Google's new operating system

Google announced on its blog that it is going to launch its own operating system next year based around its web browser, the Google Chrome. The Google Chrome OS will initially be targeted at the netbook market. It will be open source and based on the Linux kernel. Since it’s a Google product, it’s going to be free as well. The blog claims that the new OS will be light weight and more focused on getting the user onto the internet within seconds of booting up rather than waiting minutes for the computer to load.

This step is perhaps the next best logical step for Google since the online world is its home ground. Right now, it depends on other providers providing the user with a platform-the OS and the browser-to get onto the internet and access its services. It solved part of the problem last year by launching its own web browser with the hope that it would come together with all its online applications to provide an integrated experience to the user.

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So, an operating system that is oriented for the internet would be ideal for a netbook since such devices with low processing power are likely to be used for things like accessing the internet. However, totally depending on the internet to provide all the functionality assumes that the netbook would be constantly connected to the internet. The most popular method of accessing the internet through a netbook is by using a dongle that connects to the internet via the mobile 3G network. Although such dongles can be obtained cheaply through deals, which include the dongle and the netbook, such deals have incredibly small download allowances. Since there would be a lot of exchange of data with the internet, the download limit would be quickly reached. So, Google should not only work with manufacturers to get its OS onto their devices, but also with the telecommunications companies and explore new ways of providing cheap internet access with huge download caps where the cost is subsidised by advertising-Google’s main business.

The news media are referring to Google’s announcement as “Google taking on Microsoft”. I think that’s a bit premature to think that Google’s new OS,which depends on cloud computing, will offer all the functionality and applications that Microsoft’s operating system, which largely depends on software hosted locally, can provide the user. Especially since all we have from Google is an announcement, and not an actual product that can be tested, compared and bench marked.

That is not to say that Microsoft shouldn’t be worried about Google’s OS. That’s because currently, users that want Windows on their netbooks are offered Win XP and not Vista. The other alternative is a Linux based OS. Most users prefer XP although its expensive and old because they are familiar with the user interface and have apprehensions about switching to an unfamiliar system. That is why Linux distributions, most which are free and some of which already offer a light weight OS some as small as 50Mb, do not have many users since they are seen as being complicated and “techie”. But with a popular name like Google attached to it, it wouldn’t take long for these apprehensions to go away and for users to start switching to Chrome OS.

It would be interesting to see how Google goes on to monetize its operating system. Microsoft of course gets its revenue by charging a huge price to those who wish to use its operating system and so does Apple to those who wish to use its OSX, although its not so pricey. Linux distributions depend on a community of developers and some organisations get their revenue by providing support to businesses that use Linux operating systems and also by providing customised solutions. Google will obviously fall back on its core competency-its advertising business. That’s how it currently generates most of its revenue, by advertising to those that use its products.

Like in most cases, at the end of the day, it all depends on how Google execute their plan. If they become complacent and start thinking that anything that has the Google brand attached to it will become popular, their OS may not turn out to be a Windows killer. It will be interesting to see what the end product looks like when the beta version is released later this year.

And if any of its previous products are to go by, expect the Google Chrome OS to be in beta till the year 2020.

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Market Research

Watching the candidates of The Apprentice talk about themselves misleads one into feeling that not only are they the best, but that they are the best of the best of the best when it comes to running a business and that Sir Alan Sugar should feel lucky that they are willing to work for him. Yet, when it comes to doing a task, they forget the most basic of business concepts.

As seems to be the norm these days, the task involved designing a portable piece of fitness equipment for, surprise surprise, the cash strapped consumer. It was clear from the beginning that the whole task was about the product. It is no surprise then that team Empire, which came up with a Gym-in-a-box idea failed to sell even one unit to two of the three retailers they pitched to. The candidates failed to realise that the perfect product isn't one that tickles their own fancy, or one which their family would like to buy, but one which addresses the needs of the consumer, hence filling a possible gap in the market.

Both teams failed to conduct even basic market research to help them develop their product. Team Empire should have realised that creativity wasn't their strongest bit and rather than sit around the table bouncing useless ideas of each other, they should have sent two people to the local gym to talk to the members there about the kinds of products they would like to buy and what price they were willing to pay for it. Another team of around two people could have scoured the internet looking at the products that their competitors were selling at that price level. After all, the task was about designing a product for consumers who were finding the gym membership too expensive and were looking for low cost alternatives. Who better to ask about the product than those who are going to buy it in the end.

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Their lack of research was also evident in their pricing strategy. It felt as if they had just closed their eyes and picked the figure of £29.99 randomly for their product. At that price, there are numerous alternatives in the market which are certainly better looking if not better value for money. Even the promotional material, including the pictures, looked like something that came out of a secondary school student's Media Studies project.

Although team Ingnite failed to do any market research either, they still won the task and were offered a deal of exclusivity by John Lewis. One of the reasons why their product succeeded was perhaps because it was simple. Their opponents product was a case of "Jack of all Trades, Master of None", like a new mobile phone which offers to make you a cup of tea and take your dog for a walk. Ignite's product was also more pleasing to look at and truly portable.

Two days to come up with a concept, build a prototype and pitch a product is indeed a tall order and both the teams did that with a lot of patience and commitment. Was firing Majid the right decision? Its not for us to decide. After all, this isn't a talent show, its a long job interview and Sir Alan should keep those whom he feels would be right for his organisation.

