Disney: The Monopoly of All Monopolies

December 9, 2016 by katherine Leave a Comment

In July of 1955, the magic of Disneyland began with the first theme park opening in Anaheim, California. Sixty-one years later, Disney parks and resorts dominate the tourism industry inside and out of America. Every movie and TV show is the perfect opportunity to bring children’s favorite characters to life right in the park. Disney theme parks would not be nearly as lucrative without cashing out on gift shop souvenirs, as screaming children beg their parents to buy them a plush, pet-sized Olaf. The opening of Disneyworld in Orlando, Florida and its booming success has lead to Disney theme parks crossing borders to Paris, Tokyo, Hong Kong, and Shanghai (and that isn’t even including all the resorts.)

Not only does Disney dominate in tourism (Disney runs the world,) their presence in all things entertainment such as media and cable networking is undeniable. However, with the subscription and viewing issues at ESPN, the historically stable company is facing unforeseen challenges.

It is no secret that America’s patience with cable is slowly dwindling, but no one knows this better than ESPN. Nielsen Cable confirmed the alarming loss of subscribers for November 2016 was 621,000, and a drop in revenue of over $52 million. Don’t try to do the math for 2016 as a whole. Long story short, its pretty painful.

The question is will ESPN put Disney at long-term risk? Although shareholders aren’t exactly fleeing anytime soon, we have to consider how the future of cable will affect the company as a whole. Disney may be too big to fail in many people’s eyes, as the popularity of Disney’s parks, resorts, and studio entertainment will not wane anytime soon. Despite this, looking at the impact Disney parks and resorts have on the economy is important to understand how much could be lost if Disney earnings continue to slow down (the thrilling exploration of quarterly earning reports will take place to further understand this.)

Disney’s effect on the urban economy in Anaheim and Orlando

The Disneyland Resort in Anaheim has undoubtedly changed the economy of the surrounding city (Disneyland Resort includes Disneyland and Disney California Adventure, Downtown Disney, and three hotels.) In fact, Disneyland is one of the reasons for Southern California’s economic success. An economic impact study was conducted by Arduin, Laffer & Moore Econometrics (ALME) which revealed that $5.7 billion is generated annually for Southern California’s economy. Additionally, the Disneyland Resort contributes $370 million in state and local taxes. The employment statistics are equally impressive The study was based on fiscal 2013 data, so these numbers may be higher today. Employment is also positively impacted with 28,000 employed and 25,000 jobs created indirectly due to the company. Disneyland Resort’s employment rate has grown at 34% which is faster than California’s 6.7% rate (from 2009-2013.) As you can see, Disneyland dominates Anaheim, one-third of Orange County’s tourism profits being linked to them.

The opening of Disney World Resorts shaped the future of Central Florida. Before Disney, the area was far from a popular destination. As of 2015, there are an estimated 67.8 million visitors to all theme parks combined (which includes Magic Kingdom, EPCOT, Hollywood Studios, Animal Kingdom, Typhoon Lagoon, and Blizzard Beach.) Compared to Disneyland and California Adventures combined 27.7 million visitors, that is a huge difference. It shouldn’t be too surprising then that Disney dominates this urban economy as well. According to a study conducted by Fishkind and Associates, Disney World is responsible for generating an estimated $18.2 billion annually and 1 in 50 jobs in the state are linked to the company. The 161,000 jobs linked to Disney World along with $900 million spent paying Florida vendors is equally noteworthy if not more. This study was based on fiscal 2009 data, so its impact since then has surely increased.

If it is not already apparent, Disney has a huge impact on local economies. Disney pumps money into these areas by attracting so many visitors who end up spending money outside of the parks themselves. Job growth and tax revenue are equally as important if not more to keep the system growing. This economic growth positively impacts the U.S. and makes us more appealing to international travelers. In fact, the multitude of park and resort locations have not dissuaded international Disney fanatics from coming to the states, as it gives the incentive for true fans to accept the challenge of visiting all parks and resorts. According to a fellow anonymous Trojan who works as a performer at Disneyland Anaheim, “true Disney fans will stop at nothing to come to the parks. Some annual pass holders come every day! And a lot of the time I get to meet so many international kids it’s crazy.”

The fact is cities like Anaheim and Orlando were created by Disney, for Disney. If Disney begins to falter then so do these cities as they are all almost too reliant on each other at this point in time. To show this, it is now time to play the numbers game.

Disney as a whole

As Disney expands, it is unrealistic to expect every quarter to be a slam dunk. Additionally, increase or decrease in attendance, revenue, and profit has a lot to do with the season in tourism. Disney’s best profit time of the year is during the most wonderful time of the year: Christmas. Other factors come into play such as unforeseen events. For example, the Charlie Hebdo attacks in 2014 along with the terrorist attacks in 2015 during Bastille Day and in November decreased attendance at Disneyland Paris. No one wants to put their entire family at risk after a tragic event like that. Therefore, there was a 10% drop in guests and 7% drop in revenue this past year.

The fourth quarter for Disney as a whole was a shock compared to past years, and even compared to the third quarter. The third quarter generally had a trend of increased revenue and income, with a 6% increase in revenue for parks and resorts and 8% increase in profit. On the other hand, the fourth quarter resulted in a decrease across the board.

Fourth Quarter and Full Year Earnings for Fiscal Year 2016 https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

As shown above, revenues were down 3% from $13.5 million to $13.1 million, and operating income was down 10%, from $3.5 million to $3.1 million.

Looking at revenues for parks and resorts, there was only a 1% increase from $4,361 billion to $4,386 billion. Operating income was down 5% from $738 million to $699 million. The report attributes lower operating income to lower turnout at Disneyland Paris and Hong Kong, but this is offset by the opening of Shanghai. Long story short, Disney always has an answer for concerning numbers.

The true reason for decreased revenue and income is largely connected with cable networks. Media networks revenue was down by 3% from $5,826 billion to $5,658 billion, and operating income down by 8% from $1,819 billion to $1,672 billion. Revenue for Cable Networks decreased by 7%, and operating income at Cable Networks decreased by $207 million to $1.4 billion (from $1.6 billion.) This is linked to both ESPN and Disney Channels.

ESPN is bleeding money

Decreased revenue is primarily due to ESPN, as the loss of subscribers in November alone was 621,000. According to Market Realist and Nielsen Cable projections, from 2013 to 2015, 7 million subscribers have been lost.

The issue is the expense of ESPN. At roughly $7 a month, you end up paying around $80 a year. However, owning as many sports rights as ESPN has is truly that expensive. But customers don’t really care about that they just want their sports!According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with

According to Disney, this quarter resulted in lower income from ESPN specifically due to “lower advertising and affiliate revenue and higher programming and production costs” Ironically, during their third quarter press conference, it was the complete opposite wording with “higher advertising and affiliate revenue” to explain the “nice operating income growth” of 1%. I see what you did there Disney, but no one is fooled (but seriously what is that plug-in statement code for/what does it really mean?)

During their press conference back in August, Disney said they are optimistic that subscriptions would slowly trickle back in. To combat loss of subscribers, they are pairing up with BAMTech to allow future streaming. The licensing rights of BAMTech include MLB and NHL which will bring more viewers. Bob Iger claims the goal is to provide a complimentary service to what ESPN already has, by creating streaming access for the sports that are not currently on the channels. This includes college sports, basketball, tennis and so on. Although no cable subscription is necessary to watch this new ESPN streaming service, the catch is the channels already available on ESPN will not be viewable through this service.

To me, this idea may work for in the short term to bring people in, but it will further frustrate customers and be counterproductive to not be able to fully stream all ESPN channels. However, Iger also feels that more subscribers can be brought in through Direct TV’s Sling TV, which is only $20 a month and includes all the ESPN channels a sports fan needs. Perhaps this will work, but this would require more incentives to join Direct TV and every region in America has a different cable monopoly (for example Comcast is your only viable option in Marin County in Northern Calfornia.)

How ESPN aka the former cash cow of Disney may affect theme parks

You may be wondering how all of this connects. Logically, every component of business matters but how much impact could the decline of ESPN have on theme parks and resorts? Before streaming programs changed the game, ESPN was the be all and end all of Disney profits. The money has been pouring in ever since being acquired through ABC back in 1995. According to the annual report of 2014, ESPN brought in $6.8 billion in operating profit or 46% of the company’s total. Cable networks overall contributed to 34% of Disney’s revenue. Wells Fargo Securities analyst Marci Ryvicker estimated back in November 2015 that $700 million in fee revenue and $200 million in earnings would be lost due to the loss of subscribers (3 million at the time.)

All of this is problematic because if there are less corporate funds, then there are fewer funds to open new attractions within existing theme parks, along with taking the possibility away of expanding further (but does anyone really need another Disney theme park, I think not.)

