Business Economics and Market Competition

Over one in five nightclubs across Scotland, England & Wales have closed since the first lockdown in March 2020. The trade body representing the interests of night club owners says a perfect storm of corporate debt, rising household bills, and supply chain problems means the closures will continue. I'll admit it is a while since I last stepped into a night club. Most are happy to pay me to remain outside! But the long term trend is obvious. More people prefer to celebrate in pubs and at home saving themselves plenty of money into the bargain. Night clubs have faced significant increases in operating costs such as business rents, wages and energy bills. The shift towards home-working or hybrid home-office employment contracts has reduced the volume of occasions when an after-work pub visit has morphed into a night-club adventure. And perhaps the days of rip-off drinks prices have played a role too. With real incomes falling, people of all ages are having to make tough choices over how to spend their hard-earned money. Much cheaper supermarket alcohol and improved home entertainment systems are proving hard to beat.

This is a fairly damning report on the privatised UK water industry in general and South West Water in particular.  Almost all the water companies in England and Wales have cut their capital spending  in real terms since they were privatised 31 years ago. Total capital investment across England’s water and sewage companies has fallen by 16 per cent, and wastewater capital investment by 19 per cent in real terms since privatisation. Yet dividends paid to shareholders have grown. Increasingly frequent spillages of raw sewage into rivers that flow onto coastal waters are obvious examples of negative externalities from production that create significant social costs. According to the FT article, " Surfers frequently become sick from exposure to sewage effluent, he said, while a study by Exeter university found that they were three times more likely to have antibiotic resistant e-coli in their gut than other people."

The Competition and Markets Authority have argued in an interim report that Google and Apple's duopolistic dominance of the mobile phone industry in the UK risks damaging economic welfare and efficiency especially through limited choice and higher prices. The Head of the CMA is quoted as saying "Apple and Google have developed a vice-like grip over how we use mobile phones and we're concerned that it's causing millions of people across the UK to lose out,"  Heavy market dominance of what the CMA terms the mobile phone eco-system is now firmly in the sights of the UK competition regulator who recently told Meta (Facebook) that they needed to sell (divest) the animate gif platform Giphy. The CMA is concerned that Apple and Google have too much control over operating systems (iOS and Android), app stores (App Store and Play Store), and web browsers (Safari and Chrome) that together form their ‘ecosystems. The CMA is also worried that people could be facing higher prices than they would in a more competitive market, including for Apple phones, app subscriptions and purchases made within apps. This leads to a loss of consumer surplus and higher prices in real terms makes many of these products less affordable for people and families on lower incomes - which in turn risks deepening the digital divide.  The CMA's full findings are expected to be published in the early summer of 2022.

Here is a great example of a business whose revenues and profits have benefitted from the shift to online spending during the pandemic. Moonpig (originally founded by Nick Jenkins) and now a recently-floatesd online greeting-card-and-gift platform has seen their year-on-year revenues double to over £350 million bringing a pre-tax profit of £32 million. Part of their commercial success is getting customers to bundle cards and gifts to increase the average spend per transaction. They fulfilled around one million orders a week last year and clearly also benefitted from economies of scale and expanding their customer base - it is nearly always cheaper to sell to an existing consumer than spend money on marketing to find new ones. Once Moonpig purchases become almost a default option for those looking for cards for birthdays and other celebrations, then their revenue base will look really solid for the medium term even if we gradually return to shopping offline again.

Some good context here on changing demand factors in the market for outdoor camping equipment. Demand has surged as millions of families have chosen the outdoor life for their UK staycations in 2021. Stocks of family-sized equipment in retail outlets such as Decathlon and Mountain Warehouse have dropped sharply. Prices for available equipment via the usual online channels have climbed. You should be able to apply some demand and supply analysis to this! Note too that the number of new camping grounds is expanding as land-owners are sensing the commercial opportunities to essentially rent out their grounds for families in search of a pitch.

