Greggs Bakery Sink or Swim?

greggGreggs reported that sales for the first quarter of the year and up until this point that sale have dropped 4.4%. They are blaming “bad weather, and under pressure consumers” as the cause for the fall in sales.

The bakery is a major feature of high streets in the United Kingdom with an estimated 1,700 stores, and still creating new outlets in order to increase sales. There are two factors which may point that Greggs is only heading down. Firstly, it may be that pasties have become increasingly less popular in a society that is concerned with body image and health. Secondly, the high rent costs of high street property which may no longer balance out with profits made from sales.

The high street has already been struggling this year, but this may the first occasion that a business of this nature may fail to survive. HMV, Jessops, Blockbuster, and Comet to name a few were all involved in sales of a technological nature, whereas Greggs is part of the food market. It is possible that competition from high street competitors such as Subway, and McDonalds are simply taking a greater percentage of customers.

Greggs have reported that they believe the issue is part of the decreased footfall in UK high streets, alongside the issue of competitors.

It is understandable that over the past few years Greggs variable costs have increased as the result of increasing basic food commodity prices. This is forcing them to raise their costs, putting further pressure on consumers. The business has been heavily pursuing deals and promotions in order to revitalise their customer base, but this is so far only proving to be a strain on their already limited profits.

The question is whether or not Greggs will survive the high street squeeze? And what will this mean for competitors in this industry?

I get the feeling that Greggs might die out, not only as a result of the competitive nature of the market, but also as a result of demand for certain foods moving elsewhere. But we will have to wait and see.

We Are All Dead

“In the long run we are all dead”

-John Maynard Keynes

Over the past couple of days I have taken a greater focus on long run aggregate supply (LRAS) and short run aggregate supply (SRAS). I quickly fell upon the arguments posed by both the Monetarists and Neo-Classicists versus those of Keynesians.

I felt quite comfortable with the monetarist and neo-classicist outlook, as it followed what I would consider as logical. The markets will manage to clear themselves, yes there will be unemployment and other economic repercussions, but in the “long term” the economy will be better off. This is on the basis that inefficient and unproductive firms will fall out of the market, whereas the firms that are stronger will maintain their position. The fall in prices will encourage investment and renewal if the industry if there is still demand within that market.

I personally agree with above, but in that sense I could also agree with Communism. Theoretically it is a very sound and strong argument, however when put into practice the results are not as comforting. It will take a long time for the market to clear itself, and during this period there will be social unrest (as a result of unemployment), lack of rational decision making (human quality), and depending on the case an economic standstill until the market forces begin moving again. There is also the issue of downward inflexible prices (sticky) which means that suppliers will wait out the market and won’t drop their prices, thereby further delaying the clearing process.

With continued unemployment there is almost an inevitable drop-off in aggregate demand, so the overall sight of the economy by leaving the market forces to clear it does not seem too bright.

Keynes would argue that it is essential to “prop up” demand through government spending, with this it is important to note that this is the only point at which Keynes argues that government spending is vital (he is a free marketer). Keynes would further mention the need to keep maximum employment, ensuring that there is effective demand which would push aggregate demand along the Keynesian LRAS curve.

As usual with economic theory it is difficult to argue which one is in a sense “correct”, as we tend to always end up intervening. This is a result of the nature of government and democracy, as it is unlikely a party will be voted into power during the market clearing period.

On most occasions, I take a monetarist point of view, but at this point I would prefer to take the Keynesian stance. This is as a result for the overall benefit of the people functioning in the economy, as economics mainly seeks to maximize welfare. A true monetarist would argue that in the long term the market is not better off as unproductive and inefficient firms have been allowed to survive.

This brings me on to an issue that seems to almost be at the heart of all economic theory, and one I find myself running into often. It is the issue of human frailty, and furthermore our inability to truly consider the long term.

Depressing Drugs?

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It looks like a certain pharmaceutical company has been caught being rather naughty once again. GlaxoSmithKline is currently being investigated for paying other drug companies to decrease their production of substitute drugs for their profitable antidepressant. This particular drug is known as “Seroxat” and GSK has been caught before with previous “pay-for-delay” agreements.

