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In this week’s Commercial Awareness update we discuss Brexit as the negotiations begin, interest rates, Amazon acquire supermarket Whole Foods, online advertising and which country will be the first cashless society?
Brexit negotiations begin
After triggering Article 50 of the Lisbon Treaty back in March, today is the day Britain will start negotiating a deal with the remaining 27 member states. Brexit Secretary David Davis is in Brussels today to meet EU chief negotiator Michel Barnier. The first day will focus on procedure, but in the coming months the status of EU nationals living in Britain, the UK’s divorce bill, the Northern Ireland border and ongoing trade agreements will be key topics of discussion.
The start of the negotiations has come at a bad time for the UK government, with Theresa May still trying to thrash out a deal to form a workable government and pass the Queen’s speech through Parliament. Many suggest that without a strong majority, May won’t be able to push for the hard Brexit she had set out before the election. Chancellor Philip Hammond has already suggested that after the two years of negotiation, there should be a transition period for British business to get accustomed to the post-EU age, as well as ensuring they can access the top foreign talent. According to the British Chambers of Commerce, Theresa May’s new government is ‘listening a lot harder’ to business, who tend to want a softer Brexit, with good access to the single market.
In other Brexit-related news, the EU has begun taking steps to move London’s lucrative euro clearing business away from the capital. The EU has planned to redraft legislation to give itself more power over businesses which impact finance in the EU, including the London Clearing House. Clearing is a process where a middleman will deal with both the buyer and seller during financial contracts, rather than them dealing with each other. The clearing house makes the business deal easier to complete, and takes on the risk of one side not paying up – buyers and sellers will keep money in an account with the clearing house just in case of problems with payment. The London Clearing House is very dominant in the market and clears around €900 billion of euro-denominated contracts per day. Losing control of this and having it potentially relocated is likely to damage the City and business is encouraging the government to do what it can to maintain London’s position as a market leader.
Questions to ask yourself… Is the Government going into Brexit negotiations in a weak position? What does a good deal look like for Britain?
It was an interesting week with regards to interest rates on both sides of the Atlantic, as the US Federal Reserve (the Fed) raised short term interest rates from 1% to 1.25%. On the back of a record run of job growth in the US and as confidence in the economy increases, this new increase puts rates at their highest level since the financial crisis of 2008. The original plan will see rates rise further over the next twelve months, but many experts believe this course of action could harm the fragile recovery – higher rates can lead to consumers spending less. In the same announcement, the US Federal Reserve also plans to slowly reduce their bond holding. During the financial crisis, the Fed acquired $4.5 trillion worth of bonds, trying to kickstart activity in the economy – they are now keen to start offloading their stocks.
In the UK, the Bank of England voted once again to keep interest rates at the record low of 0.25%, but the vote was closer than many expected. Three members of the Monetary Policy Committee voted to raise interest rates, but five wanted to keep them the same. While this meant nothing changed, the markets did react to the surprise vote. When the markets opened earlier today, banking shares were up on the back of the news – with a rise in rates now seen as more likely, banks will have a better outlook for the future, as they would be able to make more money on lending if rates rose.
Questions to ask yourself… Should the Bank of England raise interest rates? Is it bad for the economy for the government to hold large quantities of bonds?
Amazon buy Whole Foods
US retail giant Amazon has announced it will buy upmarket supermarket Whole Foods in a deal worth $13.7 billion. Amazon will buy the company’s shares for $42 each – at a 27% premium on the share price last week. Whole Foods has over 800 stores across America, Canada and the UK, making it Amazon’s biggest move into the grocery market to date. Recently, Whole Foods has tried to expand their market share by diversifying their offering, but it’s yet to show widespread success.
Last year, Amazon expanded their deal with British supermarket Morrisons, enabling customers to order their products online through the Amazon Prime Now platform. Leading supermarkets have shown concern about Amazon’s increasing presence in the market, so it will be interesting to see how they react to this news.
Reports over the weekend suggest Sainsbury’s is close to a deal to buy convenience store chain Nisa. Nisa buys and distributes for 2,500 independent stores across the UK and has an annual turnover of £1.46 billion. In morning trading today, Sainsbury’s shares jumped 2% on the news, as it now looks likely they will complete the deal instead of rival Co-op. Sainsbury’s is said to value Nisa at £130 million, but the offer will need the support of 50% of their shopkeeper members.
Questions to ask yourself… Can Amazon gain a bigger market share in the UK than the likes of Sainsbury’s and Tesco? Does Whole Foods need a change of image to attract more customers?
Online advertising to overtake television spend
Advertising agency Zenith has said online advertising will overtake television later this year as the world’s biggest medium. In 2017, online ads are expected to account for 37% of the total, but it isn’t all good news for digital agencies, as the rate of growth is expected to slow over the next two years. Last year the industry in the UK grew by 9.6%, but this year it could be as low as 0.9% - the uncertainty surrounding the election and Brexit have been implicated as a cause for this slowdown.
However, things are set to pick up in 2018 with key events leading to extra spend. The Winter Olympics and Football World Cup are amongst the events set to stimulate spending growth. Within digital media, online video is currently growing at the quickest rate, while social media is also becoming increasing popular for advertisers.
Question to ask yourself… Is there a future for television advertising?
And finally… Sweden moving to cashless society?
New figures released last week suggest Sweden is the closest economy to becoming cashless, with 80% of transactions being made by card or mobile app. It’s predicted that in five years the Nordic country will be pretty much cashless and many banks have already stopped holding cash and taking cash deposits. The move towards digital forms of payment has become so prevalent that a number of churches have started taking donations via a mobile app.
Questions to ask yourself… Are there potential problems with moving to a completely cashless society?