There has been a 38% increase in profit margins made by energy companies in the last 2 months and it is this which has prompted an investigation by Ofgem, the electricity and gas market regulator in the UK. Alistair Buchanan, Ofgem’s chief executive, said:
“With Britain facing an investment bill of £20bn over the next 10 years, consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers.”
Three of the big six suppliers have recently announced price rises and the fast-track review by Ofgem will consider whether consumers should be better protected. Scottish Power has increased gas prices by 2% and electricity prices by nearly 9%, meaning some customers may pay an extra £138 per year. British Gas is also planning on raising prices from December 10th, with gas and electricity bills expected to increase by 7%. Scottish and Southern Energy said it will increase domestic gas tariffs by 9.4%. EDF has promised a price freeze – at least until after the winter and nPower and E.ON are yet to announce their plans, but we can expect some form of a price rise.
While the review won’t make any difference to customer bills in the short term, Ofgem does have the power to make some changes to the way the companies are run. It is also expected that Ofgem will ask for more legislative support from the government and the Competition Commission. Although there are several suppliers in the energy market, each has market power and their dominance is preventing new firms from entering. As Adam Scorer, Director of Reputation and Impact at Consumer Focus, said:
“They do not feel the hot breath of competition on their necks.”
Articles
Energy firms facing gas and electricity price review BBC News (26/11/10)
Energy firms face new Ofgem enquiry over price rises and increased profits Telegraph, Andrew Hough (26/11/10)
Ofgem promises review as energy firms boost profit margins 38% Guardian, Jill Treanor (26/11/10)
Fuel bills: turning up the heat Guardian (27/11/10)
Energy firms face profit rise probe The Press Association (26/11/10)
Scepticism greets energy price probe Financial Times, David Blair (26/11/10)
UK utilities face review after recent price hikes Reuters (26/11/10)
UK to review retail energy market after price rises Bloomberg, Business Week, Kari Lundgren (26/11/10)
Has the toothless energy regulator learnt how to bite? Independent on Sunday, Julian Knight (28/11/10)
How to beat the energy price rise Telegraph (20/11/10)
Ofgem must mean business this time Herald (27/11/10)
Ofgem Press Release
Ofgem to review the effectiveness of the retail energy market to see if further action is needed to protect consumers Ofgem (26/11/10)
Questions
- What type of market structure is the UK energy market?
- The BBC News article talks about barriers preventing new competitors from entering the market. What types of barriers exist in this sector?
- What is a profit margin?
- What is likely to be the impact on family income following such price rises? Illustrate this on a diagram.
- Britain faces a £200 billion bill to invest in updating the energy network. What sort of updates are being referred to?
- What power do regulators such as Ofgem actually have? Why won’t they be able to change the amount that consumers pay?
The owner-occupied housing market has seen widespread coverage. With house prices falling throughout the recession and problems accessing mortgages for many people, it is this sector of housing that has received most attention. However, it is rental homes that we’ll be considering here and a new strategy being adopted by landlords. As access to mortgages dried up, people instead turned to renting. Demand for rental properties began to increase, such that competition between potential tenants increased significantly. Not only has there been a substantial increase in rents – up by some 35%, but it has also led to a new ‘sealed bid’ strategy.
A strategy that is often used for purchasing houses is where potential buyers submit sealed bids and it is this approach which is now spreading to the rental sector, as demand and competition for properties increases. Potential tenants are required to submit a sealed bid, containing the amount that they are willing to pay to rent out the property and all this must be done within a deadline. Whoever submits the highest bid ‘wins’ the property and hence tenants are encouraged to submit a bid at or close to the maximum they are willing to pay. Landlords insist that they are not trying to force tenants to pay more, but that it is simply the most effective way of letting properties that are short in supply, but face significant demand. As the BBC News article states:
‘It seems that with the current state of the housing market, sealed bids will be here to stay – as long as many would-be renters are chasing a dwindling supply of good rental homes.’
Rental ‘gazumping on the up as demand rises Metro, Tariq Tahir (8/11/10)
’Bidding war’ for homes to rent BBC News, Nigel Cassidy (20/11/10)
Rental market’s now so hot tenants are having to make sealed bids Mail Online, Sebastien O Kelly (8/11/10)
Is the buy-to-let market on its way back? Seek4Media (20/11/10)
Gazumping on the rise as London rental soars Gulf Times, London Evening Standard (8/11/10)
Questions
- Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
- Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
- To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?
- How could this sealed bid strategy be an example of price discrimination?
- What is likely to happen to your consumer surplus if you have to submit a sealed bid?
Blockbuster US has become the latest in a long line of companies filing for bankruptcy. With huge debts and a need to restructure the business, given the huge competition in America, Blockbuster has made agreements with its creditors to cut its debts from $1 billion to $100 million. Blockbuster has suffered from mail-order and online film rental services, in particular in America.
Blockbuster is a worldwide phenomenon with stores ranging from the UK to Mexico. However, as legally separate entities, the non-US branches of Blockbuster are protected from the bankruptcy. While the UK branches will remain unaffected, there are concerns that they may suffer from a lack of new DVD stock, especially with the approach of Christmas.
As news of Blockbuster’s bankruptcy spread, Netflix – a key competitor – saw its shares soar. Netflix was a catalyst in the demise of Blockbuster US and it has seen its market share increase rapidly over the past few years, with subscribers increasing from 1 million in 2002 to 15 million in 2010. Blockbuster responded by ending late fees and started its own online services, but it has been unable to compete effectively in this competitive market. Although restructuring of Blockbuster has begun, only time will tell what the future is for this once dominant movie rental firm.
Blockbuster files for Bankruptcy in US BBC News (23/9/10)
Blockbuster fizzles in US, but renters overseas haven’t switched to Netflix – yet The Christian Science Monitor, Stephen Kurczy (23/9/10)
Blockbuster files for Chapter 11 protection Guardian, Richard Wachman (23/9/10)
Blockbuster wins Court’s approval to draw $20 million from bankruptcy loan Bloomberg, David McLaughlin and Tiffany Kary (23/9/10)
Fitch lowers debt rating on Blockbuster Bloomberg BusinessWeek (23/9/10)
Netflix shares hit high after Blockbuster bankruptcy Reuters, Sue Zeidler (23/9/10)
Debt, changing media habits topple Blockbuster The Associated Press, Mae Anderson (23/9/10)
Questions
- What are the key factors behind Blockbuster’s decline?
- New competitors have entered the market for movie rental. Illustrate this on a diagram. How can we use this to explain Blockbuster’s problems?
- Online services and mail-order have become increasingly popular services in this market. Is the extra competition in the market in the best interests of consumers?
- What type of market structure is the rental movie industry? Explain your answer.
- What type of legal structure does Blockbuster operate under? What are the key advantages and disadvantages of this?
- Why are the non-US chains not affected by the bankruptcy of Blockbuster US?
- Have a look at the share prices of Blockbuster and Netflix. What has happened to them over rthe past year? Is this consistent with recent developments?
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?