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Ryanair

Ryanair, it seems, is very good at attracting negative publicity every time it comes up with a cost-cutting measure to "decrease the air fare for all its customers". Its latest one is a plan to charge its passengers £1 for each time they want to use the in-flight toilet.

It doesn't look as if it really makes commercial sense for Ryanair though. After all, it doesn't give free drinks on board its flights, passengers are expected to pay for them. That means that consumption of liquids is decreased in the first place, which means less number of people would be using the toilets anyways. Or as Rochelle Turner from Which?Holiday pointed out, passengers may end up buying less over-priced drinks on board because they will then be charged to relieve themselves of it. This would make the move counter-productive.

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I am sure it would cost a considerable sum of money to install a coin slot machine in each of its toilets on each of its flights. How many £1 paying people would it take for them to cover that cost? And if the whole idea is to lower the air fare, how much would it lower it? Its not as if the maintenance cost of the toilets depends on the number of times it is used. The toilets would cost the same if they were used ten times or just twice. The only variable cost, if Ryanair is really counting its pennies, would be stuff like the toilet paper and soap. So why not just save their passengers the hassle and the negative publicity and offer them for free, like what all airlines do currently?

Ryanair's spokesman was quick to reassure that they had no immediate plan to implement this, but felt that their move was justified since passengers were already used to paying for toilets at bus and train stations. Well, toilets at bus and train stations are used by more people than a toilet on a plane. And in addition to generating enough revenue for maintenance, another reason why passengers are charged at stations is to discourage misuse of the facilities.

Last week Ryanair announced that by the end of this year, it would be replacing the check-in counters at the airports with manned baggage drop-in area. All customers instead would be expected to check-in online. According to Ryanair, about 75% of its customers are checking-in online currently. In that case, it does make commercial sense to get rid of check-in counters since only 25% of the passengers are using it. The cost saved on staff could genuinely help reduce the fares.

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Ryanair is by now used to being in the news for all the wrong reasons. The most recent one being its staff engaging in an unpleasant exchange with a blogger who thought he had found a bug on Ryanair's website. Rather than apologize to the blogger, Ryanair instead said that they had no time for "idiot bloggers". Idiot or not, that is not the best way for an organisation to talk to its stakeholders. Of course, this all wont result in passengers suddenly switching Ryanair for another airline. Far from it. In these though times, more people would be attracted to the cheap price and not the customer service. Still, those within Ryanair that come up with the cost cutting measures should spend some time now pondering over their public relations.

"Spend a pound to spend a penny" said Michael O'Leary yesterday. If they don't learn where to draw the line for the cost cutting, it may end up being "Penny wise and Pound fool" for Ryanair.

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Throwaway Fashion

The Department for the Environment, Food and Rural Affairs (Defra) has launched a "Sustainable Clothing Action Plan" co-inciding with the London Fashion Week to highlight the increasing problem of "fast fashion". Apparently, UK consumers buy around two tonnes of clothes every year, and throw away a massive 1.2 million tonnes of them every year.

Rapidly changing fashion trends means that many consumers have to keep on buying new clothes to keep their wardrobe up-to-date and to compete with their friends and peers. This means that new clothes are worn only a few times and as trends change, are then consigned to the bin.

Of the two million tonnes of clothing bought every year, only 300,000 are recycled. If the majority of the clothes are worn only a couple of times, surely more of them can be recycled. Due to the current economic crisis, donations to charities has dropped. Consumers are cutting back on their spending. If more clothes that are in a good condition are donated to the charity shops, they can then sell them on to consumers looking for a bargain which results in a win-win situation. The charity shops get their revenue, consumers can bag a bargain and there are less clothes ending up in the landfill site.

One of the reasons why consumers can afford to keep on buying new clothes and then throw them away is partly due to ready availability of cheap fashionable clothes on the high street. However, many fail to see the real story behind the cheap price tag. An investigation by BBC's Panorama last year revealed how Primark's suppliers used factories with unfair standards and also child labour to provide the consumers on the high street with cheap fashionable clothing.

Jane Milne, who is the business environment director of the British Retail Consortium, said that retailers should be "applauded, not criticised, for providing customers with affordable clothing, particularly during these tough economic times". Sure, if the low prices are due to a better, more efficient production technique. But not if someone less unfortunate than us halfway across the world is subsidising the cost for us by being exploited and made to work in unfair conditions.

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Comet to charge suppliers for shelf space

According to the Financial Times, electronics retailer Kesa, who owns Comet, has asked its suppliers to pay up to £15,000 for the pleasure of having just one of their product lines displayed on Comet's shelves. Why? Well, according to Comet's commercial director Bob Darke, its because of the tough economic times.

Comet must be stocking 100s if not 1000s of products. Do they really think that all the suppliers will pay a huge fee for each and every product displayed? They would have to sell hundreds of units of each product range just to make up this fee, let alone pay their direct and indirect costs. This would be a great strategy if (a) the economy was booming and (b) the amount of product ranges out stripped the amount of shelf space available. It would allow Comet to stock the most profitable product and earn a nice fee at the same time. Sadly though, the economy is not booming nor is it likely that suppliers are dying to have their products displayed on Comet's shelves. Suppliers may in fact be forced to increase their prices to meet this fee otherwise it would add to the heavy losses that they already would be suffering from or they might even have to withdraw their product ranges entirely.

