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In this week’s Commercial Awareness update, we discuss a slowdown in China’s growth, Mike Ashley’s high street empire, Ryanair’s profit warning, Netflix’s year ahead and who’s losing out from Dry January.
China’s annual growth
There was a blow for the global economy this week as figures showed that the Chinese economy grew at its slowest rate last year since 1990. The second largest economy in the world increased its gross domestic product (GDP) by 6.6% in 2018, but this still caused worries across the globe about the state of the economy. In 2010, China’s economy grew more than 10% and since 1990 there have been years where growth surpassed 14%. There were earlier signs this was the case, with large corporations reporting lower sales than forecast in the country, including Apple and some car manufacturers. There’s a number of reasons for the slowdown - US tariffs on Chinese exports is likely to have had a knock on effect for consumer confidence and the attempt by the Chinese to become less dependant on their exports may also have had an impact.
China exports more than it imports, but Chinese companies are increasingly trying to focus on domestic markets. This and a knock on consumer confidence could lower demand for the goods the UK and other countries sells to China, hence why there is nervousness around the globe surrounding these figures. Also, the UK is reliant on China for significant investment in business, which may be less forthcoming in times of uncertainty.
The Chinese economy is forecasted to grow slightly slower again this year, so it’s worth keeping an eye on their quarterly results and how it is having a knock on effect across the world.
Questions to ask yourself... If China's growth continues to slow, what could be the impact on Britain? Are we heading for a global recession?
Companies to watch
CEO and founder of Sports Direct, Mike Ashley is understood to have made a bid for music retailer HMV. The deal would see 125 HMV stores and 2,025 staff added to Ashley’s growing high street empire. In December, HMV filed for administration for the second time since 2013, after stating that it was unable to keep up with the ‘tsunami of challenges UK retailers are facing’ and such a ‘dramatic change in consumer behaviour in the entertainment market’. Sports Direct already owns stakes in multiple high street chains including House of Fraser, Evan Cycles, Game Digital and French Connection.
Ashley’s investment in the high street comes at a difficult time for traditional high street stores as consumers shift towards online shopping. According to the Local Data Company, the problems facing retailers has meant that over 4,400 shops, pubs and restaurants have been lying empty in the first six months of last year - the biggest figure ever recorded.
Europe’s largest low-cost airline, Ryanair has issued a profit warning after they have cut airfares to a lower level than anticipated in response to higher competition. The budget airline had previously expected they would be cutting fares by 2% rather than 7%. Consequently, Ryanair has stated that its annual profit will be over $100 million lower than expected. However, the lower prices of fares was partially offset by an increase in customers. Ryanair had 9% more customers, totalling around 142 million more than the year before. However, Michael O’Leary - the CEO of Ryanair - said that they could not rule out having to cut fares further, especially as customers were enjoying “record low air fares”. These prices have been causing problems for rival airlines, including Flybe who was rescued last week after receiving an offer from a consortium, including Virgin Atlantic and Stobart Group.
Electric car manufacturer, Tesla, is cutting 7% of its 45,000 person workforce, amounting to over 3,000 jobs. This news came as Elon Musk, Tesla’s founder, stated that its last year had been the most successful but most challenging year ever for the firm. In 2018, Tesla made almost as many cars as it had in its entire history. However, with the introduction of the Model 3 car, the company’s first car available for mass market, there were several production issues. Furthermore, the cheapest version of the Model 3 is currently $44,000, which is far too expensive for most people.
Tesla’s goal this year is to reduce that to $35,000 and Musk cited the cuts to its workforce as necessary to produce cheaper variants of the Model 3. This announcement follows a surprise profit of $312 million in their third quarter, but Musk does not believe this is set to last in the fourth quarter - Tesla’s share price dropped 13% as a result of the announcement.
Netflix’s stocks fell 4% last week after announcing a revenue of $4.2 billion for last quarter. Despite a year-on-year quarterly revenue increase of 27%, they fell short of forecast and investors’ expectations. It’s been a strong financial year for the video streaming service, which has seen a 30% surge in their value this year and their user base continuing to grow. With a further 8.8 million more paying customers in the last three months of the year, Netflix ended the year with 139 million subscribers.
One reason for their growth in viewers is due to the funding allocated to Netflix Originals including Bird Box, You & Narcos. Last year, over $13 billion was spent to produce Netflix Originals, which is expected to increase to over $15 billion this year. The original material is now said to represent the ‘vast majority’ of the streaming service most popular shows. This was demonstrated by 80 million households watching Bird Box in the first four weeks since its release.
Questions to ask yourself... Why is HMV worth buying? Is the tactic to undercut competitors at a cost to profits a value one for Ryanair? Should Netflix increase prices to boost profits?
Pubs and dry January
Are you doing Dry January? If you are, you’re not the only one. This year it’s believed that a record of up to 4.2 million people have attempted not to drink alcohol during the month of January. The health benefits continue to be debated in the lifestyle section of major newspapers, but what’s certain is the impact it’s having on the pub industry. In 2015, figures showed that alcoholic drinks served decreased by 7% in January and that’s expected to be much greater this year as more people participate. Pubs have been struggling in recent years with a change in consumer behaviour to drink at home rather than out - Dry January adds an extra challenge.
However, it’s not all doom and gloom for the trade - many pubs and bars have seen this as an opportunity and are offering greater selections of tasty non-alcoholic and healthier options. With a trend to people becoming healthier, maybe pubs and bars will have to develop their drinks menu to stay relevant, not just in January.
Question to ask yourself... With young adults drinking less, is the future bleak for the pub and bar trade?
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