Additionally, if the stock price begins to drop significantly, investors pulling out is never a pretty sight. You can even say ESPN is potentially holding back Disney’s stock price from growing as the headlines of “millions of subscribers lost” doesn’t help anyone.

Overall, what we’ve learned here (and probably already knew) is everything within Disney is deeply intertwined. The theme parks and resorts simply cannot succeed without the funds to maintain upkeep and periodically upgrade them. I believe that the current business model for ESPN will not be successful or beneficial past 2020. Streaming is taking over as it is, and although families will continue to buy cable packages for a long time, nothing is permanent in this technological world. It may be time for Disney to sell ESPN to Comcast or AT&T and let someone else face the backlash. In fact, if subscribers do increase as Iger predicts, it would not be a hard sell to another cable company to take on the project. Since Disney theme parks and resorts are such an important part of the domestic economy (if I had discussed the world market as well this would be overwhelming) sacrificing the most traditional and magical component of Disney is not worth it. Disney’s history all ties back into the mini economies of Anaheim and Orlando (and the rest of Florida) and therefore prolonging their well-being is not negotiable.

Disney Parks and Resorts Research

https://smartasset.com/credit-cards/the-economics-of-disney-world

https://ditm-twdc-us.storage.googleapis.com/q3_fy16_earnings_transcript.pdf

http://www.usatoday.com/story/money/2016/08/09/disneys-q3-income-up-5-theme-parks-film-studio-gains/88483996/

https://blog.shermanstravel.com/2014/8-major-differences-between-walt-disney-world-and-disneyland/

http://www.ocregister.com/articles/study-665882-resort-disneyland.html

https://publicaffairs.disneyland.com/disneyland-resort-generates-5-7-billion-for-southern-california-economy-2/

http://www.broadcastingcable.com/news/currency/disney-ceo-bullish-espns-future/161076

http://www.broadcastingcable.com/news/currency/disney-earnings-suffer-espn-declines/161072

https://finance.yahoo.com/quote/dis?ltr=1

http://marketrealist.com/2016/03/disney-believes-espn-will-start-gaining-subscribers/

http://www.heritage.org/research/reports/2011/07/what-is-poverty

https://en.wikipedia.org/wiki/List_of_assets_owned_by_Disney#Walt_Disney_Parks_and_Resorts

https://www.bloomberg.com/news/articles/2015-11-27/espn-viewer-losses-add-to-angst-for-disney-s-big-profit-engine

Disney Quarterly Reports

https://thewaltdisneycompany.com/disneys-q3-fy16-earnings-results-webcast/

https://ditm-twdc-us.storage.googleapis.com/q1-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q2_fy16_earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q3-fy16-earnings.pdf

https://ditm-twdc-us.storage.googleapis.com/q4-fy16-earnings.pdf

Behind Bars and Bonuses: How the U.S. Private Prison System Became a Multi-Billion Dollar Industry

December 9, 2016 by heyside Leave a Comment

The United States incarcerates more people than any other country in the world, with approximately 2.2 million inmates behind bars in state, federal and private prisons across the country. That’s over half a million more inmates than in China, whose population is four times the size.

The Beginning of the Modern Private Prison Industry

The sharp increase in incarceration levels can be traced back to the 1970s, when the government struggled to combat the nationwide issue of drug-use and crime. When President Nixon declared a war on drugs in 1971, it forced an increase in tough policies against crime across the country.

In the two decades following 1980, the incarceration rate more than tripled, which led to major overcrowding in jails across the country. To tackle this issue, many states turned to private companies to build or run their prisons.

The first modern private prison was built in Tennessee in 1984 by the Corrections Corporation of America (CCA). Its opening marked the first time that any state government had contracted out the full operation of a prison to a private corporation.

What began as a quick-fix solution to the overcrowding of public prisons, the for-profit prison sector now accounts for 10% of the corrections market with an annual turnover of $7.4 billion per year.

As of 2013, the US Department of Justice reported that 19.1% of the federal state prison population is housed in private prisons along with 6.8% of state prisoners. Today, there are over 130 for-profit prisons with 157,000 beds and this number is expected to reach 360,000 by 2026.

For-profit prisons are legal in 29 states across the country with some relying predominantly on private facilities to house their inmates. For example, nearly 44% of all New Mexico prisoners are held in private prisons, followed by 38.7% in Montana.

While the rate of violent crime in the United States has fallen by about 20% since 1991, the number of people in prison or jails has risen by 50%, as roughly 13 million people are sent to jails in any given year.

But how does that make sense?

Proponents against private prisons argue that the contracting of prisoners has created an economic incentive to put people behind and because of this, for-profit prisons rely on the incarceration of prisoners to keep their corporations afloat and their stockholders happy.

Private Industrial Complex

This complicated intersection of public and private interests is known as the “prison-industrial complex”. The term was created to explain the correlation between the rapid expansion of the United States’ inmate population and the influence of private prison companies that house and supply labor to government prison agencies.

The corporations who operate under this title include construction companies, surveillance technology providers, private probation companies, lobby groups, and even prison cafeteria vendors. This complex, however, has become highly controversial, as the economic and social implications of “contracting out” prisoners to private companies has placed the privatization of prisons at the forefront of American politics.

The prison-industry complex is one of the fastest growing industries in the United States, with private prisons accounting for the largest business in the group.

Why Support Private Prisons?

The main argument for establishing private prisons is that they can provide correctional services more efficiently and for a lower price than the government itself. This is because they do not have to compete directly with other state penitentiaries for contracts and are able to decide on the types of inmates that they will house. Similarly, those in favor argue that they provide a financial solution that prevents the government from having to invest major capital into building new prisons and providing other benefits such as pensions, salaries, and health-care.

Supporters of this industry argue that private prisons are more advantageous for American taxpayers, as for-profit owners have more incentives to find efficient practices and lower overall costs. Furthermore, private prison corporations claim that building new facilities generate income for surrounding communities as they create jobs and receive tax revenues.

Arguments Against Private Prisons

However, the validity of these arguments are hard to confirm, as an evaluation of 24 independent studies on the cost-effectiveness of public vs. private prisons found that for-profit institutions were no more cost-effective than public ones. Instead, the report suggests that the most important factors in determining a prison’s daily cost per inmate are the facilities economy of scale, age, and security level. A 2011 report by the American Civil Liberties Union also found that in addition to influencing mass incarceration levels, private prisons are more expensive, more violent and less accountable than public ones.

Since private prisons are created to be more cost efficient than public ones, it is common for them to have lower staffing levels and training than their counterparts. This links to the argument that violence against guards tends to be higher, as a nationwide study found that assaults on guards were 49% more frequent in private prisons than in those run by the government.

The key arguments against the establishment of for-profit prisons are that they are not run with safety in mind, they harm minorities, they create financial incentives to incarcerate and they corrupt the political process. They argue that firms in the prison business reap profits by billing the government more than is needed and find alternative ways to lower costs which can make prisons less secure.

Secondly, it is argued that for-profit prisons marginalize minority groups, as according to a report by the Justice Policy Institute, private companies hold nearly half of the nation’s immigrant detainees. This is double the rate that it was nearly a decade ago.

Policy, Politics, and Problems

Moreover, political corruption and the influence of corporations on federal detention policies have become an area of major contention. Because private prisons are for-profit, many of them are funded and invested in by national corporations, investors, and politicians.

Of both public and private correction systems, Corrections Corporation of America (CCA) operates the 5^th largest in the US and has 51 owned-and-operated facilities in 16 states and 18 state-owned facilities in 7 states. Their large market share provides them with a staggering market cap of over $3 billion and reported revenues of $1.84 billion in 2015. Likewise, the 2^nd largest private corporation, GEO group, reported $1.79 last year.

So how much political influence do these corporations have?

According to a report by the Justice Policy Institute, private prisons increase their political influence through lobbying, direct campaign contributions, and building relationships and networks. This notion is supported by the fact that both corporations have funneled more than $10 million to political candidates since 1989 and have spent nearly $25 million on lobbying efforts.

Lobbying is a key reason why these for-profit correction corporations have been able to achieve such high margins, as their efforts have influenced government at all levels to underwrite private prison expenses and to pass laws that ensure certain levels of beds will be filled at each prison…also known as an incarceration quota? For example, in 2015 CCA and GEO lobbied for a Congressional mandate that required 34,0000 immigration detention beds be maintained and paid for with tax dollars.

Due to lobbying efforts, these corporations are also exempt from taxpayer oversights, as they have been excluded from the federal disclosure system under the Federal Freedom of Information Act, which denies public access to private prison operation records.

In an interview with the LA Times, Alonzo Peña, former director of US Immigration and Customs Enforcement from 2008 to 2010 said, “he had long been concerned that for-profit prison companies had been hiring former immigration official to help them secure favorable contract terms.” This is extremely problematic as manipulating the system through contracts allows the corporations to be exempt from following governmental standards and protocol.

