Introduction to Managerial Economics
Managerial economics plays a crucial role as it defines the application of economic theory. It is very effective in determining the methodology of decision making. In the following report, Carrefour, a UK based retailer chain will be taken for discussion over conditions of demand and supply will be presented along with pricing policies. The market structure will be elaborated with application of few theories and models for better understanding. Determining the risk factor will be a part of study and its impact over strategies will be presented and finally, role of ethics will be studied in process of decision making with respect to the stated company.
According to the traditional economic theory, resources exchange in a free market and transactions occurs instantly at free prices. The value statement says that company aims to offer wide range of quality goods at best possible prices every day but on a critical note, this concept cannot be applied in everyday life (Jacobs and Wallis 2010). It is not feasible for the organization to change prices for its product on every day basis. There is a multitude of buyers and sellers in the economy. The traders carries a perfect knowledge of potential outcomes and they trade in their long term self-interest. Carrefour is standing parallel to all other global retailers (Kirby, Meaning and Warren 2014). Its core purpose is communicated in terms of the interests and in needs of different stakeholders in its value statement. Company's value statement is highly concentrated towards the needs of its customers. They want to make revenue and sales by focusing on needs of people. Company consider its employees as their major resources (Pesaran and Pesaran, 2010). It expect to train their workers efficiently so that they can fulfil their needs better. The aim is to develop a long term sustainable business by giving respect to its commitments. As per the traditional theory, traders trade in the market for their long term self-interest (Sentance, Taylor and Wieladek, 2012). On the other side company desires to achieve sustainable long term business by fulfilling its commitments which is not again feasible. The reason behind the fact is that company cannot serve long for its long term commitments if they perform business for its self-interests. Further the market conditions changes from time to time and a firm needs to modify its business accordingly (Jacobs and Wallis 2010).
UK retail industry is composed of large store chains, department stores, independent stores, virtual stores and many more. It employs over 10% of the UK workforce. It accounts for more than 5% of the value generated by the UK economy each year. Major companies are part of this industry such as Tesco, Asda. Marks & Spencer’s, Sainsbury etc. (Corporate report, UK retail industry, 2014). It is a vital sector which highly contributes towards the economy of UK. It offers a link between production and consumption at a simple level for high number of consumer goods and services. The industry is also a significant employer especially in younger crowd. The sector is a leader in innovation and for this thing majority of sector are responsible (Retail UK economics, 2014). Phenomenon such as e-commerce and self-service are improving the shopping experience across the world. Retail comprises of 11% of global internet retail sales and the economy is having highest spend per head for e-commerce of any country (The retail industry: statistics and policy, 2013). The international brands of UK act as magnet for inward investment. It is believed that London is the shopping capital of the world. The industry is diverse and carries huge range of potential opportunities related to international growth (Caravle, 2002).
Today the goods are available to the consumers through all available shopping channels due to Omni and multi-channel retailing. Through technology consumers can purchase anything, anywhere and at any time. Under this area, digital malls are the most significant new type of shopping channels to be emerged in the recent years (Choudhury and Hoque, 2004). Companies by using a blended approach and by making full use of digital and non-digital channels are growing their business at home and overseas. Any new business is having the opportunity to grow into international brands within a quick span of time due to rise of omni-channel shopping and e-commerce (Henderson, 2014). Presently UK is standing at the platform of multi-channel shopping. One of the fastest growing sub-sector of online retailing is online sales. More and more customers are preferring to buy products through online mode. They find this approach easier and cheaper than traditional methods. The rate of online customer is expected to be more than 5 million in the next 2 years (Himmelberg, Mayer and Sinai, 2005).
