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You are here: Home > Current Topics > Mind your Business > 13 September 2004 |
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'It's like a second Christmas and a market we should get in on', so said a representative of Asda Wal-Mart in a radio interview recently on the company's 'Back to School' marketing campaign. No sooner have schools broken up and large posters and signs go up in all types of retail stores on the high street advertising products associated with school - calculators, books, files, pens, pencils, etc as well as school clothing. It is the latter, however, that is causing some concern amongst parents. Image: It's not only stationery that parents have to buy for the new school year. Copyright: Ole Jørgen Bratland & Gisele Jaquenod stock.xchng. In the United States, few schools expect students to wear a uniform. The problem for parents therefore is in ensuring that students have clothing that is not only practical but also clothes that students themselves want to wear. For many, this can end up being expensive as more than one set of clothes used for school is required to satisfy the daily demands of school students! In the UK, many schools not only have a uniform but also a supplier for that uniform. The school crest, logo or badge has to be sewn or embroidered onto the clothes to give the uniform its distinctiveness and in such circumstances, it is not economical for many companies to do short production runs in the hope that customers might buy the items. In addition, the local nature of the market would militate against a large retailer like Asda, Tesco or Marks and Spencer carrying such items. Many schools, therefore, that have such distinctive uniforms will engage the services of a sole supplier who will produce sufficient runs of the items to satisfy the likely demand for the garments. The schools may either process orders from parents directly and then distribute them or provide a form for parents to order directly from the nominated supplier. To kit out the average secondary school pupil has been estimated to cost around £340 - that includes stationery, books, and clothing. Some parents have complained that the use of single suppliers means that the prices are higher than obtaining similar items from high street retail stores. If the uniform consists of white shirts, polo shirts, grey or black trousers/skirts, etc then many of these items can be bought for low prices from the likes of Asda, Tesco, BHS and so on. However, if the school insists on certain types of trousers, skirts and sweatshirts with the school logo on them, then generic clothing cannot be used and this is where prices can differ significantly. 
A quick Google search on uniform prices allowed us to look at an example of two schools. Beaconsfield High School in Buckinghamshire in the south of England revealed a cost of £230 to buy the uniform for an average pupil (assuming the parent bought one of each item advertised as being compulsory). Additional extras such as a scarf, tights, trousers and a sweatshirt could add to the total cost. In addition, different sizes could increase or reduce that cost. In contrast, Aylestone School in Hereford in the west of England had a price of £58 for a boys blazer, trousers, tie, craft apron, badge and cookery apron. Image: Kitting out these two can be an expensive business, especially when it includes school bags for PE and books that includes the school crest or logo. Is it an abuse of monopoly power? For the larger retailers, the 'back to school' bonanza is clearly something they are taking seriously. An investigation of the market shows that parents either have to buy new school uniform and equipment if their child is starting a new school, or as replacements for worn out, or, more likely, outgrown clothing and shoes. In all years of school, pupils change very quickly during the course of a school year and so retailers know that there is going to be a ready market for clothing. Clothing, however, is not the only focus of their attention. Increasingly, retailers are recognising that the increased demands of school life mean that many parents are seeking to give their children every possible advantage and that means spending money on school books, calculators and computers as well as files, paper, pens and so on. Dell, for example, has a sponsored link when you search on Google for "back to school". Selecting this link takes you to the Dell home office page where the company is advertising its normal range of PCs, laptops and hand held devices. There is no obvious link to school nor is there any perceptible link to special offers for students. Companies know, however, that the market in this type of 'support product' is growing and that it is a market that they need to be involved in. Asda and other high street retailers are expecting to boost sales significantly in the run up to the start of the new term and are very aware of how to target the appropriate market segment to maximise sales during this 'second Christmas'! |
There are a number of business and economic theories that are relevant to this story. They are:
The story shows how important it is to be able to recognise how different concepts and theories are involved in an issue and that it is rarely the case where a topic can be analysed without bringing together a knowledge and understanding of a number of concepts.
Economies of scale are the advantages of large scale production that result in lower costs per unit produced. A common mistake for many students when explaining this concept is to confuse total costs with unit or average costs.