It is clear that if these allegations are true, that this is a flawless example of monopoly abuse. GSK is the UK’s largest pharmaceutical company and is a key supplier for the National Health Service. The investigation is currently being investigated by the Office of Fair Trading.

There is the potential for this to cause a domino effect, with the Office of Fair Trading beginning to crackdown on various agreements between competitors in the pharmaceutical market. There is a stereotype that pharmaceutical companies are “evil” conglomerates that over price drugs in order to keep their profit margin, and people ill.

This poses a serious issue for the NHS and taxpayers, if this becomes common practice for large pharmaceutical companies then the taxpayers will bear the burden. I would argue that it is unfair to stifle the competitiveness of the market; however it is clear that large companies that innovate will not be rewarded if a competitor can come in and recreate their drug. This is a very well established issue in the pharmaceutical industry as the question of how competitive? has gone on for a while.

The patent for Seroxat ended in 2004, and this led to the flooding of the market with cheaper substitutes. This obviously benefits consumers, but GSK then take a hit to their profits. It is arguable that the 10 year period of the patent was enough to settle the costs of research and development, and add to GSK’s already existing abnormal profit. However, it is clear that large pharmaceutical companies do not want to re-enter a R&D cycle every five years.

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If it were to be revealed that GSK actively pursued “pay-for-delay” methods, then I believe it is only fair for them to be penalised for these actions. Furthermore, a possible alternative for the pharmaceutical industry would be to introduce a system which regulates the introduction of substitute products into the market. There remains the issue of whether to stifle the competitiveness of the firm, in order to create savings for the NHS and as a result the taxpayer; or keep the market deregulated and encourage the firms to innovate thereby advancing medicine to a higher degree.

GlaxoSmithKline released a press statement stating:

“GSK supports fair competition and we very strongly believe that we acted within the law,”

Now, I hate to point the obvious, and the allegations have not been proven. But I personally feel that GSK is not too certain at all. Two European commissions had already investigated the firm, so it is evident that there is increasing suspicion concerning the firm’s behaviour.

Competition in the pharmaceutical industry is already difficult with extremely high barriers to entry. This is as a result of the expertise required for drug innovation, and developments. There is also the required “capital” machinery for testing and production which small firms cannot attain.

It is clear that in the existing market that GSK is not a “pure monopoly” there is an abundance of other British pharmaceutical companies, but they are not competing at the same level as GSK. The main rivals of GSK are Pfizer, Novartis, and Sanofi. Due to this and several other factors I would argue that GSK is partaking in an oligopoly.

The  argument forms as there several key indicators. Primarily in the pharmaceutical industry there is an ever increasing amount of asymmetric competition, as the technology and science behind the drugs produced becomes more complex the more complicated it is for the average consumer to truly “understand” the product.

A key factor is the existence of many small firms, but there are more than two large firms which have a significant degree of market power. In this case it can be identified as GSK, Pfizer, etc. The market power of the central four firms, dictates the relationship between them and the various aspects of market behaviour.

Moreover, there is the existence of personal decision making, and the factor that the four major firms are price setters. This identifies the existence of market power, in the short term (5-10 years), whereas in the long term (10 years +) firms must create new products to gain the market power edge. However there is still the factor of inter-dependency and this is where there is the game theory aspect in the pharmaceutics market structure. The firms will not collude with each other, but will consider their actions, and possible repercussions.

Finally, there is product differentiation. For a given period of time one company may have an individual product which gives it greater market power. However, after that given period of time substitutes will emerge in the market and reduce the significance of the market power.

These three key identifiers clearly correlate with the behaviour of GlaxoSmithKline, and the other major pharmaceutical companies. Which is why it is notable the GSK is being investigated for breaching competition standards; it would be in their interest to maintain market power and to create an environment in which they are more of a monopoly.

I personally believe that competition is what drives the pharmaceutical industry; this keeps new products coming out and forcing firms into R&D cycles. It is still important to ensure that the firms can compete without the burdensome bureaucracy of regulation. This is why I believe that the current model is benefiting the consumer as much as possible, while maintaining the firm’s desire for profit.

