Globalisation has led to an increasingly interdependent world, with companies based in one country often dependent on a market abroad. In recent years, it is the rapid growth of countries like China that has led to growth in the size of the markets for many products. With incomes rising in emerging countries, demand for many products has been growing, but in the past year, the trend for Prada has ended and seems to be reversing.
As the market in China matures and growth of demand in Europe slows, Prada has seen its shares fall by the largest margin since June last year.
Prada is a well-known luxury brand. The products it sells are relatively expensive and hence its products are likely to have an income elasticity of demand well above +1. With changes in China and Europe, Prada expects its growth in sales to January 2015 will be ‘low single-digit’ – less than the 7% figure recorded for the last financial year.
This lower growth in same-store sales is likely to continue the following year as well. Add on to this the lower-than-expected profits, which missed analysts’ forecasts, and you have a prime example of a brand that is suffering because of its customer base and the economic times.
Prada isn’t alone in suffering from economic conditions and, relative to its European counterparts, is expected to have higher growth in sales and profits in the next 12 months – at 11.5% and 14.8% respectively. This is according to a survey by Thomson Reuters.
Prada has exploited high demand by Chinese consumers, but has recently been affected by the strength of the euro. A strong euro means that the Italian-based Prada is struggling with exports, which only adds to its problems. As economic growth picks up in China and as other emerging economies begin to experience more rapid economic growth, the fortunes of this luxury-retailer may change once more. However, with volatile economic times still around in many countries, the future of many retailers selling high-end products to higher income customers will remain uncertain. The following articles consider the fortunes of Prada.
Prada shares fall sharply after China luxury warning BBC News (3/4/14)
Prada falls after forecasting slowing luxury sales growth Bloomberg, Andrew Roberts and Vinicy Chan (3/4/14)
Prada profits squeezed by weakness in Europe and crackdown in China The Guardian (2/4/14)
Prada bets on men to accelerate sales growth Reuters, Isla Binnie (2/4/14)
Prada misses full year profit forecast Independent, Laura Chesters (2/4/14)
Questions
- How can we define a luxury product?
- Explain the main factors which have led to a decline in the demand for Prada products over the past 12 months.
- Using a diagram, illustrate what is meant by a strong euro and how this affects export demand.
- What business strategies are Prada expected to adopt to reverse their fortunes?
- Using a diagram, explain the factors that have caused Prada share prices to decline.
For some people, a pint of beer is a regular thing each week. Add all your pints of beer together, then add your friend’s pints, their friends’ pints and … you get the idea. Once you’ve done that for the entire population, you have an estimate of total beer consumption in the UK. This can then be compared with total consumption of beer in other countries and between continents.
Prior to 2007, Europe and the Americas were the biggest beer drinking continents, but since then, Asia has emerged as the leader of pints of beer consumed, drinking 67bn litres of beer compared with the Americas’ 57bn and Europe’s 51bn in 2011. In per capita terms, Asia is still some way off, with Japan leading the way as the highest Asian country in 41st place, consuming 64 litres of beer per year per capita of the population. So how is this relevant to economics and business?
Consumption of anything provides jobs – bar workers, manufacturers and in the case of beer, probably law enforcement! It probably also increases utility – after all, why consume it if it’s not going to give you some degree of satisfaction!
We can analyse the demand for beer and see how it varies with changes in price and income. Minimum prices for alcohol have been proposed as a means of reducing consumption, and tax and excise duties are always linked to alcoholic beverages and clearly have an effect on demand. In this case, however, we can also consider the emergence of Asia and how tastes have changed. It is the fastest growing beer market in the world; so what can we deduce from that? As the BBC News article states, it is ‘a sign of a young, upwardly mobile, and increasingly hedonistic population.’
Experts also say that the increased consumption of beer in Asian countries is closely correlated with growing incomes and prosperity. A consumer research analyst from Standard Chartered, Nirgunan Tiruchelvam, said:
“Beer has a clearer correlation with strong economic growth … People tend to drink beer in times of growth. They drink spirits when times are good and when times are bad.”