So if the government is not responsible for keeping watch on these private prisons…who is?

The haziness between what is legally acceptable and followed by these private prisons continues to cause controversy in the US, as the government’s level of jurisdiction over these corporations becomes increasingly unclear.

What was created as a short-term solution to combating overpopulation has developed into a multi-billion-dollar industry where investors are pouring their money into these corporations’ stocks to watch the value go up on the stock exchange.
However, the tradeoff between public and private interest doesn’t seem to balance…

More inmates? More Money?

A life-sentence for a stock?

That sounds like democracy…right?

SOURCES:

The Prison Industry in the United States: Big Business or a New Form of Slavery?

http://www.economist.com/blogs/democracyinamerica/2010/08/private_prisons

http://greengarageblog.org/5-foremost-pros-and-cons-of-private-prisons

http://www.truth-out.org/news/item/21694-shocking-facts-about-americas-for-profit-prison-industry

https://www.propublica.org/article/by-the-numbers-the-u.s.s-growing-for-profit-detention-industry

https://www.washingtonpost.com/posteverything/wp/2015/04/28/how-for-profit-prisons-have-become-the-biggest-lobby-no-one-is-talking-about/?utm_term=.a8418a44291a

http://www.huffingtonpost.com/bernie-sanders/we-must-end-for-profit-pr_b_8180124.html

https://www.theguardian.com/commentisfree/2012/jul/06/prison-labor-pads-corporate-profits-taxpayers-expense

http://cad.sagepub.com/content/45/3/358

https://smartasset.com/insights/the-economics-of-the-american-prison-system

Old Banknotes Can’t Be Swept Out Easily in India; Neither Can Old Problems

December 9, 2016 by Faye Chen Leave a Comment

On Nov. 8, the Narendra Modi government surprised India with a declaration banning 500- and 1,000-rupee notes (Rs500 and Rs1, 000) to tackle black money and corruption. The demonetization policy may be well intentioned, but it has brought up unintended consequences over the domestic economy in India.

Rs500 and Rs1, 000 were India’s two biggest notes that and accounted for 86 percent of the money in circulation by value. According to the announcement, all citizens will have until Dec. 30, 2016 to exchange the old banknotes at bank branches. People seeking to replace more than Rs250,000 (about $3,650) must explain why they hold the cash. Those who fail to do so must pay a penalty.

Due to the large number of notes and the short replacement period, Indian banks and ATMs have long queues as people rush to exchange old notes for new ones. The government can’t print enough new notes to fulfill the demand. Till Dec. 10, the banks have received Rs12.4 trillion as deposits but only released Rs4 trillion back into the system as of 5 December.

People queue as they wait to exchange or deposit their old high denomination banknotes in Jammu, India. Photograph: Mukesh Gupta/Reuters

As a normal economy influence, the lack of cash led to a soft inflation on the market. Food inflation in November softened to 2.11 percent from 3.32 percent a month ago, according to data released by the Central Statistics Office. Retail inflation also decreased from 4.2 percent a month ago to 3.63 percent.

However, the demonetization of high-value currency notes has had a negative impact on the Indian economy. The lack of electronic bank accessibility and wireless payment in India has magnified the effect of insufficient cash on the business activities of investors and consumers. The overall industrial output decreased by 1.9 percent compared to before demonetization, according to the industrial production data.

There are worries about the money liquidity problem. “The Reserve Bank of India is likely to outline measures to manage the systemic liquidity, which would be of interest to the banks, and provide some timeframe by which cash liquidity would increase, that would be of significance to the public,” said Naresh Takkar, managing director at ICRA Ltd., the local unit of Moody’s Investors Service.

The original goal for the government’s demonetization policy is to tackle black money — cash that is not declared to avoid taxation or that is obtained via corrupt practices. But according to the New York Times, the vast majority of black money in India isn’t money at all. It’s held in gold and silver, real estate and overseas bank accounts. The requirement also stimulated a new black market where people can break old notes into smaller ones by illegal couriers.

Demonetization alone can’t tackle the issues of black money and corruption. More actions toward improving policies for administration transparency, tax regulation and the modern online bank tracing system are needed.

Work Cited:

India pulled 86% of its cash out of circulation. It’s not going well.

http://www.vox.com/world/2016/11/29/13763070/india-modi-cash-demonetization-protests

Cash-Crisis India Looks Likely to Cut Rates

https://www.bloomberg.com/news/articles/2016-12-06/india-decision-day-guide-seeking-clarity-on-the-cash-clampdown

In India, Black Money Makes for Bad Policy

http://www.nytimes.com/2016/11/27/opinion/in-india-black-money-makes-for-bad-policy.html

How India’s Cash Chaos Is Shaking Everyone From Families to Banks

https://www.bloomberg.com/news/articles/2016-11-21/india-s-cash-chaos-by-the-numbers-guide-to-banknote-revamp

New note ban rules and regulations as of 14 December

http://www.livemint.com/Politics/p1VV2avZvT2hWIrc07PBfJ/New-note-ban-rules-and-regulations-as-of-14-December.html

League of Geeky Athletes: E-Sports and League of Legends

December 9, 2016 by Dan Leave a Comment

“He’s gonna find Santorim right before the dragon. Looks like he’s gonna try to get over the wall. Not gonna work though. Oh chilling spikes and now Santorim is in a lot of trouble.. he’s lost and WOOOOOOOOOO DENIED! HEAD BUTTING AND BACK, OUT OF THE LANTERN!” Believe or not, this quote is from a sports caster. What kind of sports commentary involves a dragon and chilling spikes? You guessed it, the E-Sports. Back in Fall of 2013, there was an unusual event held in Galen Center and Staples Center. The League of Legends World Championship semi-finals and finals were held in those arenas. Those events attracted about 23,000 fans to spectate the video game matches in both event halls. In case of the finals held in Staples Center, the tickets were sold out in an hour. Even for a professional basketball event held in Staples Center, it is very extraordinary. On top of the arena attendance, the final matches in Staples Center attracted about 32 million viewers worldwide according to Riot Games. In the end, South Korean team SK Telecom T1 won the prize of 1 million dollars.

It may seem totally outrageous by traditional sports fans because these so-called “Professional Gamers” (or Pro-gamers) are earning millions of dollars by simply playing a video game in front of people. Yet, pro-gaming is more than that. Donghun Lee, scholar at Ball State University, wrote a journal article about how the E-Sports players need to train rigorously just as traditional athletes do. According to Lee, the Pro-gamers need to train their eyes to follow fast movements of pixeled characters and objects on the computer screen, train their hands to react faster for mouse clicking and keyboard button pressing, and train their hearing for reacting to gaming effect sounds. Some pro-gamers like SangHyuck “Faker” Lee plays practice games for over 12 hours a day to master his finesse in League of Legends.

League of Legends is vital to E-Sports because it showcased how serious the professional gaming can be through the outstanding number of viewers over the world. League of Legends is a free-to-play online competitive multiplayer game developed by Riot Games in 2009. Two teams of five players are required to play the game and one match lasts about 35-45 minuets. Since its release, League of Legends has been gathering monthly active users in a very fast pace. The monthly active users have increased from 15 million in 2009 to 100 million in 2016.

As mentioned earlier for the League of Legends Season 3 World Championship, the final matches attracted 23,000 physical fans and 32 million fans streaming online. Chad Millman, the editor in chief of ESPN.com and ESPN magazine, praised how E-Sports market is attractive on Fortune Magazine interview: “We saw how responsive the fan base was, how tremendous the storytelling opportunities were and, for those of us not already immersed in the industry, how similar it was from a competitive standpoint to what we already cover [. . .] It didn’t seem like that much of a stretch then to get aggressive about creating a digital destination.”It is very apparent that the E-Sports industry is growing. In the same article, Fortune states how the revenue from the E-Sports industry will grow from $278 million revenue in 2015 to $765 million revenue in 2018.

Essentially, League of Legends has made E-Sports big enough to attract investors to bring a significant change; once a niche industry is now becoming a profitable mainstream industry. As shown on the info-graph on the left, 2016 League of Legends World Championship had accumulative prize of 6.7 million U.S. dollars to distribute to the competing teams. Besides the prize money, the player salaries are pretty crazy as well. For example, aforementioned star gamer Faker earns $2.5 million per year from his contract with SK Telecom. While being this successful, the model of E-Sport industry actually comes from overseas despite the origin place of League of Legend being in the United States.