In an economy which is officially in a recession, increasing one's prices is not exactly the best strategy. Everyday there are news of more and more job cuts. Even those who have jobs are spending less because they are worried that they might lose their jobs. At such times, consumers are likely to focus more on necessities and forget about the luxuries. And plasma tvs and mp3 players are not exactly as important as bread and milk such that people will be forced to buy them.

Kesa is not alone, almost all retailers are affected by the tough economic times. Many supermarkets deal with it by squeezing every last penny out of their supplier's profit margins. Others buy on credit and exert their purchasing power by paying their suppliers after a long time. The supplier has no choice, he has to either accept it or lose the order. But I dont think anybody, not lest at this time, would charge their suppliers for shelf space.

I think Kesa's move is akin to digging one's own grave. It might as well just hand over its market share on a silver platter to its rivals.

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High Street Blues

The trading that occurs in the run up to Christmas is very crucial to retailers even in the "normal" years. It allows them to make up for the losses they might have incurred over the year and helps them prepare financially for the coming year. 2008 has been, by any standards, anything but a normal year. Huge banks have become small banks, some have been swallowed up by bigger banks, some have merged with other banks while some have disappeared altogether.

Little surprise then that the past few weeks have been really tense for the retailers. The number of shoppers visiting the shops have decreased. As a result, retailers have been forced to cut their prices to attract shoppers. According to Experian, the number of shoppers during the weekend, the last weekend before Christmas, was down by 8.7% as compared to last year. However, the number of shoppers yesterday were up 13.6% as compared to the same Monday last year.

It's a bit unfair to compare the two corresponding Mondays because last year the Monday was Christmas Eve. The kind of shoppers who go shopping on Christmas Eve are generally those looking for food items or ingredients for their Christmas dinner, last minute shoppers or those looking for last minute bargains.

Even though the number of shoppers increased, it still remains to be seen how much revenue that translates into. The main reason why more consumers went out to shop perhaps has a lot to do with a last minute heavy discounts by retailers in desperate attempt to attract shoppers. According to the accountants Ernst & Young, the average discounts were 40%, up from 38% last year. It means that even though people had more shopping bags in their hands, the retailers wouldn't have made a lot of money from that.

Although the high street is seeing a decline in the number of shoppers, according to Hitwise, the number of people visiting the websites of high street retailers has increased. Between Dec 18 and Dec 21, traffic to online retailers(including internet-only and high street) increased by 2.2% on average as compared to last year. Websites of high street retailers saw their traffic increase by 2.7% on Saturday and 5.9% on Sunday as compared to last year.

When it comes to prices, mostly the online retailers clearly have an advantage over their high street rivals. But their biggest drawback is that the items have to ordered before a certain date to ensure that they are delivered in time for Christmas. On the other hand, the websites of high retailers allow the shoppers to book their products online and pick them up instore. It may not be cheaper than the internet-only retailers, but it certainly is more convenient. One of the put-offs of shopping on the high street before Christmas is clearly having to navigate through crowded streets and aisles holding your shopping bags. It is also very hard to compare prices across different retailers and browse the items leisurely.

The rise in the number of shoppers will definately be of some relief to retailers. But it will by no means make up for the dismal sales and revenues they have generated over the past few weeks. Woolworths and MFI have gone bankrupt and Whittard of Chelsea is said to be on the brink of administration. And it is clear that more will have the same fate in the new year, what remains to be seen is who they will be.

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Sales rise amidst the credit crunch

According to figures released by the Office of National Statistics (ONS), the volume of sales between September and November rose by 0.5% as compared to the three months before it. This may not sound good, but compared to all the doom and gloom and the difficulty of obtaining credit, it does sound good. Also, the value of weekly sales in November were 2.9% higher than in November last year.

However, the high street retailers beg to differ with the figures. The British Retail Consortium (BRC) said that the figures released by the ONS were optimistic and painted a "rosy picture" of the current difficulties. According to BRC's own findings, the sales value actually fell by 0.4%. Experian reported that the footfall (the amount of traffic generated by shoppers visiting the stores) in stores for the first three days of the week had decreased by 11.5% compared to last year.

It seems hard to believe that the increase in the volume in sales could have lead to a increase in the value of sales. After all, the increase in the volume of sales is largely due to a wave of heavy discounting by the high street retailers, especially after Woolworths slashed its prices to get rid of its stock. It is likely that the spectacular and well-publicised offers by retailers would have made some reluctant consumers go out and spend. It is also equally likely that many who generally would have waited for Boxing Day sales have instead done their shopping before Christmas since they feel that the discounts offer good value for money. After all, there is a limit to the amount of discounts that the retailers can offer before it starts eroding their profits. So many consumers may feel that the discounts are as good as they are going to get. If this is true, what would happen is that the average amount of sales during the Christmas period hasn't really increased, but the shopping has been concentrated to a few weeks before Christmas.

The reason for this difference in figures, according to Reuters, is that the figures of "the ONS figures capture internet shopping more fully". According to the ONS, the value of online sales was £220 million in November and it accounted for 3.8% of the total retail revenues. According to Experian, its company Hitwise which is an online competitive intelligence service, found that the websites of high street retailers had 22% more visits than its internet-only rivals. This could explain why the sales have increased even though the number of shoppers visiting the stores seem to have decreased.