Data suggest that when a certain level of prosperity is reached in a nation, beer sales begin to rise. As many Asian economies begin to develop rapidly, beer sales have taken off. This could be regarded as a good thing for Europe. With stagnant Western economies, beer producers within Europe may be grateful for a growing demand in Asia. Indeed, many of the world’s biggest breweries are expanding rapidly, providing jobs and income. Consumers in Europe will also be happy to see that beer production remains profitable in other parts of the world. With unemployment still high and recession ongoing, a pint of beer will be a much needed pick-me-up for many people. At least, that’s what the evidence from the Great Depression of the 1930s suggested!!
It’s not good news for everyone, however. Beer production has also increased in Asian countries, most notably in China, which now leads the world as the largest beer producer. This clearly reduces the export potential for European beer producers.
Also, many argue that the growing consumption of beer in Asia is simply an illustration of growing Western influence and it is likely to create severe medical problems in the future. Binge drinking and under-age consumption is already a big problem in Western countries and this could soon begin to extend across the world. The following articles consider the growth in consumption of beer.
Brewers thirsty for expansion as taste for beer grows in emerging markets Guardian, Simon Neville (3/9/12)
Beer in Asia: the drink of economic growth BBC News, Saira Syed (6/9/12)
Study says world beer production hits new high Long Island Business News, Associated Press (8/8/12)
Global beer sales go up for 27th year running News Track India (9/8/12)
Questions
- Use a supply and demand diagram to analyse recent trends in beer consumption across the world.
- Which factors have caused demand in emerging markets to increase? Based on your answer to the previous question, how might that have affected equilibrium prices?
- How has growth in beer consumption throughout Asia benefited Western producers?
- What would you expect the price and income elasticities of demand to be for a product such as beer? Explain your answer.
- To what extent do you think this trend in beer production is a sign of globalisation?
- Evaluate the extent to which the growth in consumption and production of beer in Asia is a good thing. You should consider everyone who and everything might be affected!
It doesn’t seem that long ago when Greece was in the news regarding its deficit and need for bailing out. Back then, countries such as Spain, Portugal and Ireland were being mentioned as the next countries which might require financial assistance from the EU. It is now the Irish economy that is in trouble, even though the Irish government has not yet requested any financial help. The EU, however, is ‘ready to act’.
The Irish economy experienced an extremely strong boom, but they also suffered from the biggest recession in the developed world, with national income falling by over 20% since 2007. Savers are withdrawing their money; property prices continue to collapse; and banks needed bailing out. Austerity measures have already been implemented – tax rises and spending cuts equal to 5% of GDP took place, but it has still not been enough to stabilise the economy’s finances. All of these problems have contributed to a large and unsustainable budget deficit and a significant lack of funding and that’s where the EU and possibly the IMF come in.
If the Irish economy continues to decline and experiences a financial crisis, the UK would probably be one of the first to step in and offer finance. As our closest neighbour and an important trading partner, the collapse of the Irish economy would adversely affect the UK. A significant proportion of our exports go to the Irish economy and, with Irish taxpayers facing troubled times, UK exporting companies may be the ones to suffer.
One thing that this crisis has done is to provide eurosceptics with an opportunity to argue their case and blame the euro for the collapse of Ireland. With one monetary policy, the Irish economy is tied in to the interest rates set by the ECB and low interest rates fuelled the then booming economy. The common currency also increased capital flows from central European countries, such as Germany, to peripheral countries, such as Ireland, Spain and Portugal. In themselves, capital flows aren’t a problem, but when they are used to fund property bubbles and not productive investments, adverse effects are inevitable, as Ireland found to its detriment.
As prices collapsed and banks simply ran out of money, the government stepped in and rescued not only the depositors of Irish banks, but also their bondholders. Unable to devalue their currency, as it’s the euro, the Irish economy was unable to boost exports and hence aggregate demand and in turn economic growth. Although, the Irish government has not requested any financial help, as the French Finance Minister commented about a potential bailout: “Is it six months or a few days away? I’d say it’s closer to days.” The following articles look at this developing situation in Europe.