South Korea has had the strongest market environment for E-Sports since late 1990’s. According to New York Times Article, the Asian Financial Crisis triggered South Korea to have the best environment for E-Sports because the government allocated its funds in telecommunication and Internet infrastructure. By 2000s, the PC Bangs (PC방, it is directly translated as Personal Computer Rooms) were formed and the wide community of gamers was created. PC Bangs are the Internet cafes on steroids that provide the fastest Internet speed, computers with great CPUs, and superior graphic cards for very cheap price like a dollar for an hour. With the introduction of StarCraft, a game released by Blizzard Entertainment in 1998, the PC Bangs became the proving ground for early gamers and multiple tournaments were held in different PC Bangs. In my personal experience, PC Bangs are like the neighborhood basketball courts. If someone in my class was good at either StarCraft or WarCraftIII, he would have the same popularity as a varsity football quarterback would have in the U.S. PC Bangs has made an E-Sports culture in South Korea and the market was meant to do well because of the infrastructures.

As the competitive gaming became popular, the South Korean government created the Korean E-Sports Association to manage E-Sports. As a result, a TV station dedicated for broadcasting E-Sports and big companies such as Samsung, CJ, and SK started to organize, manage, and finance their own E-Sports teams. Those companies still act as major sponsors in South Korea. For League of Legends, those sponsoring companies put their players in a training houses so they can practice as a team at least 8 hours a day. This model of hardcore training has influenced other League of Legends teams in the world. According to New York Times, “the country’s success at League of Legends has led several Western teams [. . .] many foreign teams have also tried to emulate the group living and training approach used in South Korea.”

League of Legend’s popularity in global E-Sports market triggered the United States to take actions. The U.S. teams such as Team Solomid, and Cloud 9 are sponsored by HTC. Cer Wang, the chairman of HTC said in 2015, said that “E-Sports has seen significant growth in the past few years and we see synergy between people who are passionate about this sport and our own customer base. It was an easy decision for us to sponsor these talented teams and individuals.” Apart from HTC, many different companies like Red Bull or GEICO sponsor League of Legend Teams because they see the profitability. According to SuperData report, “Brands have taken notice of E-Sports’ popularity and many have become sponsors quicker than projected [. . .] By year’s end, sponsorship of tournaments, players, and esports-related sites will exceed $578 million, just 28 percent less than this year’s NBA sponsorship total.”

Just as Fantasy Sports exists for traditional sports fans in the U.S., the hype of E-Sports seem to extend its reach to the betting game as well. According to the Internet magazine Travelers Today, a casino in Las Vegas started to allow people to bet on the League of Legends. The magazine also mentions that XLIVE, an entertainment organization event, will have a betting panel for League of Legends this month in Las Vegas. Waco Hoover, founder of XLIVE says that “E-Sports is a burgeoning industry that’s poised for significant growth in the coming years. Some estimates put the global sports betting industry over $1 trillion and with the growing popularity of E-Sports the industry is looking to capitalize on gambling. Unheard of in traditional sports – crowd sourced prize pools in excess of $20 million demonstrate the extraordinary fan bases that exist with E-Sports and their leagues.”

Moreover, there has been a deal going on between Major League Baseball Advanced Media and Riot Games recently. According to Los Angeles Times, Riot Games is finalizing a deal to sell streaming rights for League of Legend matches to MLB’s tech unit for $200 million over two years. This is quite significant because most of the E-Sports matches are broadcast on Twitch or YouTube. What this deal means is that the streaming of League of Legends can be done in MLB app. The LA Times suggests that there could be a synergy for MLB to purchase League of Legends streaming rights because Riot Games has proven the wide audience its game can reach. Both Riot Games and MLB could gain massive profit with advertisers. Yet, there are still concerns regarding E-Sports broadcasting because the profit generation in E-Sports broadcasting is still in early stages. Whereas South Korea has its own TV station dedicated for video games that the station can profit from advertisers, the American E-Sports are broadcast mostly online. In this regard, moving into a premium app may pose a danger to the League of Legends fan community because the matches may lose its audience and perhaps become unpopular.

Though the MLB deal is still not announced to be closed, the concern LA Times brought up is very significant. League of Legends is not the only E-Sports game. Until recently, the League of Legends has been the most popular online multiplayer video game for MOBA (multiplayer online battle arena) genre. According to data on Statista, League of Legends hold 66.3% of the market share based on PC and console revenues in 2016. For the MOBA genre, League of Legends may still be secure in E-Sports arena; however, new competitive game was introduced in this year’s Summer to perhaps bring down League of Legends from its E-Sports throne. Overwatch, a competitive online first person shooter game developed by Blizzard Entertainment, recently gathered over 15 million users according to Forbes. Bringing the E-Sports to South Korea, the PC Bangs are now populated with more Overwatch players than League of Legends. Even though League of Legends matches are still broadcast on Korean TV station, Overwatch matches have been raising a great number of fans.

Does the emergence of Overwatch mean the downfall of League of Legends? According to major video game news outlet Polygon, the first Overwatch World Cup at Blizzcon 2016 had more than 100,000 viewers. According to Polygon, Overwatch definitely has a potential to be big in E-Sports scene. While League of Legends has been focusing on team construction in the beginning of each round, Overwatch provides more fluidity in game. This means that once players select their champion characters in the beginning of the game, the players are locked with the champions they selected; in other words, the strategy is already locked with the character choices in the beginning of the game. Meanwhile, players can switch their choice of characters at any time of the gameplay. Providing more fluidity in strategy, many hardcore gamers find Overwatch to be a great game in competitive setting. Yet, Polygon points out the flaw of Overwatch that may hinder it from entering the E-Sports market. Overwatch is not the best game for the spectators because it is a first person shooter and it confuses spectators on which characters are on the same team. For a fast pace gun-serking game such as Overwatch, it becomes very difficult for the spectators to see what is going on. For League of Legends, each teams’ health bars are color coded so it is intuitively easy to figure out what is happening in the battle field. In case of Overwatch, not so much.

Does an introduction of new exciting competitive game threaten League of Legends? Not so much. It is just like traditional sports. Basketball getting more popular than baseball does not mean that baseball is not relevant at all. Just like how League of Legends have been treated as sport, it will not have the same decline. Older games can still be relevant and profitable in E-Sports. For example, StarCraft I is still relevant in South Korea even though the competitive market started since 1990s. There are still StarCraft I matches in South Korea and they are broadcast, although StarCraft II came out and the tournament of its own has been getting popular. For this regard, I think the emergence of new games is not a threat to the E-Sports community or League of Legends. It just means that more sport genres are added and the fans will have more options to watch the pro-gamers competing with their passion. As E-Sports get popular just like League of Legends, maybe people will see E-Sports being part of Olympics.

When Americans Have Beef with Red Meat

December 9, 2016 by joyce Leave a Comment

Whether it be for ethical, environmental, or health reasons, vegetarians around the world have long been making a compelling case for why they do not eat meat. However, knowing Americans, perhaps the most persuasive reason of all lies in targeting carnivorous Americans where they would be most empathetic: their pocketbooks, as opposed to their hearts. With the difference of up to $200 billion dollars at stake for reducing meat consumption in the United States, the financial argument is one that could lead many to reconsider what they’re really putting into their mouths. However, red meat seems to be the main victim in an increasingly vegetable-dominated world.

This is profound news for a country where meat has always been a large cultural and historical component of the American diet. A majority of American holidays include meat as a staple item, including Christmas, Thanksgiving, Fourth of July, and perhaps the most revered American Holiday of all: the Super Bowl party.

For the past few decades, demand for meat has steadily risen or declined, based on the type of meat. Americans have been adjusting their meat consumption patterns in accordance to the variations of meat pricing over the years. Global Meat News reported this past September that beef and veal recorded a three percent decline in consumption, compared to a global increase of meat consumption steady with the world’s growing population. In 1972 alone, the average American consumed 144 pounds of red meat a year, according to the USDA (National Chicken Council). Comparatively, in 2015, the average American consumed only 104 pounds of red meat. However, consumption of poultry has increased from 50 pounds per American in 1972 to 106 pounds in 2015 (National Chicken Council). This increase in consumption of poultry over red meat can be attributed to two factors: recent red meat health fears and rising red meat prices.

Behind the rising price of red meat in the United States is lower supply of cattle due to the drought. Raising cattle requires more room and feed than other animals like chicken or turkey, making it especially costly to raise throughout drought conditions, directly impacting the supply of cattle.

Cattle pricing strategy in an extremely volatile market is incongruent amongst internal sellers and producers. To combat unsteady prices are multiple safety nets are in place to protect sellers and buyers. These vary per seller/buyer relationship, ranging from simple forward contracts and more complex options and plans. Ultimately fueling the volatility in the cattle market is the strong basis levels, or the difference between the cash sales price and the futures price. According to Rabobank’s global strategist animal protein Justin Sherrard:

“In the event a producer has had the opportunity to place a hedge or further position at a price level that offers a positive price for the cattle, a strong basis can be viewed as a bonus. This is because it enables the producer to capture the difference between his cash sales price and the offset to the lower-priced futures position” (Global Meat News, “Extreme Volatility”). With ever-changing prices, both beef processors and buyers become weary as they find difficulty setting prices that will help the overall market.