The attractiveness of UK retail market is also evident from the fact that industry faced a positive growth in 2013 despite of the reason that economic conditions in the country are very challenging. Spending habits of customers always remain affected by the economic recession (Venugopal, 2006). During the period of 2013, it was believed that economic recession is finally coming to end or it was reflected the worst of recession is in the past. Improved economic prospectus has enhanced the consumers’ confidence (Andrés and Arce, 2012). It is evident from the fact that all macroeconomic indicators have improved such GDP, employment and disposable income figures. All these indicators have contributed to a slow increase in consumer confidence which has resulted in gradual recovery of consumer spending. A positive economic outlook make continues efforts to signify that UK economic is improving (Ball, 2013). Carrefour can have lot of scope in grocery retailing. Retailers in grocery registered strongest growth in UK and mostly driven by modern grocery retailers. The major formats which are gaining expansion includes convenience stores, discounters and online grocery retailing (Corporate report, UK retail industry, 2014)
Apart from all this, government of UK is also making big plans to expand the UK retail industry. It was announced that UK Trade & Investment will offer strategic support to the retail sector (Retail UK economics, 2014). The support is made in the direction of helping the UK retail sector to gain business from other nations. It is concentrating on reinforcing UK as the location of choice for investors. Retail sector has been identified as the crucial part of these plans for growth. Government is encouraging international growth and has set a target of getting 100,000 companies exporting by 2020. It will double the exports to £1 trillion (The retail industry: statistics and policy, 2013).
The action plans are helping the omni channel retailers in accessing international markers. The government will help the firms in solving the issues related with market development, market access and supply chain management (Henderson, 2014). Foreign direct investment is welcomed highly in order to improve the retailing conditions. Government wants UK to become number one destination for new inward FDI in Europe. Hence these are the opportunities which are to be en cashed by the company in order to enter the UK retail market. All they have to do is to analyse the big retail trends associated with the company.
Carrefour entered into Greece in the year 1991 by investing in the continent hypermarket in the nation. In 1993, the retailer entered the segment of food retail by acquiring food supermarket chains owned by the local retailer Marinopoulos. In June 2012, company took an exit from Greece after selling its stake to Marinopoulos (Sentance, Taylor and Wieladek, 2012). On exit, it took a non-cash charge of €220 million. It has operated in Greece for more than 21 years and it was its second largest market in Europe in the context of number of stores.
There were many key issues that led Carrefour to sell its 50% stake in its supermarket chain in Greece. In 1981 Greece became the 12th member of European Union. It became the member of Eurozone in 2001 and since then euro has been the currency of Greece (Jacobs and Wallis, 2010). It borrowed funds from other EU countries and then several investments were made by different companies and banks in the country. As per the economic experts debt was used to finance economically un-viable projects. The economy of the nation was in trouble in 2009, due to global economic fall-down (Kirby, Meaning and Warren 2014). It was a very weak domestic economy because of high government expenditure, high debts, high debt to GDP ratio, high debt levels etc.
Further consumer spending in Greece also declined in dramatic manner in 2010. Job losses and compressing taxes constrained Greek customers from spending funds. In the year 2011, the retail food segment was slumped by 10% in the country (Pesaran and Pesaran, 2010). Traditionally Greek customers were brand conscious but economic instability strained them to change their shopping behaviour and to seek for low prices goods. Consumer buying was highly influenced from the price of goods. They started preferring private label products which provided high quality at cheaper prices (Sentance, Taylor and Wieladek, 2012). The economic crisis in Greece forced the people to prioritize their needs. The non-grocery retail segment was affected due to increase in demand for food and grocery goods. The demand was flat in the segment because consumers were restricted from unessential spending and also there was tough competition (Corporate report, UK retail industry, 2014). Consumers opted to purchase essential products from the retailers offering the lowest price.
The supply and demand is an economic model for determination of price in a market. It states that in competitive market conditions, the unit price for a specific good will vary until it settles at a point where quantity demanded by consumers equals the quantity supplied by producers (Caravle, 2002). There are four basic laws of supply and demand which are as follows:
- If demand increases, supply remain unchanged. In these situation, a shortage occurs driving towards high equilibrium price (The retail industry: statistics and policy, 2013).
- If demand decreases, supply remain unchanged and there is lower equilibrium price
- If supply increases and demand remain unchanged, then surplus arises resulting in low equilibrium price (Choudhury and Hoque, 2004).
- If demand remain unchanged and supply decreases, then shortage occurs ending in high equilibrium price.
