In this week’s Commercial Awareness update, we discuss Trump’s tariff war, how the “Beast from the East” hit the economy, Carpetright’s profit warning, Spotify’s IPO and why Lego made too many bricks in 2017.
Will there be a tariff war?
Donald Trump has caused a potential trade war this week, after announcing plans to impose tariffs on imports of steel and aluminum from abroad. Trump is expected to sign the order this week which will introduce a 25% tariff on steel and 10% on aluminum, as well as a possible tariff on EU-made cars. The President points towards the “$800 billion yearly trade deficit because of [America’s] very stupid trade deals” as the key motivator behind the move. America currently imports four times the amount of steel than it exports and the industry in the US is faltering. In comparison, last year China produced nearly half the world’s supply of steel.
In response to Trump’s plan, the World Trade Organisation warn that this would lead to a “deep recession” across the world. Both the EU and China are planning retaliation measures if Trump does go ahead with his tariff reform - the EU plan to place a tariff on American manufactured cars, as well as other imports from the US. Global markets have dipped as a result of the announcement with investors worried about the implications for restrictions on trade. The FTSE 100 dropped 2.6% last week, largely due to these worries. However, since the announcement, Trump has faced a backlash from Republicans and many large corporations, so there’s increasing doubt he will be able to push through with this reform.
Questions to ask yourself… What are the possible benefits of imposing tariffs on imports? Which industries will be worse affected by a 25% tariff on steel?
Economy hit by weather
The weather system known in the press as the “Beast from the East” caused schools to close and travel to be disrupted last week, but it also had a substantial impact on the economy - in fact experts believe it will be the most costly weather since Christmas 2010. They predict that GDP growth could be reduced by 0.1% in Q1 of 2018 as a result, which doesn’t sound significant, but equates to approximately a £1 billion loss each day. With limited train services and inaccessible roads, the construction industry was impacted the most - they could stand to lose £2 billion over the worst three days last week because materials weren’t transported and work stopped. However, it isn’t just construction, the hospitality and retail sectors face a difficult time when weather conditions worsen. Rather than shopping or going to restaurants, people are more likely to stay at home.
The Centre for Economics and Business Research suggests output fell 20% across the whole economy, despite most people being able to work from home as well as purchase groceries and other items online. However, not every sector suffered during the cold snap, with the energy sector being boosted by 20%. National Grid actually issued a warning on Thursday stating the UK may not have enough gas to meet public demand late last week - the first time this sort of warning has been issued since 2010.
Questions to ask yourself… Should the UK do more to deal with the impact of cold weather? How can businesses protect themselves from adverse weather affecting productivity?
Companies to watch
Spotify looks set to list on the New York Stock Exchange as they make the move to offer an Initial Public Offering (IPO). The Swedish music streaming services could be valued at more than $20 billion, despite the firm currently losing money. The service has 159 million monthly active users, with 71 million of those paying for the premium service. They made an annual revenue of just under $5 million last year, but this equated to a $1.5 billion loss. The loss is largely due to the licenses Spotify pays to record labels for their library of music - at the moment it pays for more than it can afford to ensure the customer experience is the best it possibly can be, encouraging more subscribers.
Spotify faces significant competition in the music streaming market, especially from Apple Music. Even though they have half the number of subscribers as Spotify, they don’t need to be profitable for Apple to be profitable overall - Spotify’s music streaming service does.
Household retailer Carpetright surprised the markets this week by issuing its second profit warning of 2018 and announced it was in talks with the banks. The firm was expected to make a profit of around £14 million, but in January suggested tough market conditions would see them only record a profit of between £2 million and £4 million. In their most recent announcement, they warned they are now likely to make a pre-tax loss for the year ending 28th April. Shares dropped more than a quarter on the news, but the firm suggests the banks remain supportive. They are in talks with their lenders to ensure they are complying with the terms of their deal - if the banks remove their backing, this could be significant for the future of Carpetright.
Danish toymakers Lego has admitted to making too many bricks, as profits and sales both fell in 2017 for the first time in 13 years. The weak performance has been attributed to having to sell off excess stock on the cheap after the firm produced too much for the demand. Revenue dropped 8% to £4.2 billion, with Lego also announcing it would cut 1,400 jobs back in September. The difference between supply and demand for their bricks wasn’t the only reason for the decline last year - the firm has diversified its offering in recent times, including Lego movies, which can make their operation more complex. It isn’t all bad news for the toymaker with strong growth in new markets, especially in China.
Questions to ask yourself… What are the benefits of Spotify listing on the New York Stock Exchange? Should Lego significantly cut production to match lower demand?