Many shoppers percieve the prices of online retailers to be cheaper than their high street counterparts. And this has been shown to be true in most cases. After all, they do not have to worry about expensive overhead costs like rent and sales staff. However, many shops on the high street nowadays allow their customers to haggle and bag bargains, and this is not available to online shoppers.

It would be interesting to see the figures of the overall retail sales before and after Christmas since that would allow us to see the whole picture.
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Inflation? Worry about Deflation instead.

It was announced today that the Consumer Price Index (CPI) fell by 0.4% from 4.5% in October to 4.1% in November. The CPI is the official measure of inflation used by the Government. The biggest factor for this fall is being attributed to the fall in crude oil prices. The average price of petrol was 95.2p. On the other hand, prices of fresh fruit and vegetables and non-alcoholic beverages is said to have risen compared to last year.

Although the drop is good news, the rate of inflation is still twice the official target of 2%. So, Mervyn King, the governor of the Bank of England put pen to paper and wrote a letter to the Government explaining why the rate of inflation had not hit the target. The governor of the Bank of England is required to write a letter to the Government whenever the rate of inflation is either 1% above or below the target and explain the possible action the BoE might take to solve it. However, Mervyn King feels that the next time he has to write a letter to the Government, it may not be about the reasons for inflation, but deflation instead.

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What are Inflation and Deflation?

Inflation is regarded to be a bad thing since it means a rise in prices, which is a bad thing for shoppers. Then, deflation must be a good thing, right? In the short term, yes it is. In the long term though, its a dreadful thing. To understand why a drop in prices is such a bad thing, one has to understand the meaning of the terms "inflation" and "deflation" and its causes. Inflation is the general increase in prices or, it is the decrease in the purchasing power of money. There are two possible causes; either the cost of production has increased, like the cost of raw materials or labour, or demand is out stripping supply. Take for example a rise in price of a NintendoWii games console. This may be due to a rise in the cost of materials and parts and workers who produce it. Or it could be that the number of units available is less than the number of people wanting to buy it, so the price goes up. Around Christmas, it is likely for the latter to be true. It wouldn't be unusual around this time to find a NintendoWii on eBay at twice its retail price.

Deflation is the persistent decrease in prices. This happens when supply outstrips demand which could happen due to a surge in productivity. Or, like in the current climate, consumers rein in their spending which means that shops have to cut prices to entice customers to spend. If this happens a couple of times, it creates an anticipation of further cuts in the future. So, although consumers may have the purchasing power, they postpone certain purchases since they would be cheaper in the future. Its a self-fulfilling prophecy where consumers postpone their spending thinking that there would be price cuts, and sure enough, shops cut the prices to persuade shoppers to loosen their purse strings. Good news for shoppers, bad news for businesses. Businesses experience cash flow problems and their staff would have to accept a pay cut or even lose their jobs. So, debt becomes expensive because one owes the same amount of money, but has less income to meet it. Signs of deflation can already be seen on the high-street. Retailers are offering massive discounts, the likes of which are usually seen after Christmas, because they are desperate to clear their stock. And the consumers know this and know that further discounts will follow eventually.

It will be interesting to see how Mervyn King and the Government will go about coaxing the shoppers to spend their money.

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Cool to be Frugal

According to Andy Bond, the Chief Executive of ASDA, its now becoming cool to be frugal and not so cool to be frivolous and wasteful. He feels that consumer's shopping habits are changing and a new generation of shoppers who are thrifty are emerging as the credit crunch begins to bite even further.

So what does this really mean? It means that consumers will now focus more on products that offer them value for money and will aim to eliminate waste. Value for money doesn't really mean something that is priced less or discounted. It is actually something that offers satisfaction and quality for its price. Consumers will increasingly try to differentiate their "needs" from their "wants" and think carefully if they really need something or do they just want it. For example, ASDA noted that consumers are beginning to shift from buying ready meals to buying ingredients and cooking at home. People are also beginning to mend or fix items rather than getting rid of them and buying new ones. Cobblers, for example, have seen their business increase since consumers are coming in to get their shoes mended rather than splashing out on a new pair. A quick search on Google Trends showed that visits to the comparison site moneysupermarket.com and myvouchercodes.co.uk which lists voucher codes across a variety of stores had more than doubled.

What's really interesting is the 40% increase in the number of people who are ignoring best-before dates and consuming the product rather than throwing it in the bin once it is past its sell by date. Perhaps the increase has also something to do with the numerous reports on saving money on television featuring people who regularly consume food, as long as it looks fit, well past the best before date. Consumers are also freezing leftover food rather than wasting it and sales of bottled water and smoothies has also been said to have decreased since many are opting to fill tap water and eat fresh fruit instead.

It is important then that retailers spot this trend and adjust their business models accordingly in order to survive the downturn. Thrifty consumers would focus on long term value and would be willing to spend a little bit extra on an item that is likely to last longer than buy something cheaper in price which would also be cheaper in quality and hence not last as long. Rather than reducing prices on cheap Christmas stocking fillers that perhaps wont even last till next Christmas, retailers should instead focus on reducing prices on items that actually are of some use to the consumers. Also, thrifty consumers are less likely to buy items on impulse which retailers greatly depend on. So, businesses should make sure that they are really operating on a low cost model which aims to eliminate waste as that would be the only way that they would be able to offer low prices and good service at the same time.

