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.

The Apprentice on BBC iPlayer

BizEasy

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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BizEasy

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.

BizEasy

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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BizEasy

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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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.

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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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Drop in oil prices, but don't be happy just yet.

Prices of crude oil dropped from a peak of $147 a barrel in July to below $60 a barrel today. This drop in oil prices has sparked off a price war between, you guessed it, UK’s top four supermarkets-Tesco, Asda, Sainsbury’s and Morrisons. After trying to fill up cash strapped consumer’s shopping carts, they are now trying to fill up their cars. Prices of unleaded petrol fell to just under £1 per litre. The recent fall in the prices is due to the fear that the sharp increase in prices is likely to lead to a fall in demand and hence a fall in revenue.

However, this drop in prices is likely to be short lived. This is because OPEC (Organisation of Petroleum Exporting Countries), a cartel of oil producing nations, announced in the wake of the recent drop in prices that they would cut the production of oil by 1.5 million barrels a day by next month since they fear that their revenue will decrease because of the drop in oil prices. This, they hope, will lead to a decrease in supply and since the demand of petrol is likely to go up due to the decrease in prices, it will ultimately lead to an increase in the price of oil, which some experts estimate to be around $80 to $100 per barrel.

Although it is immoral and unethical, the oil producing nations, in a way, have made a smart move by coming together and working for a common interest, i.e., to make as much money as possible, rather than against each other. Working together ensures that they can control the amount of supply of oil and hence also the price we pay. Oil is by all means almost a necessity which means that the demand is price inelastic; this means that the change in price does not have a huge impact on the level of demand. People still have to fill up their cars to go from A to B, transportation firms still have to fill up their trucks to transport goods and so do buses, trains and airplanes. Also, petrol and diesel have no real alternatives.

However, in a recession, demand is likely to be price elastic, which means that demand is sensitive to the price. So, the move to cut production may lead to a fall in supply, but the increase in prices might also lead to a fall in demand, which would give counterproductive results to what OPEC hope.

Cartels formed by companies are against the law, otherwise we would not have competitive prices and certainly no price wars between supermarkets since they would be busy colluding with each other and fixing prices.

The value of Pound (£) has been falling against the Dollar ($). The benefit of this is that it makes UK businesses very competitive in foreign markets and allows them to import their goods at a competitive price. The flip side of this is that it increases the cost of importing raw materials of which oil is a part. It is likely that even this will increase the price of petrol and diesel we pay at the fuel station.

So, there is no reason to be happy about the drop in fuel prices since it is only temporary and more of a Christmas offer than a real deal.

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Food prices rise by 8.3%

It was reported this week by the BBC that food prices have risen by 8.3% since January this year. This is based on the figures from a survey carried out by Verdict Research specifically for the BBC.
A packet of ham, a pack of four croissants and a medium sized chicken were among the seven products whose individual prices had risen by more then 40%. Among the 13 categories into which all the products were classified, Meat and Fish rose the highest, by 22.9%, followed by Store-cupboard items and Fresh Fruits and Vegetables which rose by 15% & 14.7% respectively.
Inflation is also affecting the sales of organic produce which fell by 8.1% as compared to last year according to the analysts TNS. Families with low income are unable to afford the high price of organic produce and more people are increasingly switching to buying supermarket own-brand products.

Supermarket Sainsbury's believes that most people no longer perceive supermarket own-brand products in a negative manner nor are they embarrassed of buying them and are beginning shift to buying own-brand products to help cuts their costs. According to Marketing Week, Sainsbury's research showed that a minority of the people believed that the brand they bought reflected on them as a person. To make the most of the current situation, Sainsbury's launched an ad campaign on the 5th of September called “Switch & Save” to encourage their customers to buy the supermarket's own-brand products. The link to watch the new Sainsbury's advertisement is given below.

http://news.bbc.co.uk/1/hi/business/7597703.stm

http://www.marketingweek.co.uk/cgi-bin/item.cgi?id=62302&d=254&h=5&f=3

http://www.youtube.com/watch?v=6u-P9C2obec