In this week’s Commercial Awareness update, we discuss the state of the UK economy, Carillion’s pension shortfall, Netflix’s “beautiful” Q4, Starbucks’ not so beautiful Q4 and Arsenal sign a cryptocurrency deal.
Strong UK growth
New figures from the Office for National Statistics (ONS) show the British economy grew more than expected in the fourth quarter of 2017. Despite continuing Brexit concerns, Gross Domestic Product (GDP) grew 0.5% in the final three months of last year - above the 0.4% forecast. Service sector growth continues to be the predominant driver of the strong performance, and now accounts for 80% of UK output. The UK is benefiting from strengthening global growth and, surprisingly to many, has been able to keep up with other G7 members, including Japan and Italy. This may not be set to last though, as the International Monetary Fund (IMF) remains sceptical about the UK’s future growth. It has upgraded global growth by 0.2% to 3.9% in 2018, but expects Britain to lag behind other advanced economies, including Germany and France, in both 2018 and 2019.
Regardless of the new forecasts, the news of stronger than expected growth pushed the pound to a new post-Brexit high of $1.42. As the pound has recovered, the dollar has weakened compared to other global currencies and now stands at an 18 month low. Last week, at the World Economic Forum in Davos, US Treasury Secretary Steven Mnuchin suggested he welcomes a weaker dollar, as it will encourage investment into America. In President Trump’s first year in office, economic figures have generally been positive, with the markets reaching record highs and unemployment dropping. However, figures recently announced put US economic growth at 2.6% for the last quarter, which missed the target of 3%.
Questions to ask yourself… Could the weak dollar and lower than predicted growth be signs that the American economy isn’t as strong under Trump as many suggest?
Companies to watch
As an investigation by the Work and Pensions Committee into the collapse of construction firm Carillion continues, MPs have revealed it “wriggled out” of payments into its pension scheme. Despite the scheme being in deficit, bosses decided to defer last year’s contributions to 2019 in a bid to keep finances healthy. It’s believed that the pension scheme has a deficit of around £990 million and the pension trustees were “kept in the dark” about the company’s financial troubles until late 2017. However, Frank Field, the chairman of the Work and Pensions Committee, has criticised both the trustees and the regulator that allowed the firm to defer pension payments but continued to pay more than £70 million in annual dividends. The firm has also been criticised for bonus payments to senior leadership.
It’s important to think about the knock-on effect to the British economy from such a large company ceasing to operate. Carillion owns a number of government contracts, including responsibility for the upkeep of schools, prisons and building work surrounding the HS2 train line. Insurers have said they will be paying more than £30 million to businesses owed money by Carillion.
Last week, content streaming provider Netflix announced its fourth quarter earnings for 2017, calling it a “beautiful Q4”. It added 24 million new members (two million more than Wall Street had predicted) and grew its revenue by 36% in 2017 - it stands at $11.6 billion for the year. The expansion of the service has taken the subscriber numbers past 117.5 million across over 190 countries.
The latest announcement increased Netflix’s market capitalisation to more than $100 billion and shares jumped 9% - this comes on the back of a successful 2017 for Netflix, with its share price rising 53%. Netflix plans to spend $8 billion on content in 2018 to stay ahead of its closest competitors in the market, Amazon and Disney.
Starbucks’ shares fell last week after it announced its fourth quarter results in 2017 were lower than expected. In the three month period, sales totalled $6.1 billion, which was a 6% year on year increase, but less than the $6.18 billion Wall Street expected. It’s not a new belief that the coffee market in the US is saturated, but these latest figures suggest the global market is not as strong for Starbucks. Revenues grew 2% in America and 6% in China - a market Starbucks has worked on expanding in recent years.
Shares fell 4.6% following the announcement, with many potential investors worried about the long-term outlook for the company. Studies suggest more people are drinking hot drinks at home, especially with the increase in household coffee makers. When consumers do go out for a drink, there’s more competition in the market, with a recent rise in independent coffee shops in both America and the UK.
Questions to ask yourself… Should there be more regulation on company’s pension scheme? What can Starbucks do to grow their revenues in their core markets?
Arsenal signs cryptocurrency deal
At a time when many fans would be hoping the club was signing new players, Arsenal hit the headlines last week after becoming the first major sports team to sign a sponsorship deal with a cryptocurrency provider. US gaming firm CashBet will be promoting their initial coin offering (ICO) at Arsenal home games at the Emirates Stadium. The deal comes as many financial authorities and regulators are warning customers about the risks associated with cryptocurrencies. The Financial Conduct Authority (FCA) has said it is closely watching ICOs and will increase regulation if it is required.
Professional services firm EY analysed the $3.7 billion raised from ICOs last year and has warned of the risks of cybercrime. CashBet plans to raise between $40 million and $70 million from the sale of CashBet Coins tokens, which will be offered at 50 cents a token - they can be used on CashBet’s gambling apps.
Question to ask yourself… Should Arsenal be promoting cryptocurrency products?