailers have already increased prices but there is more to come. The products most under threat are T-shirts, underwear and socks. More complicated garments such as heavy jeans will be less affected.” Why are the prices of more complicated garments likely to rise by a smaller percentage than those of simple garments?
- What has been happening to the demand for cheap fashion clothing and why? Combine this effect with those of costs on a demand and supply diagram.
- What type of market structure is the market for fashion clothing? What are the implications of this for the profits of retailers?
There has been talk for some time about the possibility of standing room on flights, but it is hardly surprising that this has been rejected by the Civil Aviation Authority. Not the safest option, you might say, nor the comfiest – certainly not for a long haul flight to the other side of the world! However, this could be coming closer to reality, as we see The Skyrider, which is a new saddle-style airplane designed by Avioninteriors. It has yet to be snapped up, but Ryanair could be top of the list with their plans for a new style of flying.
It may not be quite what you imagine – you don’t literally stand up in the stalls at the front of the aircraft. Passengers will have seats, but these seats give a completely new meaning to ‘upright seats’. Seats would be 23 inches apart (some 10 inches closer than we’re used to), but they would only be available for flights up to 3 hours. Despite the publicity, the design is yet to be approved. Ryanair believe that such a design would increase passenger capacity by some 40%. However, passengers remain rather skeptical, as many struggled to fit in to the seats when it was unveiled in New York.
Technological development is vital in any dynamic industry, but is this one step too far? One day, it could be a game of sardines when packing passengers into a plane!
New airline seat for Ryanair resembles a saddle Irish Central, Molly Muldoon (18/9/10)
New plane ‘saddle’ would pack in passengers Edmonton Journal (19/9/10)
Ryanair one step closer to fulfilling dream of getting more people on each plane Travel News, Natalie Cooper (16/9/10)
Budget airlines love bad new stories about how cramped their planes are Telegraph, Harry Mount (15/9/10)
Behold! The world’s most cramped airline seat Reuters, Charlie Sorrel (13/9/10)
Questions
- Is it a rational decision for a passenger to travel in a new upright seat?
- Is it a cost-effective strategy for Ryanair or any other airline to adopt? Explain (a) why it is, but also explain (b) why it may not be cost-effective.
- Using a diagram, illustrate the opportunity cost to an airline of providing more upright seats.
- If successive airlines adopt the new saddle style seats, what is likely to happen to the price of such seats?
- As passengers become aware of these cheaper seats, what is likely to happen to the market price? Illustrate this on a diagram.
- If Ryanair were the only airline to offer such seats, does this mean it would have a monopoly? Explain your answer.
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?
Later this afternoon I’ll be going down to watch my beloved Leicester City. Our first home match drew a crowd of just over 21,500. This was perhaps a little disappointing for the first home match of the season. Normally, supporters’ spirits are high are the start of the season, we all go down to the ground with renewed optimism, and so ‘first match’ crowds are high. But, this year a number had not come along and the problem was not confined to my club. Just down the road in Coventry, their first match against fellow Midlanders Derby County drew a crowd of only a little over 13,000. While this match was televised by SKY, the attendance is likely to have disappointed many at this historic club. Up by the River Tees, Midllesbrough’s first home match drew a record low league crowd of 14,633 and led manager Gordon Strachan to blame poor crowds on the recession. But, while some clubs are struggling to get supporters through the turnstiles, others seemed rather more immune from the affects of the economic climate. Manchester United’s first home match drew a near-capacity 75,221, despite being a televised match on a Monday night, while Arsenal’s first home match against newly promoted Blackpool drew a capacity crowd of 60,032.
These contrasting experiences amongst football clubs raise some important questions about the nature of demand for attending football matches. Perhaps a good place to start for any chief executive thinking about the demand for their club’s matches is to actually step back and consider about how supporters derive satisfaction from attending matches. This satisfaction from consuming something is also known by economists as ‘utility’. In understanding how supporters derive utility clubs may gain some really useful information when pricing season tickets or match-day tickets.
Well, let’s start with me! I am a fox (a Leicester supporter) through and through and so it’s about an emotional attachment. I was first taken down to Filbert Street by Grandfather in the early 1980s. We were soundly beaten on the day by Notts County on the day. But, while I was gutted, I was supporting my team! I derive a lot of my satisfaction from supporting my home-town team. I guess that makes me what we might term a ‘core supporter’. It’s important for clubs to have a sense of their core support because these are likely to be supporters who are least sensitive to pricing. In other words, this group of supporters is more likely to exhibit a price inelastic demand.
So, a happy chief executive of a football club is likely to be one with a sizeable core support. Another way of looking at this, which is not always popular amongst football traditionalists, is to think of a football club as a brand. A popular, sought-after brand gives the supplier a greater degree of power over pricing. The greater the attachment to the brand the greater the power to set price. While for me the attachment comes from the geography of my birth, for others the attachment comes from being associated with success. This helps to explain the attachment of so many supporters to what we refer to as ‘the big clubs’. Therefore, success can help generate supporter-attachment which can therefore be ‘priced-in’ by clubs when determining the pricing structure for matches and season tickets.
But, not everybody is attached to a team out of loyalty to their town or city or because of its success. For others, the utility from attending matches could come from a variety of sources. A ‘floating supporter’ is therefore likely to be more choosey and pricing needs to try and take this into account. For these supporters it might be a question of who the two teams on show are on a particular day. This helps, in part, to understand why local derbies are generally well attended – but why they are also relatively expensive to attend. It might also be the case that particular matches allow supporters to see a ‘superstar’. If a certain player or club is in town then prices at the turnstiles are likely to reflect this.
What we have suggested here is that in beginning to understand the demand for attending football matches, clubs need to build up a profile of their supporters and their potential supporters. We have focused on how supporters derive satisfaction from watching football and how this affects what they are willing to pay. Yet they need to do more than this, including building up a profile of the economic, social and geographic demographics of supporters. As Gordon Strachan points out, supporters are not immune to economic conditions and football clubs can’t be either. Therefore, clubs will also need to have a sense of how income-sensitive is the demand for attending their matches. The economic climate means that many in football, especially those at clubs involved in setting prices, may need to give considerable thought to the demand function for attending live football matches. May be an economist really could help in the board rooms of many football clubs. While I may not make the board room at the Walkers Stadium later, I will be in the crowd!
Articles
Boro boss Strachan blames recession for poor crowds BBC News (22/8/10)
Premier League fun for all – at a cost BBC Sport, Matt Slater’s Blog (27/8/10)
Inside football with Rob Tanner: Where have all the fans gone Leicester Mercury, Rob Tanner (27/8/10)
Questions
- What do you understand by term ‘utility’? Think of any two products or services and draw up a list of how you derive utility from them?
- What do you understand by the terms ‘price elasticity of demand’ and ‘income elasticity of demand’? Try applying these concepts to the demand to attend matches at any two football clubs that you might be aware of.
- Are football clubs price-takers or price-makers when determining match prices? Is this true of all clubs?
- Imagine that a club is promoted to the top league in its country for the first ever time. How will this affect the position and slope of its demand curve for season tickets?
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?