Further impacting the demand for meat in the United States are alarming headlines and announcements from health organizations, including, “Red Meat causes Cancer” and, “CSPI calls for a cancer warning on processed meat,” Americans have understandably turned to alternative meat products to satisfy their desire for protein (Global Meat News). However, demand for meat in outside countries have remained high, and with the lifting of a Chinese import ban on U.S. beef in September 2016, the price of beef has not yet dropped despite the low demand (Global Meat News, “Food trends”).

Many Americans have not yet considered how their individual meat consumption patterns could have a larger significant economic impact. In March 2016, the Proceedings of the National Academy of Sciences published a global-specific health model study describing the varied effects of adopting a diet with pro rata reduction in animal products, including ruminant meat, total meat, and dairy. According to Marco Springman, one of the study’s researchers, “It’s always hard to really get your head around what it means if you avoid climate change to [a certain] degree, or have one less person dying from diet-related diseases. We wanted to illustrate the scale of those benefits.” In comparing the world’s current meat consumption patterns to diets that abstaining from meat or are less-meat heavy, they were able to examine the subsequent economic impact of current meat-heavy diets.

The five researchers from the University of Oxford compared hypothetical situations set to arise in 2050 if the world were to continue their current meat-heavy eating habits. They compared these hypotheticals to the recommended diets proposed by healthy global diets (HGD), vegan, and vegetarian diets, and examined the subsequent impacts that current diet trends could have on healthcare, environmental, and value-of-life benefits.In order to access the economic valuation of the health benefits associated with dietary change, the study relied on both “cost-of-illness” techniques which included direct and indirect costs of informal care and lost work days associated with deaths from specific diseases– and “value of statistical life” which would estimate the cost of the lives saved under each dietary scenario. They found that changes in diet, particularly in Western high- and middle-income countries would reduce the number of overweight and obese people, by 29-40 percent. Furthermore, in combined healthcare, illness, and “value of life” costs, the study found that current meat-heavy diets are costing Americans between $197 and $289 billion annually (PNAS). In particular, America, for its high per-capita healthcare costs, is in a favorable position to save more money than China, or all of the EU countries combined (Atlantic).

Though the current meat industry as a whole slowly declining as Americans begin to adopt more plant-based diets, meat will most likely remain a staple for a majority of Americans. In recent history, red meat has received its fair share of media backlash, and in conjunction with its steadily rising prices, Americans are filling their carts with more reasonably priced meat alternatives. As beef prices are set to increase, whether Americans continue their health-conscious meat-eating behavior, or revert back to their red-meat eating ways will reveal the true motivations behind their changing diet. However, the study published in Proceedings of the National Academy of Sciences suggests that continuing reducing meat-heavy diets could not only change the hearts of Americans, but also their pocketbooks.

Sources:

http://www.globalmeatnews.com/Analysis/Food-trends-meat-consumption-up-beef-declines

http://www.theatlantic.com/business/archive/2016/03/the-economic-case-for-worldwide-vegetarianism/475524/

http://www.pnas.org/content/113/15/4146.full.pdf

Per Capita Consumption of Poultry and Livestock, 1965 to Forecast 2022, in Pounds

http://www.msnbc.com/msnbc/the-decline-red-meat-america

http://www.globalmeatnews.com/Retail/US-beef-industry-targets-millennials

http://www.globalmeatnews.com/Financial/Food-trends-Beef-pork-prices-to-fall

http://us.blastingnews.com/news/2016/09/beef-prices-to-come-down-usda-001146533.html

Nordstrom and its Path into the Future

December 9, 2016 by chung Leave a Comment

Consume. America is a consumer society. We like to eat, drink, and shop. And as the holidays roll around we are constantly bombarded with advertisements and marketing campaigns reminding us that it is time to buy- buy gifts for our family, jewelry for our wives, toys for our kids, and even treat ourselves. However, over the past decade the annual pilgrimage to the shopping mall has experienced a shift. With the still growing trend of e-commerce, more people are looking online to make their holiday purchases. This comes as no surprise to Nordstrom who has been adjusting their company strategy to maintain a competitive edge as the landscape of retail changes.

Over the past 100 years Nordstrom has built itself into a trusted and recognizable retailer throughout the United States. They are known for their impeccable customer service and good selection of products. However for a high-end retailer it is not easy to stay afloat in the current retail scene. In order to run a physical store, a lot of costs are involved. The retailer has to pay rent to a landlord, pay utilities, keep an inventory, hire employees, account for theft, and much more. These costs have always been a factor in opening a store however the ever-growing bigger threat to traditional stores is e-commerce. Our society has progressively become more connected to technology and this has influenced our shopping habits. As a result the traditional store set up faces real obstacles moving forward.

These purchasing habits can be seen in Nordstrom’s division of sales. In 2014, Nordstrom’s web sales increased by 26%, accounting for $2.5 billion in revenue. For the first six months of 2016, Nordstrom reported net sales of $6.782 billion with $1.178 from Nordstrom.com, up 6.6% from the previous year. This number has only continued to increase. E-commerce has become such a burgeoning item that during the second quarter of 2016, Michael Koppel, Nordstrom’s CFO announced, “We recognize that the shift towards e-commerce is having an impact to our financial model. As we accelerate investments to support changes in customer expectations, our expenses, particularly in technology, supply chain and marketing, grew faster than sales”. This means that for Nordstrom to stay competitive in today’s market they need to pivot the way they make their products available to consumers. They have invested heavily in growing their e-commerce platform and on engaging their customers on their mobile devices. In the past couple of years Nordstrom has really begun to reap the rewards with 21% of its revenues coming from digital sales.

If you open Nordstrom.com you will be exposed to a carefully planned marketing set up. Their opening page constantly changes showcasing the most popular products and trending brands.

Their website is also extremely customer friendly and easy to navigate with tabs dedicated to holiday shopping. Carefully curated links can be found with Gifts for Her, Gifts under $100, and Luxury Gifts, making the shopping experience a hopefully easier one. They also make sure to be at the forefront of online promotions. Leading up to Black Friday they sent out email blasts reminding their customers of the promotions they were offering. Beyond that they regularly send out emails giving product suggestions and to inform their customers about new arrivals.

One of Nordstrom’s possibly most competitive strategies is their price matching promise. They have a competitor price matching policy that states, “We are committed to offering you the best possible prices. If you find an item that we offer, in the same color and size, in stock at a national retailer, we’ll be glad to meet a competitor’s price”. By offering this they are promising their customer that at no other location will they be able to find a better price, and in the event that they do, Nordstrom will match it. This makes it easy for shoppers to shop on their platform with confidence that they are getting the best prices. While perusing Nordstrom.com it is quite common to come across the red “We’re Price Matching” banner. In many occasions the customer does not need to shop around and compare prices because if Nordstrom sees a competitor selling a product at a lower price, they automatically match it so the customer does not need to ask for a price adjustment. This also makes the store immune to shoppers who come in to look at the physical product just to make the purchase online for the cheapest price. This policy is more valuable than meets the eye because according to Entrepreneur’s article, millennials are price sensitive and are using their mobile devices in store and online to compare prices. With a website that works symbiotically with its online stores, Nordstrom effectively cuts out its competition for millennials who would otherwise be searching for cheaper prices.

Some might question what the comparative advantage Nordstrom has over other retailers offering similar prices, but Nordstrom offers quite a few very enticing incentives. They offer free shipping on all orders without a minimum purchase requirement making their website a go to source when shopping for virtually anything that can be purchased online. The customer can also have peace of mind that the product that arrives on their doorstep is authentic and accounted for because Nordstrom has an established reputation. Making a purchase with them also means knowing you will receive impeccable customer service including an extremely lenient return policy. They handle their returns on a case-by-case basis with the goal of keeping their customers happy, relying on the idea that if they treat their customers fairly, their customers will also treat them fairly.

They also have a price adjustment policy that ensures customers that the price they pay is not going to fluctuate and in the event that the product goes on sale for a lower price within two weeks they will be able to be reimbursed for the difference.

It’s stores work symbolically with their online website. Customers who might not be fully accustomed to shopping online can satisfy their need for instant gratification because they can place their orders online with the comfort of knowing that they can bring their items in to the store to exchange for a different size or color or get a refund. This saves them the hassle of having to ship their packages back and wait to receive their money. Customers also have the option of buying online and picking up their purchases in store. This gives them the convenience of shopping online without the downsides of having to wait for shipping. This also saves them from the potential of going to a store just to find out its run out of stock of the item they are looking for. This is a win-win situation because when a customer picks up their items in store, Nordstrom saves on shipping costs. And whether a customer is coming in for an exchange or a pick up, the company has won half the battle once a customer has stepped into the store. Whether the shopper is looking to make a return or pick up their items, they are likely to browse as they walk through the store. So in all actuality by creating a business model where both a physical store and an online store serve important needs but have enough of a point of difference where they are both valuable makes for a sustainable business in today’s world of instant gratification and convenience.

