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In this week’s Commercial Awareness update, we discuss the decline in car sales, Aldi’s stellar Christmas, Apple’s declining share price, a massive merger in the pharmaceutical industry and are universities on the brink of a credit crunch?
Declining car sales in the UK
There has been a sharp decline in the number of new cars bought in the UK during 2018. The Society of Motor Manufacturers and Traders (SMMT) reported that a total of 2.36 million number license plates were registered, which was 6.8% down on the previous year. Sales of diesel cars fell 30% as the public concerns about their environmental impact and the potential for further restrictions on diesel cars. Diesel cars tend to produce higher levels of nitrogen oxides, which can lead to breathing difficulties. Petrol vehicles do have their own environmental impact, producing CO2 emissions (which diesel cars produce much less of) - as there was a move away from diesel last year, CO2 emissions actually rose 3% per vehicle. If the public do turn towards hybrid cars and electric vehicles, then diesel cars may start to become a thing of the past, particularly if the government increase restrictions/taxes on the vehicles. However, when it comes to fully electric cars, there’s a lot of hype but it’s having little impact - production only rose by 15,000 vehicles in 2018.
The SMMT believe that the slowing sales is attributed to a decline in consumer confidence over the last two years, especially when it comes to buying high priced items. There is also the worry that car manufacturers will have more problems sourcing the materials when they need them after Brexit, especially if it is a no-deal. The industry looks set for another year of decline with predictions for 2019 suggesting a 2% decline in sales.
In terms of vehicles, the Ford Fiesta continued to be the most popular car in the UK, with almost 96,000 sold last year.
Questions to ask yourself… What is currently preventing consumers buying electric vehicles? What can the car industry do to boost sales?
Companies to watch
The country’s fifth largest grocery chain, Aldi, had a great Christmas after revealing that it made £1bn over the month of December. It was their best ever UK trading period, with consumers purchasing over 17 million bottles of wine, champagne and prosecco in the run up to Christmas. The German grocer has attributed their success to demand for their new premium products range, where consumers were able to buy high quality products for the fraction of the price that they would have paid elsewhere. Aldi is well on their way to meeting their goal of opening 1,200 shops in the UK by the end of 2025, after opening 65 new stores last year bringing their current total to 827.
The success of the German supermarket has been heavily focused on undercutting larger food retailers. Other supermarket chains have begun to feel the pinch. In an attempt to keep up with German retailers Aldi and Lidl, Morrisons has announced it’s slashing the prices of 935 of its ‘store cupboard’ favourite products by an average of 20%. However, despite changing consumer behaviour, this morning Morrisons reported an overall sales growth of 3.6% last year.
Questions to ask - is this a sustainable move for Morrisons? Will other supermarkets be forced to implement similar strategies?
The world’s first trillion-dollar company, Apple has issued a profit warning after reporting that shares have fallen nearly 10% in the final quarter. The tech giant stated it expected revenues of $84bn for the final quarter of 2018 - down 5% from the predicted $89bn. This is significant for Apple as it represents the firm's first quarter-on-quarter decline since 2016. Tim Cook, the Chief Executive, stated that the problems were primarily oriented in the Greater China region, including Hong Kong and Taiwan, which accounts for more than 20% of the firm's revenue.
Cook said that they had not foreseen the magnitude of this economic deceleration. However, it's not just Apple who is experiencing trouble in China, other companies including fashion retailer Burberry whose shares fell 6% in 2018, have also blamed the economic conditions in this region. Nevertheless, Apple’s trouble does not just lie in China. Fewer customers than expected chose to upgrade to Apple’s newer models, opting instead to stick with their older, cheaper models. Apple was until recently, the world’s largest company. However, due to the recent fall in shares, the firm is now lagging behind other tech giants Amazon, Microsoft and Google’s parent company Alphabet.
Bristol-Myers Squibb, a major US pharmaceutical firm, is acquiring rival firm Celgene to create a ‘premier innovative biopharma company’. The $74bn merger will leave Bristol-Myers Squibb shareholders with a 69% stake in the company. The deal will create a company with nine treatments which will bring in more than $1bn annually. With this, there will be a significant potential for growth in oncology, immunology & inflammation and cardiovascular disease. Recently, there has been increasing competition from both companies for main cancer treatments, along with clinical setbacks, resulting in concern from investors over their future prospects. The acquisition is expected to bring an additional 40% to Bristol-Myer’s earnings on a standalone basis after the first year. The deal is anticipated to close in the third quarter of 2019.
Tesla’s share price has fallen 9% coming into the New Year, despite the car company more than tripling deliveries in the last three months of 2018. Elon Musk’s company has failed to reach delivery targets for the year, delivering 90,700 vehicles in the fourth quarter. Several targets were missed, including the model 3 Sedan - the company’s cheapest vehicle, where 63,150 were delivered compared to the 64,900 which had been expected.
Musk has been under intense pressure to stabilise production of the more economical vehicle which has been seen as crucial for achieving long term profitability. Furthermore, there were 100,000 deliveries of Model S and Model X expected in the fourth quarter which was just missed by a small margin of 99,394. This isn’t the first time that Tesla have had delivery problems and was enough to spook investors. This news came in conjunction with the company announcing that they are cutting the price of Model S, Model X and the Model 3 by $2,000.
Are universities ‘on the brink of a credit crunch’?
Universities have been warned they could be heading towards a ‘credit crunch’ after a review found that the debt the sector has taken on continues to rise. Over the last decade borrowing by universities has tripled and now the debt stands at £10.8 billion. The battle between universities to attract students has intensified and they have spent more to improve campuses to encourage new students. Now universities don’t have a cap on the numbers they can accept, universities that fall behind with their facilities, could find themselves losing new admissions. Some universities have also started lowering grade requirements and offering unconditional offers to students before they receive their A Levels in the aim to boost numbers.
In a time of uncertainty for higher education, banks may be less inclined to lend to universities - historically, they have had excellent credit ratings, so would be able to access capital with low interest rates. Now, this may not be the case and if admissions at universities with high levels of debt start dipping, it could start to become a problem for the sector as a whole.
Questions to ask yourself… If it came to it, should the government bail out struggling universities? Are the universities short sighted taking on more debt?
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