EU plays down Irish republic bail-out talks BBC News (17/11/10)
Ireland bailout: the European politicians who will decide Telegraph, Phillip Aldrick (17/11/10)
Don’t blame the Euro for Ireland’s mess Financial Times, Phillipe Legrain (17/11/10)
Britain signals intention to help Ireland in debt crisis New York Times, James Kanter and Steven Erlanger (17/11/10)
Ireland will take aid if ‘bank issue is too big’ Irish Times, Jason Michael (17/11/10)
Irish junior party says partnership strained Reuters (17/11/10)
Ireland resists humiliating bail-out as UK pledges £7 billion Telegraph, Bruno Waterfield (17/11/10)
Markets stable as Ireland bailout looms Associated Press (17/11/10)
The implausible in pursuit of the indefensible? BBC News blogs, Stephanomics, Stephanie Flanders (16/11/10)
Ireland bailout worth ‘tens of billions’ of euros, says central bank governor Guardian, Julia Kollewe and Lisa O’Carroll (18/11/10)
The stages of Ireland’s grief BBC News blogs, Stephanomics, Stephanie Flanders (18/11/10)
Q&A: Irish Republic finances BBC News (19/11/10)
Could Spain and Portugal be next to accept bail-outs? BBC News, Gavin Hewitt (19/11/10)
Questions
- Why will the UK be affected by the collapse of the Irish economy?
- If Ireland were not a member of the eurozone, would the country be any better off? How might a floating exchange rate boost growth?
- The Financial Times article talks about the euro not being to blame for the Irish problems, saying that ‘tight fiscal policy’ should have been used. What does this mean?
- Why is the housing market so important to any nation?
- What are the arguments (a) for and (b) against the euro? Would Ireland benefit from leaving the euro?
- Should the UK government intervene to help Ireland? What are the key factors that will influence this decision? What about the EU – should Ireland ask for help? Should the EU give help?
- Austerity measures have already been implemented, but what other actions could the Irish economy take to increase competitiveness?
If you are an Irish resident, you may be feeling very worried! As Irish debt levels reach new heights, the bill will once again fall on the tax payer. Irish government borrowing is almost 12% of GDP, but with two key banks requiring a bail out, government borrowing is expected to treble this figure to some 32% of GDP. The Anglo-Irish bank requires approximately £30 billion and Allied Irish also requires more cash. The Irish Finance Minister said:
‘The state has to downsize these institutions to prevent them becoming a systemic threat to the state itself.’
The Irish have already faced a round of austerity cuts and with the latest banking catastrophe, the next round is about to start. There are concerns that the Irish economy could move into a downward spiral, with more money being removed from the economy causing more people to lose their jobs, which will weaken public finances further and mean that more borrowing will then be required. It is hardly surprising to find a pessimistic mood on the streets of Ireland.
However, with a new interdependent world, this crisis will not only be felt by Ireland. The UK exports a large amount to Ireland – more than to Spain or Italy. With Irish tax-payers facing higher burdens and unemployment still relatively high, UK exporters may feel the squeeze. Other countries on the periphery of Europe, such as Portugal, Greece and even Spain are also feeling the pressure. There are concerns of a ‘two-speed Europe’. Below are some articles about the Irish crisis. Do a search and see if you can find any information on the problems in Greece, Spain or Portugal.
Ireland: a problem soon to be shared BBC News blogs, Stephanomics, Stephanie Flanders (30/9/10)
European recovery hope grows despite Ireland’s swelling deficit Guardian, Richard Wachman (30/9/10)
Ireland bank rescue spurs global debt concerns The World Today (ABC News), Peter Ryan (30/10/10)
Irish debt yields in new record despite better job data BBC News (28/9/10)
Euro Govt-bonds fall after overdone rally on Ireland, Spain Reuters (30/9/10)
Ireland’s love affair with masochism Telegraph, Jeremy Warner (30/9/10)
EU austerity drive country by country BBC News (30/9/10)
Anglo-Irish was ‘systemic threat’ BBC News (30/9/10)
Questions
- What do we mean by government borrowing?
- With such high levels of government debt, what would you expect to happen to interest rates on government debt? Explain your answer.
- When deciding whether or not to bail out the banks, what process could a government use?
- The Irish Finance Minister talks about the institutions becoming a ‘systemic threat’. What does he mean by this?
- Why might the UK economy suffer from the problems in Ireland?
- To what extent do you agree that there is a two-speed Europe, with the core economies, such as France and Germany making good economic progress, but the peripheral economies still suffering from the effects of recession?
- How might the situation in Ireland affect other members of Europe? Will there be an impact on the euro exchange rate?