According to law of demand, the demand will be low in case of high prices if all other factors remain consonant. The quantity of goods demanded will increase if the price of goods falls. According to the law of supply, suppliers will supply more goods if price of given goods increases (Himmelberg, Mayer and Sinai, 2005). Selling more goods at high prices will result in more revenue. The theory of the consumer behaviour can be understand by three aspects which includes object, constraints and decision variable. Object is related with satisfaction, constraints means limited resources such as income and decision variable means the quantity purchased by making use of limited resources (Venugopal, 2006). The behaviour can be understood by two approaches cardinal utility and ordinal utility. The concept of cardinal utility defines that the measurement of utility of different commodities is possible. Total utility is the sum of the utilities derive from all the units of a commodity consumed. Greater will be the total utility if more of a commodity consumed per unit of time (Andrés and Arce, 2012). Total utility will reach to a certain point which is called as saturation point. Beyond this point there is no satisfaction from the consumption. Concept of ordinal utility is expressed by indifference curve. According to this concept, consumers can make comparison between different combinations of goods within the restrictions of his income (Ball, 2013). Carrefour who had been the leading hypermarket operator in Greece started feeling the impact of shift in consumer behaviour. It was evident from the fact that its sales and profits started falling after 2008. Company was struggling with issues like liquidity and late payments to suppliers. Suppliers in turn refused to supply the required good. Due to this all its hypermarkets became dull and many inventory problems were raised (The retail industry: statistics and policy, 2013). The majority of products went out of stock. Business turnover was dropped by 15% in the first quarter of 2012.
Company was afraid of the deteriorating economic conditions of Greece. Greece economy placed many economic challenges in front of the company. The management was finding it very difficult to perform business operations in a nation where demand has fallen because of debt crisis (Jacobs and Wallis 2010). In the midst of all these economic issues, the elections of 2012 played a very significant role in deciding the future of Greece and its position in the Eurozone. The future in euro was at risk for the company. The political conditions in Greece were not favouring the business as the fate of Greece was to be decided in the pivotal elections. The issue was related with deciding whether Greece stays in the euro zone or not (Kirby, Meaning and Warren 2014). This strategic move of Carrefour was regarded as an effort to cut the knot with a nation that has been identified as sole loss making market. So these were the major reasons which led Carrefour to sale 50% stake to its partner Carrefour Mihalopoulos in Greece.
The purpose of the study was to apply the managerial economic concepts and techniques to the retail industry. From the above study it can be concluded that managerial economics is a stringent branch of study. It requires lot of concentration and focus on every economic aspects. Carrefour withdraw its operation from Greece because of financial crisis in economy. The demand in the nation was flat in the segment because consumers were restricted from unessential spending and also there was tough competition. There was a heavy shift in the consumer behaviour. The uncertainty about the Euro currency was also a major economic challenge. On the contrary, company is having lot of retail opportunities in UK. The action plan established by government is mainly towards the development of retail sector. UK Trade & Investment will offer strategic support to the retail sector.
- Andrés, J. and Arce, O., 2012. Banking Competition, Housing Prices and Macroeconomic Stability. The Economic Journal. 122(565). pp. 1346-1372.
- Ball, M., 2013. Housing policy and economic power: the political economy of owner occupation. Routledge.
- Caravle, G., 2002. Equilibrium and Economic Theory. Routledge.
- Choudhury, A. M. and Hoque, Z. M., 2004. Ethics and economic theory. International Journal of Social Economics. 31(8). pp.790 – 807.
- Corporate report, UK retail industry, 2014. [Online]. Available through <https://www.gov.uk/government/publications/uk-retail-industry-international-action-plan/uk-retail-industry-international-action-plan> [Accessed on 6th April 2015]
- Henderson, J. V. , 2014. Economic theory and the cities. Academic Press.
- Himmelberg, C., Mayer, C. and Sinai, T., 2005. Assessing high house prices: Bubbles, fundamentals, and misperceptions. National Bureau of Economic Research.
- Jacobs, J. P., & Wallis, K. F. 2010. Cointegration, long-run structural modelling and weak exogeneity: Two models of the UK economy. Journal of Econometrics, 158(1), pp. 108-116.
- Kirby, S., Meaning, J., & Warren, J. 2014. Prospects for the UK Economy.National Institute Economic Review, 229(1), pp. F40-F64.