Nordstrom’s stores pose a benefit beyond it’s physical sales as well. They are an essential part of Nordstrom’s brandy equity. Their brick and mortar stores occupy space in some of America’s most prestigious malls. Their well-groomed stores alone are a marketing tool. People walking by cannot help but notice the health and wealth of their storefronts. Businesses trying to sell their products take notice too. They have access to exclusive brands and therefore carry what is coveted, trendy and popular. In the past they have struck deals with the likes of Baublebar and Shoes of Prey both of which are brands that are exclusively online. The reason they may be willing to work with Nordstrom is because they become associated with Nordstrom’s name and thereby reputation. Furthermore their inventory is up to date. So if Rebecca Minkoff launches a new line in her stores, you can be sure that Nordstrom will have them available as well. According to Forbes’, millennials are brand loyal so once they trust a company and are accustomed to them, they are likely to continue to be patrons into adulthood. This shows the importance of capturing the millennial generation retailers have as these relationships are formed and often continue to just build on itself.

Nordstrom is also the parent company of other business such as Nordstrom Rack and hautelook.com, both of which have proven to be successful. Nordstrom Rack offers branded clothes, shoes, and accessories at a discount. Nordstrom Rack continues to expand with 113 stores and an e-commerce site that launched in February 2014. It makes up about one fifth of Nordstrom’s overall sales at $2.5 billion since 2013. Similarly, HauteLook is a shopping website and mobile app that has flash sales and limited-time sales events with branded apparel and items such as makeup, jewelry and home decor. HauteLook encourages their browsers to make purchases because of the way their website is set up. Their product offerings change daily and the time restrictions set on them create a sense of urgency. HauteLook was launched in 2007 and was purchased by Nordstrom in March 2011 for $180 million in stock. This is significant because it showed Nordstrom’s commitment to branching out into e-commerce. Furthermore it was one of the first times a traditional retailer acquired an online retail company. Since its acquisition, it has been racking in sales. Nordstromrack.com and Hautelook brought in $323 million in sales in the first six months of 2016, a 38% increase from the $234 million the year before.

While all these projections and figures sound extremely promising. Nordstrom’s ecommerce success also comes at a cost. Interestingly enough it might be taking away from some of its in store purchases which are actually more profitable for the company. Online purchases are generating a lot of sales but not always at the best margins. Online super star, Amazon, has been infamous for their extremely low profit margins but Nordstrom does not necessarily have the same business goals as Amazon. Moving forward, Nordstrom has some tough decisions to make. The efforts and investments they have focused on the past few years may need yet another adjustment to stay on top of the game. The costs involved in creating a successful e-commerce platform on a large scale are not small. They opened their second e-commerce fulfillment center last summer to expedite their shipping process and accommodate the volume of sales. This year the company played around with the idea of opening a third fulfillment center estimated to cost about $170. This may be a smart move because of the slowly online growth they have been experiencing, but it may also be a risk worth taking as Nordstrom’s upfront investments in growing their online business have paid off in the past. Nordstrom has since held off as the future of their online sales is still uncertain. These decisions are pertinent in Nordstrom’s future, as they will have repercussions whichever way they decide.

The Wells Fargo Scandal

December 9, 2016 by plouff Leave a Comment

Below is the link to my interactive timeline of the Wells Fargo Scandal:

https://cdn.knightlab.com/libs/timeline3/latest/embed/index.html?source=1AQDIY0MjwmN8BDMpiQX4jJ-UsBTdBo8gLYDc7qWHypI&font=Default&lang=en&initial_zoom=0&height=650

Attached is the Google Doc I used to build it:

https://docs.google.com/spreadsheets/d/1AQDIY0MjwmN8BDMpiQX4jJ-UsBTdBo8gLYDc7qWHypI/edit?usp=sharing

Blake, Paul. “Wells Fargo to End Product Sales Goals After Accounts Scandal.” ABC News. ABC News Network, n.d. Web. 09 Dec. 2016.

“Business News World.” Business News World – Wells Fargo Asks Court to Force Customers to Arbitration in Fake Accounts Cases. N.p., n.d. Web. 09 Dec. 2016.

Forbes. Forbes Magazine, n.d. Web. 09 Dec. 2016.

@grow_mag. “The Wells Fargo Fallout: How Does the Scandal Affect You? – Grow Magazine.” Grow Magazine. N.p., 29 Sept. 2016. Web. 09 Dec. 2016.

Https://www.facebook.com/CNBC. “How the Wells Fargo Case Will Impact the Broader Industry.” CNBC. CNBC, 16 Sept. 2016. Web. 09 Dec. 2016.

Lab, Northwestern University Knight. “Knight Lab.” 3 – Beautifully Crafted Timelines That Are Easy, and Intuitive to Use. N.p., n.d. Web. 09 Dec. 2016.

Lukomnik, Jon. “Five Steps for Wells Fargo to Rebound from Scandal.” Bank Think. N.p., 05 Oct. 2016. Web. 09 Dec. 2016.

@mjarmental. “Wells Fargo Formally Separates Chairman, CEO Roles.” The Wall Street Journal. Dow Jones & Company, 01 Dec. 2016. Web. 09 Dec. 2016.

Sabatini, Joshua. “SF Reacts to Wells Fargo Banking Scandal.” The San Francisco Examiner. N.p., 08 Dec. 2016. Web. 09 Dec. 2016.

WatchMojo. “Wells Fargo Scandal: 5 Things You Need to Know!” YouTube. YouTube, 15 Sept. 2016. Web. 09 Dec. 2016.

Following Chipotle: Can They Recover?

December 9, 2016 by evans Leave a Comment

Chipotle Mexican Grill is an American fast-food chain that was opened in 1993 by current-CEO, Steve Ells. The company is known for its commitment to serving Food with Integrity, claiming that Chipotle understands the importance of how food is raised and prepared in order to produce quality taste. For this reason, Chipotle is one of the few fast-food chains that serves simple, fresh food without artificial flavors or GMOs. In fact, Chipotle was actually the first national restaurant chain to voluntarily disclose the presence of GMOs in their food until 2015, when they transitioned to only serve food made from non-GMO ingredients (Chipotle, 2015).

This dedication to serving the best food they can find is one of the reasons why Chipotle has found so much success. However, in the last five years, Chipotle has encountered two main problems that have significantly hindered their success. The most detrimental is the E. coli and norovirus outbreaks that hit a number of stores in 2015. The other is trying to manage the rising costs of Chipotle’s core ingredients, while still maintaining the high quality of food they adhere to. Chipotle is a chain that promised something different to their customers. Then, Chipotle discovered that it was much more difficult to manage its success than anticipated. Therefore, the way that Chipotle reacts in times of difficult decision-making and crisis is essential to understanding the core characteristics and values that the company holds.

In its 2015 annual report, Chipotle announced that it had its most challenging year in history, mainly as a result of undergoing the repercussions of their widespread E. coli and norovirus outbreaks. From July to December of 2015, Chipotle’s E. coli scandal, which was traced back to issues with supplier produce, sickened around 500 customers in the United States. The food health predicament initially came as a shock as 43 stores across Washington and Oregon were closed and deep cleaned after more than 40 cases were tied to the states. As cases continued to surface throughout the country, Chipotle had to take the same precautions to ensure that this would not occur in the future. However, the damage had already been done and had detrimental effects on Chipotle’s business and its reputation among customers.

These measures had serious economic implications on the company. In 2014, it was estimated that per year, each Chipotle store generates $2,300,000 in sales. Taking into account the 49 stores nationwide that were closed for up to 10 days due to the outbreaks, it can be estimated that more than $3,000,000 in sales were lost in that short period of time. There are also a number of costs that cannot be calculated, but had a lasting affect on the company’s bank account. For example, Chipotle had to conduct more than 2,500 tests for E. coli during the outbreak, in addition to deep cleaning and sanitizing all of the infected locations, and upping the costs of food testing for health and safety purposes.

Besides the significant monetary losses Chipotle endured in this period, the greater loss the company suffered from was the damage made to their brand image. By comparing Chipotle’s earning statements from September 30, 2015 to that of 2016, revenues decreased by 14.8%, which is $1.2 billion in 2015 to $997.5 million in 2016. The number of restaurant transactions also decreased by 15.2% in 2016, meaning that there were less customers eating at Chipotle in the year after the E. coli and norovirus scandals. Even more shocking is that, in the year following the outbreaks, Chipotle’s net income was $7.8 million, a decrease from $144.9 million in 2015. This dramatic decrease in net income is a clear sign that Chipotle has significantly suffered from a lack of consumer traffic to their stores. Therefore, in an attempt to repair the damages caused by the outbreaks, Chipotle has spent millions of dollars on increased advertising, customer reward programs, and better food health and safety procedures, in order to prove that they are willing to endure profit losses if it means regaining their customers trust back.