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Retailers embrace VAT cut

The cut in the VAT announced last week by the Chancellor initially didn’t receive the reception that he might have been perhaps hoping for. News reports, newspapers and websites were filled with comments against the idea of the VAT cut, some being funny, and some downright ironic. Most were along the lines of “10p saving! Whoopee!”

However, over the weekend, it looks like many retailers are whole-heartedly embracing the VAT cut. Not because they like to go through the trouble of having to change the prices and labels and the IT systems. But because it gives them another reason to slash their prices, much more than the 2.5% VAT cut. But, why do they need a something like a VAT cut to give them a reason to slash prices? Surely, they can do it without that.

Yes they can. And many, like M&S and Debenhams, did a fortnight ago when they had a one-day only “spectacular” sale. Having yet another “spectacular” sale nearly three weeks before Christmas would give the impression that they have a lot of left over stock which they are desperate to sell. Although many shoppers would flock the stores to bag the bargains, which many have been doing due to the ongoing sales, many would stand back and wait for the prices to drop even further – a clear sign of deflation.

Hence, the cut in VAT, although not significant on its own, has provided the retailers with a timely reason to slash their prices further, using the VAT cut as a “mask” for doing so. Some companies, however, like BT and Virgin Media have decided to pass only the 2.5% cut to their customers.

But, how do single price retailers like Poundland, 99p Stores, or numerous other independent single price retailers pass on the VAT cut to their customers? After the VAT cut, an item costing £1 would then cost:
117.5% = 100p (The VAT is already added to the final selling price)
1% = 0.85p
115% = 97.87p (new price)
Poundland wouldn’t be able to rename itself as 97pLand for a period of 13 months, and the slogan “Everything’s £1” would then be deemed misleading. The only other option is for such businesses to increase their profit margins, which is not a bad thing, but they cannot take the advantage of being able to advertise the fact that they are passing on the VAT cut to their customers. Or, they could sell products that they wouldn’t have been able to in the past, as it would’ve been priced above £1, but can now since the cut in VAT allows the price to be £1.

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Woolworths goes into administration

The high street retailer Woolworths, fondly known as Woolies, has been forced to go into administration after it failed to find a buyer to snap it up for a nominal £1. So, why didn’t anybody buy it, surely £1 for a whole company seems like a bargain? That’s because the buyer would have not only acquired Woolworth’s assets (things it owns), but also its huge liabilities (money it owes), £385 million to be exact.

So, what is administration and when does a business go into administration? With regards to business, it is when a business doesn’t have enough funds to trade, also known a cash flow crisis. Cash flow is not the same as profitability of a business, but refers to the cash flowing into and out of the business. If cash coming in is less than the cash going out, then the cash flow is negative and it means that the business does not have enough funds to meet the current liabilities, like creditors and suppliers.

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However, going into administration isn’t still the end of the story for Woolworths. In fact, administrators, in this case the accountancy firm Deloitte, protect the company from creditors seizing stock to pay off the money that is owed to them. The administrators are trying to find a buyer for Woolworths, failing which it will be forced to go into liquidation. This is where the administrators try to sell off the assets to recover any money they can to pay off the debts. Woolworths competitors are dreading this because although it will mean less competition in the long term, since there is one less player in the market, in the short term, it will mean a price war during Christmas as the administrators will slash prices to sell off all the stock.

So, is the reason for Woolworth’s difficulties due to the credit crunch? Well, the increase in household bills has meant that consumers are spending less. This is evident from the fact that Woolworth’s like-for-like sales have decreased whereas their costs have increased leading to increased losses. Many analysts say that Woolworth’s difficulties should come as no surprise, as Woolworths didn’t have a clear brand image, what its brand stood for, and its purpose in the market. Additionally, suppliers of Woolworths found it expensive to insure themselves against the risk that it wouldn’t be able to pay them and hence, Woolworths had to pay upfront for the supplies, unable to take advantage of buying on credit that some of its competitors enjoy.

Woolworths has around 815 stores and employs around 30,000 employees. If the business does go into liquidation, all these employees stand to lose their jobs. Also, the businesses that supply to Woolworths will also suffer losses. The question many people are asking is why isn’t the Government bailing Woolworths out, after all, it did bail out the banks. Well, the Government can’t bailout every business in difficulty; it’s a natural business process where the one with the weakest business model fails hence making the others stronger due to decreased competition.

Other than its retail business, Woolworths Plc. also owns Entertainment UK and 2Entertain. Entertainment UK specialises in the supply of CDs and DVDs to retailers such as Tesco, Zavvi, W H Smith, Asda, Sainsbury’s, Morrisons and of course Woolworths itself. EUK is said to be a profitable business and the administrators are looking for a buyer for it as well. If EUK is shut down, it will no doubt affect the retailers it supplies, especially during the crucial trading period of Christmas. BBC Worldwide and Woolworths Plc., on the other hand jointly own 2Entertain, and there are talks of BBC Worldwide buying Woolworth’s share of the business.
It has also been reported that MFI is also going into administration, and it looks like a few more will follow, certainly after Christmas. If you want to see Woolworth’s Interim report for 2008, click here.