It is difficult to think of a more egregious and appalling example of how cost-cutting by privatised, profit-seeking corporations can lead to such damaging effects on  the environment. Over a period of six years, Southern Water permitted the discharge of a huge amount of untreated effluent into water on the south coast of the UK. According to the Guardian report, "In one wastewater treatment plant, Millbrook, outside Southampton, the equivalent of 371 Olympic-sized swimming pools of sewage or 746million litres, were released into Southampton water in four years and eight months."

Economies of scale and the role of research and increasing capital intensity of production are key features of this short video from Business Insider which pays a visit to the Navigator paper company in Portugal. 

Why might a weekly index of till-sales at Pret tell us about the changing nature of the labour market? 

This clip is gold dust for students revising negative and positive externalities from production! The FT visits breweries in the Netherlands to discover how they are attempting to reduce the environmental footprint of their manufacturing processes including tackling the important issue of water scarcity. One litre of beer often involves using up many more litres of water. But research and innovation throughout the production process is helping to lower the external cost of production. There is a terrific example of a positive production externality in this video - see if you can find it!

Knowledge of the role of activist investors and some examples of their impact is useful when understanding the economics of the principal-agent problem which many students will cover as part of their Year 13 microeconomics. Activist investors often build strategic stakes in businesses that they consider are underperforming and many will lobby for changes in the boardroom to initiate a change in business objectives. Here Causeway Capital - whose share of WH Smith increased when the business was forced to make a cash-call during the pandemic -  is said to be supportive of executive management for a business hit hard by millions working from home and the decline in the derived demand for commuting. But it also has shares in Rover where they are angling for changes at the top of the management structure.

Sheffield Forgemasters, a leading supplier of steel to the UK Ministry of Defence is to be taken into state ownership. It marks another sector where the UK government has stepped in to protect jobs in sectors of strategic importance. Sheffield Forgemasters is being bought by the Ministry of Defence which has pledged to invest up to £400m into the firm over the next 10 years, replacing defence-critical equipment and infrastructure. The long-term aim is to return the business to the private sector. Sheffield Forgemasters has, in recent years - been reliant on loan guarantees from businesses such as Rolls-Royce, BAE Systems. The takeover will preserve the jobs of around 600 Sheffield Forgemasters workers. This is a small fraction of the many thousands who used to work in steel manufacturing in South Yorkshire in years past. But the shift towards state ownership will help to bring an end of the commercial uncertainty facing the company which has faced stiff competition from lower-cost steel imports sources from countries such as China. One of the justifications nationalising the business is to protect the critical supply chain of engineering parts for Royal Navy's ships and nuclear submarines.

Here is a good example of how higher input (variable) costs are having an impact on the profit margins of one of the world's largest consumer goods firms.

For some this is beyond the pall of smoke that flows from Marlborough cigarettes - the most popular brand of Philip Morris International, one of the world''s biggest tobacco manufacturers. They have offered £1bn for Vectura, a company that has developed a pioneering inhaled treatment for Covid-19. The takeover bid is a classic example of strategic change (as Philip Morris looks to accelerate the shift from tobacco to pharmaceuticals). One of their key objectives is achieve $1bn in non-tobacco sales by 2025 and the rapid growth of inhaled therapeutics market will no doubt help them achieve this. As to their stated aim of following a  natural evolution into becoming a broader healthcare and wellness company - well that takes the breath away. Their products have contributed to the premature death of millions over the years. 

In the 2021 Royal Economic Society Annual Public Lecture, Professor Diane Coyle explores some of the "winner takes all characteristics" of many of the superstar digital businesses. It is a superb talk to listen to to understand some of the driving forces of the digital economy which have important effects for economic and social welfare. Can new businesses really dominate businesses such as Google and Facebook? This poses hugely important questions for competition authorities around the world.

Here is a good example of ancillary revenues for businesses. Transport for London has experienced a steep decline in the advertising revenues they get from a huge estate of bill-boards, posters and panels inside and outside of their network of stations. The collapse in advertising sales would have been even steeper had it not been for a surge in pandemic-related government advertising. Nearly 1,448 government, political and social campaigns were used on the network in 2020.