In addition to the detrimental effects the outbreak had on customer loyalty, the returns for its long-term shareholders were also greatly affected as the value of Chipotle’s stock plummeted. In the last year, shares lost as much as half of their value, mostly due to Chipotle’s first-quarter sales of 2016 that showed a decrease of nearly 30% because customers still feared that the restaurant chain did not resolve the causes of the outbreaks. In September of 2015, Chipotle’s diluted earnings per share was $4.29. One year later, the diluted earnings per share came out to be $0.27. Since the value of stocks is based on shareholder’s confidence in a company’s future, the dramatic decrease in the stock’s value proves that earning their customers trust back should be Chipotle’s main priority in order to ensure a more promising financial future.

To address these issues of customer and shareholder satisfaction, Chipotle stated that 2015 was a year of reinvestment in addition to a deep commitment to regaining the trust of their customers. If executed correctly, this will recover sales and once again create long-term shareholder value. One of the most significant consequences of the outbreak was the resulting contrast between practices put forth based on their slogan, “Food with Integrity,” and what was truly served to customers. Therefore, as a way of salvaging what they have left of their brand, Chipotle is standing by their vision to change the way people think about and eat fast food. However, this time around, it will be with a renewed focus based on serving a product that is safe by means of incorporating responsibly raised ingredients. Chipotle’s commitment to prioritizing their relationship with their customers, above making profits, is a strategic way of reestablishing the food chain as one of the quick, risk-free alternatives to fast food.

Chipotle’s brand is one of the key reasons for their success. However, pledging to serve their customers food made from the highest quality ingredients has made it hard for Chipotle to keep up with demand. Most of the ingredients that Chipotle uses tend to be more expensive because of their high quality standards. Certain economic conditions, seasonal fluctuations, weather conditions, global demand, food safety concerns, product recalls and changing government regulations also have a dramatic affect on food costs (2015 Annual Report). As a result, Chipotle has to make difficult pricing and purchasing decisions to maintain the desired level of quality they want to serve to their customers, while also generating a profit.

Chipotle has dealt with the rising cost of ingredients for decades. However, in 2011, the company introduced its first increase to its menu prices. As the prices of ingredients became too high to overlook, the only way that Chipotle could continue to provide customers with the same quality of food they expect was to raise the price of their meals. Chipotle had to do this again in 2014 due to a drop in margins by 40 basis points attributed to higher food costs for beef, avocados and cheese.

These three ingredients have caused Chipotle the most trouble over the last few years. In 2016, Chipotle’s food costs were 35.1% of revenue, an increase of 210 basis points from 2015, claiming that the increase was driven by higher waste costs and avocado prices (2015 Annual Report).

The rising cost of avocados has taken a toll on Chipotle’s production process. Guacamole is one of Chipotle’s most popular add-ons, but the high demand has been met with difficulties because of the scarce amount of avocados on the market. According to Chipotle, each batch of guacamole contains about 60 avocados. Due to the high demand, with all of their stores combined, Chipotle goes through more than 97,000 pounds of avocados every day. It takes 74 gallons of water to produce one pound of avocados, which means that Chipotle needs around 7 million gallons of water per day to produce the amount of guacamole to meet demand. However, California produces 95% of the avocados grown in the U.S. and with California entering its sixth year of drought, the price of avocados has spiked as a result of the state’s low water supply. With such high demand and little inventory, Chipotle must charge their customers an extra $1.80 for guacamole. While many customers are currently willing to accept this extra cost, if Chipotle continues to increase the price of their menu items, in addition to charging extra for guacamole, the chain could begin to lose customers.

Since 2013, Chipotle has also dealt with rising global cost of meat. In February of 2015, beef prices climbed by 19% since 2014 and were expected to climb by 5-6% throughout the year (Eller, 2015). Much of this increase can be attributed to droughts that have hit parts of the US in 2014 and 2015. By looking at Chipotle’s 2015 income statement, the company spent around $82 million more on food, beverage and packaging than they did in 2014. This increase was not solely due to the rises in meat products, but it definitely hindered the company’s success.

Not only did the spikes in meat costs affect Chipotle’s operations, but the high quality standards they set for themselves also created issues for the company. Between January and November of 2015, a number of Chipotle restaurants were unable to serve carnitas due to a pork shortage. The shortage was a result of one of Chipotle’s suppliers violating some of the company’s core animal welfare standards. As a result, Chipotle immediately suspended all purchases from the supplier and was unable to provide carnitas to about one-third of their 2,010 stores. This was a difficult decision for Chipotle to make. Removing a core menu item for more than eleven months could have posed an eminent threat to Chipotle’s revenues and customer’s satisfaction. However, Chipotle decided that standing by their mission statement was of the upmost importance. Therefore, the consequences that they endured from suspending the sale of carnitas was necessary in order to promote long term growth and brand loyalty.

Since the cost changes for Chipotle’s menu items were not significant enough, Chipotle did not lose much of its consumer base. However, as the E. coli and norovirus outbreaks plagued Chipotles throughout the nation, customers now had a legitimate reason to stop eating at the fast-food chain. Not only did the outbreaks cause customers to temporarily stop eating at the restaurant, but they also permanently damaged Chipotle’s brand image. When a business’ core value is to serve food made from the highest quality ingredients and then it sickens almost 500 customers around the nation, the company is going to lose a lot of its credibility. Therefore, it has been difficult for Chipotle to earn back the trust of their customers who have lost a lot faith in the company’s claims.

It is such a fragile time for Chipotle. In an effort to recover from what has happened in the past, Chipotle commits to fixing their damaged brand by showing customers the significant value they hold within the company. To jumpstart this plan, Chipotle created a rewards program, Chiptopia, to give loyal customers an incentive to return to the chain. Another strategy they employed was introducing new menu items, such as sofritas and chorizo, to boost interest in their stores. Even through the disease outbreaks, Chipotle has continued to open new locations with the hopes of expanding to new and more popular markets.

Although these are well thought-out strategies to boost consumer interest and bring customers back into their stores, Chipotle’s stock is still lower than it was in July of 2013, meaning that they have not even come close to making up any of their incurred losses. There are a number of steps that Chipotle should take in order to turn the company around. First, Chipotle should reinvent their relationships with their current and potential stakeholders and investors in order to foster trusting and attentive relationships by clearly outlining Chipotle’s plan for future earnings. In terms of their customers, Chipotle should utilize external channels and mediums to promote new levels of transparency, insight, and easier access to available information. It would also be helpful to re-emphasize the freshness and locally grown aspects of Chipotle’s suppliers, confirming that Chipotle knows where their food comes from. Chipotle is confident in their financial future and believe that there is a great chance that they can bounce back and produce all-time highs. Chipotle’s commitment to their company, brand, and customers is an indicator that the chain will find a way to come back out on top.

Links

December 9, 2016 by paridhi Leave a Comment

http://www.marketwatch.com/story/more-department-stores-should-close-study-says-2016-04-24

http://www.wsj.com/articles/department-stores-big-sales-are-getting-smaller-1479830406

https://www.bcgperspectives.com/content/articles/marketing_center_consumer_customer_insight_how_millennials_changing_marketing_forever/

http://www.cnbc.com/2016/05/05/millennials-are-prioritizing-experiences-over-stuff.html

http://www.businessinsider.com/this-chart-shows-how-amazon-is-totally-crushing-its-retail-competitors-2016-5

http://www.marketwatch.com/story/traditional-retailers-stumble-in-their-efforts-to-compete-with-amazon-2016-05-12

https://www.google.com/finance?q=macy%27s&ei=KKJGWJi2FYXcjAHPyayQCQ

http://blogs.barrons.com/techtraderdaily/2016/05/11/amazon-will-displace-macys-as-number-one-in-apparel-says-cowen/

http://marketrealist.com/2016/05/macys-1q16-sales-fell-lower-consumer-spending/

http://money.cnn.com/2016/05/11/investing/macys-earnings-donald-trump/

http://www.economist.com/blogs/economist-explains/2016/01/economist-explains-4

http://www.forbes.com/sites/rachelarthur/2016/07/20/macys-teams-with-ibm-watson-for-ai-powered-mobile-shopping-assistant/#7100b37f7395

Macy’s business challenges and what they can do overcome them

December 9, 2016 by paridhi Leave a Comment

Macy’s has been facing a major downfall and its stock price has been tanking for a while now. This problem has been persisting for several reasons, and departmental stores in general have been facing problems making profits. Macy’s stock price fell by 15% in May after its 2016 Q1 financial results were released. Even more recently, in August, Macys announced that it is planning on closing about 100 of their stores. The company executives mentioned that these stores would be performing their final sales in the next year. They have also already had a few recent store closures.