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First the Chancellor giveth, then the Chancellor taketh away.

Yesterday, the Chancellor Alistair Darling announced in his Pre-Budget Report the much talked about 2.5% cut in the VAT, bringing it down to 15% from 17.5%. In the same breath, he also announced an increase in income tax for those earning £140,000 and above. From April 2011, people falling into this income bracket will have to pay income tax at the rate of 45p.

The cut in VAT is to come into effect from the 1^st of December. This leaves ample time for businesses to revise their prices and change the all the labels in the stores, but at the same time, being just in time before the Christmas shopping.

So, how will the change affect the prices? Will a loaf of bread or a bunch of carrots be any cheaper? No, because food products do not attract VAT. Surely, utility bills as a result will go down. Sadly, no because the VAT on utilities such as gas and electricity already have a lower rate of VAT charged at 5%. A cut of 2.5% doesn’t look as if it will make a huge difference in prices, especially compared to the generous 20%, 35%, 40% discounts offered by the retailers already.

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Then, the motive behind the cut is to give confidence to the consumers to go out and spend. But, confidence cannot be used to pay for a brand new PlayStation 3, can it? You need something else, namely, money. The primary reason why people are spending less money on the high street is because they have very little surplus left over after paying the high utility and food bills. And those who have enough surplus choose to save it for a rainy day.

That’s because it’s almost impossible to see a news report nowadays without it mentioning yet another company announcing job cuts. This creates uncertainty among those who are employed about the security of their jobs. Those who have recently been made redundant have no choice but to save money. But those who have a job also save since they don’t know how they are going to put food on the table next month or meet their mortgage repayments.

Another thing that’s hard to miss in a news report is an interview with the boss of a SME (Small & Medium Enterprise) business who has been denied a loan from his bank, or has had his overdraft facility cancelled. This leads to cash flow problems which means the business cant pay its staff, pay its utility bills, or even buy raw materials to maintain production. In addition, creditors, who owe money to the business, are unable or reluctant to part with their money. As a result, staff numbers have to be cut down adding to the number of unemployed across the country.

How can such news create confidence?

Perhaps, the Chancellor should look at reducing the VAT temporarily on utilities, or even get rid of them for the time being. More importantly perhaps, he should make sure that SMEs, who are perfectly healthy, should have access to loans and overdrafts at a reasonable cost to maintain their cash flow. After all, the SMEs are not asking for charity, just for funds which they are prepared to pay back with due interest. It makes sense for the Government to ensure that businesses that are perfectly sound to not go bankrupt just because they do not have enough cash or credit to meet their current liabilities. After all, the SMEs employ a lot of people in the private sector of the economy and contribute to the Treasury in the form of National Insurance and Corporation Tax. Since people are employed, it saves the Government the trouble of have to pay job seekers allowance, hence reducing its outflow.

So, it is perhaps job security and income security that will encourage the consumers to go out and spend, as Alistair Darling and Gordon Brown along with countless retailers are eagerly hoping, fingers crossed.

But it seems highly unlikely that the cut in VAT will have the intended purpose of instilling confidence among the consumers and going on a spending spree, but for the sake of the economy and the countless people who are unemployed, lets hope its not all in vain. The high earners are certainly hoping for it, since they are going to be paying for it, come 2011.

http://www.bizeasy.wordpress.com

http://www.moolanomy.com/998/money-hacks-carnival-39/

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Spend, Spend, Spend

According to recent figures from the British Retail Consortium (BRC), the value of total UK sales as of October 2008 were down 2.2% on a like-for-like basis as compared to last year. Food and Drink was the only sector to have shown an increase in sales. Consumers are cutting back and postponing purchases that are not needed and focusing on the wants instead. Buying patterns are changing as well since many now prefer to cook at home from scratch and are focusing on products that offer them value for money and are actually actively seeking out promotions, discounts and offers.

This is bad news for retailers who are desperately depending on Christmas sales this year more than ever. No wonder then that for many high street retailers, Christmas has indeed come early this year. Discounts and promotions which are normally seen after Christmas are beginning to make their way into stores at a high street near you- five weeks before Christmas.

Leading the way is Debenhams, who is having a “spectacular” three-day sale, starting today, where many of the products are going to be 20-25% cheaper. But its Marks & Spencer who is receiving the most attention and media coverage for its “20 % off” sale for only one day-tomorrow. Other high street retailers are likely to join the battle to fight for every penny of the consumer’s disposable income this season. In the coming weeks leading up to Christmas, more and more such promotions will come out to entice people to come in and spend their money.

Up to 50% now on at House of Fraser – click here to shop

But, as Gillian Lacey-Solymar pointed out on BBC’s Working Lunch, these promotions are likely to happen on weekdays. This is because the promotions are meant to draw people into the stores, which they do anyways on weekends, and so there is no point offering them heavy discounts then if they are likely to settle for less.

It is highly unlikely that these promotions will have a huge impact since people will only buy it if they perceive it as value for money and more importantly, if it is on the top of their priority list. The truth is, people are still being squeezed by rising utility prices and high food prices. Also, almost every other day a well known business announces job cuts which is likely to make those still in employment worry about their security and hence, save every penny they can.