Milton Friedman in his book “Capitalism And Freedom” considers that this form of market power is the lesser of three evils in which the other possibilities are government backed monopoly, or a private monopoly. It is clear that there are drawbacks in this market structure for consumers, but does that not apply to most?

It will be interesting to see how GSK will continue to respond to these allegations, and how market power may shift over time to the largest firm Pfizer.

Fiscal Policy Basics

Government Spending

Discretionary Spending: The government chooses to do it.

Automatic Spending/Stabiliser: The government has no choice to pay, such as interest on debt, and benefits (e.g. law insures unemployment benefits).

With benefits they are automatic at any given moment, they become discretionary when the government changes policy, and creates new law. This would affect the level of automatic spending.

Taxation

Direct: It is taxation on income, which an individual is obliged to pay, such as income tax.

Indirect: This is done on the basis of consumption, the more you consume the more tax you pay. So in a sense the individual “chooses” to pay it. This can take the form of VAT, sales tax, etc.

The main factors can be classified as injections and withdrawals

Injections

  • Government Spending
  • Exports
  • Loans (increased amount of investing)

Withdrawals

  • Tax (indirect or direct)
  • Imports
  • Savings (ISA, IISA, etc.)

Expansionary Fiscal Policy

This is fiscal policy which is designed to expand the output of an economy. This can be done through increasing aggregate demand, or increasing aggregate supply.

The simplest manner of achieving this is from “spending more, taxing less”. Spending can take the form of government spending, or increasing loans and investments. Increasing exports can also be seen as expansionary.

It is necessary to keep factors such as tax, imports, and savings to a minimum to insure increased economic activity.

Contractionary Fiscal Policy

This is a fiscal policy which is designed to reduce the output of an economy. This is in order to “cool-off” an economy that is overheating (i.e. too much economic activity, pushing inflation rate over a sustainable level).

The simplest manner to do this would be to cut government spending, raise interest rates (make borrowing more difficult), and decrease exports. This would lead to a decline in economic activity. More withdrawals can also be made through encouraging personal savings, increasing tax, and imports.

An example of expansionary occurring would be an outwards shift in aggregate demand, and an example of contractionary occurring would be an inwards shift in aggregate demand. This would determine price levels, and the output of an economy.

The Bitcoin

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If you are not living under a rock you may have already heard and read about the currency of the 21st century: Bitcoin.

For those who don’t know, Bitcoin is a virtual currency. It is basically a protocol based on a block chain made of cryptographically-signed transactions. Sounds complicated, well it is.

Up until this point in time I have refused to comment on the validity and effectiveness of Bitcoin as a virtual currency. I have left it to caveats in economic discussion with fellow students, but now there is a growing fear that Bitcoin might crash.

Overtime the intention is that there will be a limited number of Bitcoins after all the blocks are “found” and miners will only receive transaction fees rather than “newly-minted” Bitcoins. At times I feel like I am discussing currency in a video game, but this is very real.

Just today the value of Bitcoins reached over $266 (real life dollars) and then proceeded to plummet to $70 and then “stabilised” (I am using that word loosely) at approximately $105. So far it is sounding very secure and an appropriate form of investment…

Many bloggers and journalists alike are all throwing their own argument out there whether or not it is a bubble or if it can sustain a high price in the long run. I do believe in the end there may be some true value to the Bitcoin but I don’t believe that it will replace our current forms of currency.

Bitcoin boasts that it is a form of currency that is immune to inflation, bank defaults, sovereign control, or confiscation. While that is all well and good it introduces the question of its stability and its ability to withstand the short sightedness of individual consumers. This is as a result of it being a true free market in the sense that demand and supply are the only factors in consideration to its pricing.

I have friends who have already joined the hype and bought themselves Bitcoins, but I will not be joining them anytime soon. For now I will remain to be cynical and speculative, but feel free to share your opinion.

Also, just as a side note, since when has Business Insider started to use Reddit as a credible source of information?