‘Austerity’ seems to be the buzzword, as more and more countries across Europe make steps towards reducing substantial budget deficits. The UK has implemented £6.2 billion of cuts, with cuts of £50 billion expected by 2015 to tackle a budget deficit of over 10% of GDP. Portugal’s deficit stands at 8% of GDP and this will be tackled with rises in income, corporate and VAT tax, together with spending cuts aimed at halving the budget deficit by next year. Ireland’s austerity package includes public-sector pay cuts of up to 20%, plus reductions in child benefit, tax rises, and several key services facing cuts in employment, including emergency service and teachers. And, of course, we can’t forget Greece, with a budget deficit 12.2% of GDP, a national debt of 124.9% of GDP, and a forecast to remain in recession this year and the next. The Greek economy faces hard times with a huge austerity drive, including 12% civil service pay cuts, a large privatisation programme, and substantial pension cuts.
Greece is already in receipt of a €110bn rescue package. The Hungarian economy has already received €20bn aid from the EU, IMF and World Bank and spending cuts have been implemented, as markets began to fear that Hungary would become the next Greece. Germany is the most recent country to announce austerity measures, including plans to cut €10 billion annually until 2016.
But, what does this all mean? For years, many countries have spent beyond their means and only with the global recession did this growing problem really rear its ugly head. The only way to eliminate the budget deficit and restore confidence in the economy and ensure future prosperity is to raise taxes and/or to implement spending cuts. As the German Finance Minister said: “The main concern of citizens is that the national deficit could take on immeasurable proportions”. Unfortunately, this has already happened in some counties.
Although austerity measures are undoubtedly needed over the medium term in order to get deficits down, the impact of them is already being felt across the EU. Strikes have already occurred in massive proportions across Greece in response to the austerity package and tens of thousand of workers in Spain and Denmark also took to the streets in protest. There was anger from industry, trade unions and the media in response to €86 billion of cuts ordered in Germany between 2011 and 2014. The UK has already seen a number of strikes and more could be to come with further spending cuts in the pipeline. The Public and Commercial Services Union is threatening to re-launch strikes which began in March involving 200 000 civil servants (the action was suspended for the election.) A spokesman said: “If the cuts are anything like what is being suggested, industrial action by the unions is not only likely, it’s inevitable.”
EU governments have announced public spending cuts of €200 billion, together with a €500 billion safety blanket for the euro. Although these cuts are unlikely to have any positive effects for the everyday person for perhaps many years to come, in order to restore confidence and ensure a future economy that is both prosperous and stable, these austerity measures are deemed by many as essential. As Guy Verhofstadt (the former Belgian Prime Minister) said: “We’re entering a long period of economic stagnation. That will be the main problem for years. Europe is the new Japan.”
But will reduced aggregate demand resulting from the cuts lead to a double-dip recession and a (temporarily) worsening deficit from automatic fiscal stabilisers? We wait with baited breath.
EU austerity drive country-by-country BBC News (7/6/10)
Europe embraces the cult of austerity but at what cost? The Observer, Toby Helm, Ian Traynor and Paul Harris (13/6/10)
Germany joins EU austerity drive with €10bn cuts Guardian, Helena Smith (6/6/10)
G20 to endorse EU crisis strategy Reuters (28/5/10)
The Global recovery? It’s each state for itself Guardian, Jonathan Fenby (9/6/10)
Austerity angers grow in Europe AFP (9/6/10)
Austerity Europe: who faces the cuts? Guardian, Ian Traynor and Katie Allen (12/6/10)
Is this the end of the European welfare state? New Statesman (10/6/10)
Questions
- Are spending cuts or tax rises the best method to reduce a budget deficit? Explain your answer.
- What are the economic costs of the austerity packages across Europe?
- Who is likely to gain from the debt crisis in Europe?
- If austerity packages had not been initiated to the extent that they have, how do you think the rest of the world have reacted?
- Using the BBC News article and the Guardian article ‘Austerity measures: who faces the cuts?’, which country do you think is (a) in the best state and (b) in the worst state?
- How will you be affected by the austerity measures?
This lower growth in same-store sales is likely to continue the following year as well. Add on to this the lower-than-expected profits, which missed analysts’ forecasts, and you have a prime example of a brand that is suffering because of its customer base and the economic times.