Undoubtedly, all these promotions are good for the consumers. But, offering such huge discount means that retailers are effectively cutting their profit margins, or sometimes even making a loss just to shift their stock. What this means is that in the long term, many retailers will not be able to sustain themselves and it will not be financially viable for them to operate any longer, and hence will go bust.

So what? Well, this would result in job losses, numerous suppliers losing their orders and so on. When the economy does recover, it will mean one less competitor in the marketplace and hence, less competitive prices.

So, in the short term, the promotions are good for the consumers, in the long term however, maybe not.

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Profits at Starbucks go Skinny Latte

Profits for the coffee chain Starbucks fell by 97% in the fourth quarter to $5.4 million, as compared to $158.5 million this time last year. Although the sales revenue were up 3% to $2.52 billion, like for like sales actually decreased by 8%.

This shouldn’t really come as a surprise then since consumers are cutting back on what they deem “luxuries” and are more cautious about their spending and are literally watching their pennies. Starbucks is perhaps well known for its high prices as much as it is for its coffee. Its share price dropped by 3% after the news broke out and was trading at $9.91. Last year, it would have been worth around $20-$30.Starbucks said that it has seen a decrease in customer traffic, in other words the number of customers visiting its branches, and also, crucially, the value of each transaction per customer. So, it is likely that the increase in sales revenue is likely to be due to the increase in prices.

Although drinking coffee is one of life’s little pleasures, its prices in the cafés are anything but little. A cup of coffee for $4 or £2.50 may seem insignificant on its own, but multiply them up for every working day of the month and you are left with a sizeable figure. Starbucks could lower its prices, but it is seen as a premium brand and would as a result devalue its brand value. Think of Marks & Spencer’s food range competing on its prices with Tesco’s Value range or Sainsbury’s Basic range and you get the picture about devaluing the brand value.

It’s likely that other coffee chains like Café Nero and Costa Coffee would now be worried about their own situation while the likes of McDonald’s will be rubbing their hands with glee at the prospect of attracting coffee drinkers with their cheap prices. McCoffee anyone?

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Virgin Media and Sky bury the hatchet

A deal which will see the return of Sky’s basic channels-Sky One, Sky News and Sky Sports News- on Virgin Media television packages has been agreed between the broadcasters Virgin Media and BSkyB.

According to The Guardian, the basic channels will include Sky1, Sky2, Sky3, Sky News, Sky Sports News, Sky Arts and Sky Real Lives. The broadcast on Virgin Media will start on the 13th of November. This deal is contracted to run until June 2011.

Virgin Media was formed by the merger of NTL and Virgin Mobile. As part of the deal, Virgin Media also acquired NTL’s channels-Living, Bravo, Trouble and Challenge. Virgin Media recently also launched its own channel-Virgin 1. Under a second deal, these channels will continue to be broadcasted on Sky.

A row broke out between BSkyB and Virgin Media last year regarding the price Virgin Media had to pay BSkyB in order to broadcast its basic channels. Talks between the two broadcasters broke down and in the end the broadcast of BSkyB’s basic channels on Virgin Media were ceased. Popular shows on Sky One included Lost, 24 and The Simpsons. Sky had hoped that die-hard fans of the American shows would switch to Sky in order to watch them, and at that time, many did. But not enough to make a sizeable impact. Sky lost about 3.5 million audiences (Virgin Media customers) because of the fallout. This means that advertising campaigns carried out on Sky’s channels would have had a lesser impact since the audience would be effectively 3.5 million less and hence the campaign would have failed to reach the wider audience that the advertisers would have hoped it would have. Hence, revenue through advertising would have decreased since advertisers wouldn’t be willing to pay the same amount if it’s reaching less people.

Keynes way of kick starting the economy

Home Retail Group, the company that owns the DIY store Homebase and retailer Argos, reported a loss of £450 million in its half-year operating profit. The reason for this loss is attributed not only to consumers restricting their spending, but also the weakening of the Pound which means that it costs more to import products from other countries, add to that the increase in the cost of raw materials, production and transportation. Products that are seen as a luxury have seen their sales and consecutively their profits drop as consumers switch to cheaper value-for-money products. Budget stores, as a result, have seen their sales and profits increase rapidly, in cases like Poundland, even double.

However, a drop in sales at Argos, which is not exactly an upmarket store, should create a little more than just a flutter amongst businesses operating in similar sectors. This is because it suggests that not only have consumers changed their shopping habits and switched to cheaper stores, they have stopped spending altogether on items they deem unnecessary. There are concerns about unemployment as many are worried that they would lose their jobs. The utility bills and mortgage repayments are rising. All this creates an atmosphere of uncertainity and leaves people preferring to save any surplus rather than spend it as they did before.

According to John Maynard Keynes, a well-known British economist, who lived during the Great Depression of the 1930’s, the only way to give the economy a kick-start, is to spend and spend and spend. This is because a recession is caused by a fall in demand, not by the fall in supply. Demand has fell quite a lot recently because the credit that backed it no longer exists. Although Governments around the world have injected banks with capital, banks in turn have effectively turned off the tap of credit. Keynes believed that in the event of consumer spending decreasing, the Government should maintain or even increase its spending rather than cutting back. The people employed in the sectors where the Government spends its money would in turn spend their wages benefiting the local businesses who in turn spend and make investments and that gets the whole economy moving again. That way, a downward spiral of recession could be turned into an upward spiral of growth.