There are several reasons that have been costing Macy’s major decline in sales and market share. It’s stock price and overall financial valuation has also been plummeting due to this.

Firstly, fast fashion upstarts and established fast fashion companies like Zara, H&M and Forever 21 are rapidly eating away market share because they are able to bring in new styles and designs within short intervals, which is attributable their low costs of production. Also, off price retailers like TJ Maxx and Nordstrom Rack have been providing high quality merchandise at lower prices, which have been attracting a lot of departmental store retailers.

However the real game changer in the fashion retail industry has been e-commerce. E-commerce has made a strong dominant presence in the retail world. This is more than evident as Amazon is about to have the label of the largest seller of clothing in the US. Not just Macy’s but multiple traditional retail companies have been struggling to keep up with the e-commerce industry performing at its ultimate peak. Though the profound growth of the online shopping realm is not a firsthand phenomenon, it is now establishing complete control over the apparel retail industry. Macy’s CEO Terry Lundgren is extremely concerned and recently made a statement that “Macy’s has been seeing continued weakness in consumer spending levels for apparel and related categories”. On the other hand, Amazon’s stock has been flying. According to research done by a recognized financial services firm, the Cowen group, its primary growth has been driven by its apparel and accessories businesses, which makes it a key competitor to Macy’s. This is not only apparent from numbers from financial statements and financial valuation represented in stock market prices, but also from increase in the number of shoppers of the companies over time. Cowen and Company, an investment-banking firm performed a detailed survey of 2,500 shoppers in the United States on a monthly basis for the past three years, and their results, which are reflected in the following graph, show that Amazon’s shoppers are continually increasing on an average where as Macy’s number of shoppers has remained the same.

Also, there is a current trend of millennial consumers being more willing to spend on services and experiences rather than on material or tangible products. Millennials are defined as Americans who are in the age group of 18-34. They form the U.S.’s largest generation by population and account for about $1.3 trillion of the country’s total annual consumer spending. According to research done by The Boston Consulting Group, the generation values personal experiences much more as opposed to material possessions, weather it is clothes and bags or cars and homes. This generation differs from previous generations in that happiness is a result of sharing personal experiences like a music festival or a vacation rather than of owning a car and a home. This trend has also been slightly contributory to decline in sales of high-end clothing brands, which sell in departmental stores like Macy’s and Nordstrom. The preference shift trend has also obliged many other clothing retail brands to try and adapt and provide experiences along with their products.

The stock price of Macy’s for the past year, which is summarized in the subsequent graph, has been quite volatile.

The key issues that are worrying and need to be carefully addressed by Macy’s can be gathered from data from the company’s recent financial statements. On May 11 2016, Macy’s stock price fell by 15% to $31.38, which was both a highlight of its stock price history and also an alarming wake up call for Macy’s. Macy’s released its first quarter financial results a few weeks before this and they showed that its sales fell from more than 7% from more than a year ago and its performance didn’t meet forecasts. Also, same store sales which indicate the change in sales generated from the existing stores of a retailer, are an important performance metric for retailers, have also been significantly declining for Macy’s.

The combination of fierce competition from e-commerce, off price retailers and stores that cater to fast fashion, along with shifts in consumer preferences that are moving away from traditional clothing retail stores have caused problems for not just Macy’s, but even its major competitors that have similar business models, like JC Penney’s, Sears, and Nordstrom.

It is crucial for Macy’s to craft an optimal strategy that has features that can address each of the causes for its decline in sales. Addressing each cause of the big problem specifically helps create a detailed approach. Capitalizing on the company’s existing strengths and opportunity is an integral part of implementing any plan to solve business problems. Consequently, Macy’s has announced that they have been taking some initiatives to combat their problems. They have been receiving constructive feedback and response towards these initiatives.

Firstly, the company has tried to achieve off price retailing, which is being adapted by many retail departmental stores. Off price retailers sell high quality products for much cheaper prices. The catch is that products are usually second hand goods, last season items, cancelled orders or goods returned by other retailers. They usually have an inconsistent mix of brands. An important characteristic that attracts consumers to departmental stores even today is sales and discounts. Even though departmental stores attempt to restrict discounts, it’s difficult them to do so while retaining their loyal customers. This is because some economically prudent customers get too used to this pricing and it is difficult to get them to pay full price. This is exactly where off price retailing comes into the picture. It caters to these customers by providing a discounted products option all year around. For example Nordstrom, one of Macy’s biggest competitors has introduced Nordstrom Rack, which has a strong presence in the off price retailing industry. Macy’s is also planning to start its own off-price retail store, Macy’s backstage, and aims at opening 15 stores by the end of 2016.

While the addition of this segment will definitely give Macy’s a stronger foundation to combat its competitors, off price retailing comes with its own set of troubles. It is important to look from a consumer’s perspective when trying to increase same store sales. Off price retail stores sometimes have defective products, because they are usually returned or rejected products bought out from other retailers. The décor of the store is not at all attractive and welcoming; the manner in which clothes are displayed in these stores are very unorganized and inconvenient for customers as they are all a mix of different kinds of clothes from different brands. Off price retailers project a different aura and feel altogether, and though Macy’s can start an off price retailing division, it would still need to focus on enhancing its primary departmental stores that define its brand image.

Another step that Macy’s has made towards progressing is focusing on developing and revamping their cosmetics and accessories department. While the retail industry as a whole has been struggling to perform in the United states, cosmetics and accessories sales have been soaring, and this has proven to be very beneficial to departmental stores. Not just Macy’s revenue mix, every general department store’s sources of revenue has a good proportion of income from the accessories and shoes departments. The revenue of Macy’s specifically is 38% accounted for by this department, which is the largest portion of all the categories.

Amidst of the struggle to perform, increase same store sales and expand customer base, Macys made an acquisition of Bluemerucry, which is a luxury cosmetics and spa with 100 stores all over the country. After acquisition, Macy’s is planning on opening 24 Bluemercury stores within the biggest Macy;s stores by the end of next year.

Macy’s is indeed making a clever attempt to reinforce their cosmetics department.

Sales of cosmetic products have been progressing remarkably and departmental retail stores like Macy’s should intend to take full advantage of this. Sales have been rising due to a combination of several factors. Firstly cosmetics cater to the contemporary trend of willingness to spend money on experiences. Buying make up is an experience, because most cosmetics stores like Blumercury provide in store make up salons and spas, which have in store makeovers. This is essentially the experiential service that Bluemercury stores could add to Macy’s. Exploiting the cosmetics department by selling experiences can play a substantial role in helping achieve higher sales for the company as millennials become more and more inclined towards such services. Another aspect about the cosmetics industry that makes its products so attractive is that it provides luxury at a much a smaller price and level. For example products from luxury cosmetics brands like LeMar, Clinique and Chanel provide millennials with the contentment of owning a luxury product, though it is at a much smaller level.

A noteworthy innovation that Macy’s is set to bring to its departmental stores is a virtual store assistant that guides you through the entire collection in the store. Macy’s initiated a partnership with IBM to create an app called Macy’s on call that is driven by artificial intelligence and provides customer with efficient in-store help.

A common apprehension that customers have towards large departmental stores is that that they do not get as much help and consideration from store associates as they would get in a smaller standalone store of any brand. Though a lot of times store assistants are helpful to customers, many customers, especially millennials would rather get this help from a smartphone in their hand rather than have to look for a store assistant and have them answer their questions. This app not only caters to such consumer preferences, but would also enhance the efficiency of the shopping process for customers. Such an app would be apt for shoppers with time constraints. Such customers know exactly what they want to buy, and in which size; they would take a few seconds to locate their items on the app and then checkout and get going. However, technology does come with its disadvantages. The risk of issues like network errors, app breakdowns and other technical glitches will subsist. Also, there is still an older group of shoppers who would prefer talking to a human store associate, not only because it might be harder for them to use the app but also because they actually like having the human touch in their shopping experience. Overall, however a user-friendly app like this one would be a considerable addition to improve the shoppers’ use experience and would also help attract more customers to drive sales revenues.

Ultimately, Macy’s will need to constantly keep innovating to add creative and unique components to their business to recover from its sales problems. It is not that blunders have been made by the company that have led them into difficulties, it is just that consumer preferences and trends have been rapidly changing, and intense competition from e-commerce and fast fashion retailers has been grasping customers and market share from departmental store retailers. Nordstrom, which is one of Macy’s major competitor, has also been facing a similar crisis, due to almost identical reasons. Departmental retail stores will therefore need to continually add new elements to their businesses, or remodel existing features to accommodate new trends and revolutionize the value of departmental store shopping.

MMM

Money Marks & Media - Spring 2014