Alistair Darling, the Chancellor of the Exchequer, is adopting Keynes’s ideas. He said that the Government would increase its spending on large scale projects. In the long term, it means increasing the national debt as the Government has to borrow money to keep up its spending. So be it. Keynes said that Governments should think of the short term, because, as he put it, "in the long run we are all dead".

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This isn’t just any gas & electricity; this is M&S gas & electricity

Marks & Spencer announced today (15 Oct) its partnership with Scottish and Southern Energy to launch its new offering- M&S Energy. Customers can sign up in store and online through www.mandsenergy.com which goes live on the 27th of October. M&S plans to reward their customers by offering them M&S vouchers when they sign up, reduce their energy usage or opt for paperless billing. It is relying on its strong brand name to attract customers. However, since M&S is regarded more as an upmarket brand, it is unlikely that people will switch to M&S initially since it will naturally be perceived to be more expensive than its competitors.

Offering vouchers rather than a discount on the bill itself is an interesting way of making people sign up and shop at M&S since shopping at M&S is the only way to redeem the vouchers. This would lead to a rise in sales for M&S, who has seen its sales drop-M&S style, and would ensure that the money stays within the organisation. This is because if you get a £10 voucher, M&S is not actually spending the £10, but the voucher is worth £10 that can only be spent at M&S. This is different to it giving you £10 discount on your bill that it does have to spend and since you are free to spend it anywhere you choose, M&S might not benefit from it. It will be interesting to see if other stores, like Britain’s Biggest Discounter, Tesco, will join M&S to offer gas & electricity to its customers.

Further reading:
M&S Corporate Website: http://corporate.marksandspencer.com/media/press_releases/company/pressrelease_mandsenergy

M&S Sales:
http://business-easy.blogspot.com/2008/10/m-weather-forecast-bleak-in-britain.html

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Sales at Poundland and Thorntons thrive

Poundland, the single price retailer where everything costs £1, announced that its operating profit for the financial year ending March 2008 had risen by a staggering 122%. Its profits rose from £3.6 million to £8 million. This shows that consumers are abandoning traditional retailers and heading for discount stores to save money. However, the interesting thing is that Poundland claim that they have seen a 20% rise in shoppers belonging to the AB social class. AB social class consists of the upper middle class and the middle class and typical occupations include doctors, lecturers, accountants, company directors, etc. This is interesting because those belonging to this class are generally associated with shopping at stores such as M&S, John Lewis, etc. and would rarely be seen, or want to be seen, at a discount store. It seems nobody is immune to the credit crunch, not even the rich. The Times recently reported that Lakshmi Mittal, Britain’s richest man, recently saw the weight of his fortune become a little less heavier as he lost £16 billion due to the drop in the share prices.

Thorntons, the well known chocolate maker, announced that its sales for the first quarter had risen by 6.4%. In addition to its own stores, Thorntorns also has numerous franchisees and also sells to supermarkets. Sales in its own stores grew by 4.9%, while sales at franchise stores and retailers grew by 2.4% and 11% respectively. Although consumers are cutting their spending and avoiding expensive brands and switching to discount stores, they still like to treat themselves occasionally. Thorntons has a well known brand name and a reputation for quality. It has numerous products for under £5 many starting at around £1.15. Add this up and Thorntons has a product that is able to keep up its sales even when other products which are deemed a luxury suffer falling sales.

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"Pizza Hut" gets a healthy makeover

Pizza Hut, famous for its pizzas (no prizes for guessing), is launching a new healthier menu which is to include pastas. As a part of this revamp, 30 of its branches in the UK are to be re-branded to "Pasta Hut", for the time being atleast, to reiterate the point that it is going to sell pastas. This re-brand is expected to cost £100m and will last 6 years. Pizza Hut has over 700 franchises in the UK and the first one opened in 1973, over 35 years ago. They hope that this move will help put the brand a upmarket position with a sophisticated and chic atmosphere that will clearly give it an edge over its competitors.

It seems that Pizza Hut is trying to attract health conscious middle-class people affected the credit crunch who are looking to downgrade, but are still looking for a more healthier, more wholesome option. This is the only way it is going to survive the current economic climate since it is likely that many of its current customers belonging to the lower income group would be downgrading to cheaper options and hence Pizza Hut has to somehow attract new customers.

However, not a lot changes as by re-branding to Pasta Hut, it is again restricting itself to a particular product line, like it did before, with pizzas. Currently, pasta accounts for around 3% to 4% of the sales, but Pizza Hut's chief executive in Britain, Alasdair Murdoch, hopes it will account for around 10% soon.

Those willing to try it out should go to the following website http://www.pastahut.co.uk/Home

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Richard Branson need not worry

Richard Branson is under pressure. He is opposed to the proposed BA-AA deal. I don't think, he needs to worry.

First of all, its a free world. To say that this (BA+AA+Iberia alliance) will create monopoly is exaggeration.

Secondly, he needs to make Virgin Atlantic more competitive. Virgin is known for good customer services. There is always a market for good airlines. Come on Sir Richard, be competitive. A good businessman should never be afraid of competition. Differentiate (Michael Porter), create a niche market and you will reap rewards.

Further reading: http://uk.reuters.com/article/businessNews/idUKLC60329820080912