Average costs are the total costs divided by the number of units of output:
| AC = | TC |
| output |
If you look at the formula carefully you can see that the relationship between the total cost and the output is crucial. Let us take the case of a specialist supplier of school uniform as an example. Assume that it is contracted to supply items for a comprehensive school with 1,600 pupils aged between 11 and 16. Each year group therefore contains an average of 320 pupils. If we assume that each year group contains pupils of a standard size, the company is faced with manufacturing a small number of items for each size range. If we compare this to a manufacturer supplying Asda with school trousers, since Asda supplies trousers nationwide it can afford to order large production runs. The cost of the raw materials is going to be higher and the total labour costs incurred will also be higher but the costs will be spread over a very large range of output. Asda therefore might ask for a production run of 300,000 trousers of a particular size for distribution to its stores throughout the country.
If we assume that the sole supplier does a specialist production run of 300 trousers to make the comparison, we can assume that the total cost of producing 300,000 trousers is going to be much higher than the total cost of producing 300 trousers. But, will the total costs be 1,000 times more than the smaller producer? Unlikely - they will not need 1,000 times the material nor 1,000 times the staff or equipment. The following example might help to clarify why the average cost is likely to be lower for the larger firm.
| Firm A - the small firm | |
| Production Run | 300 units |
| Total Costs | £3,600 |
| Average Cost | £12.00 |
| Firm B - the large firm | |
| Production Run | 3000 units |
| Total Costs | £1,440,000 |
| Average Cost | £4.80 |
The larger firm has significantly higher total costs, but because those total costs are spread over a larger output range, the average costs are significantly lower. The cost for the large firm is 400 times that of the smaller firm but the output level is 1000 times the size, hence the lower average cost. If we assume that the two firms price their products based on a cost plus basis, then it is clear that the large firm will have a significant competitive advantage over the small one.
From this analysis it is evident that there might be a very good reason why a school might charge a high price for their 'unique' items of uniform, not related to the issue of monopoly. The question we must now ask is what effect this monopoly power might have on the price charged to the consumer.
In strict terms, a monopoly occurs where there is only one provider of a good or service (the term 'mono' meaning one). However, in reality, firms can exercise monopoly power through a variety of methods. A firm can be investigated for possible monopoly power if it secures more than 25% of market share, but a firm can exercise monopoly power even if it is quite a small firm. For example, a local restaurant may provide a unique type of service to its customers - it could be the type of food it serves, the quality of the service it provides, the atmosphere or ambience it offers its customers and so on.
In the case of the uniform supplier, the firm may be the only official outlet for securing the uniform for a particular school. It may be only a small manufacturing firm unknown outside of its locality, but it exercises considerable monopoly power in this small instance.
Why should we be concerned about monopoly power? The concern is how the firm behaves when it has little or no competition. Behaviour may be in the form of the amount it produces, the price it charges and the extent of the profits it makes from its sales. There might also be concerns about quality and about innovation in such a market, or the lack of it!
Image: Are the shirts these girls are wearing bought from a major retailer for £5 each or produced by a local firm and sold at £18? Copyright: Tim & Annette stock.xchng.
Parents of school students might be faced with having to buy a school shirt for their child. For example, white shirts can be obtained at a major high street retailer for as little as £5 but the school has its logo embroidered onto the breast pocket. The firm making these shirts charges £18.99. Is the price reflecting the additional cost of making the item as highlighted in the economies of scale case above or is the firm exploiting its position as the sole supplier and charging a higher price to increase its profit margins, knowing that parents have to choose their product? It may be difficult to make such a distinction but in such cases the suspicion might always be present.
If the firm is exploiting its position who is to blame? Is it the school for insisting on such a strict uniform or the firm who supplies the item? Parents might argue that if the school relaxed its position on the uniform, then parents would be able to by the items required from high street retailers at a much cheaper price, but then the school might not then have a 'uniform' because each child would have slightly different clothes.
There are essentially three types of production methods:
Flow production refers to production where high volumes are produced of goods that are essentially identical, so the production line is in continuous operation.
Batch production refers to items that are produced in batches at each stage thus allowing for some modifications to be made to the eventual output. PCs may be an example of such a process; the casing for the machine may be manufactured and will be identical for each machine, the base materials and equipment such as the printed circuit board may also be common and be done in a second 'batch'. After this, differences in the specification can be made - some machines can move on to a batch that has faster processors inserted, others may have a modem included, others different quality and size sound cards, memory and so on. Finally, some machines may have different types of software loaded onto them depending on the price range which the machine is targeted at.
Job production refers to cases where a one off specification for the good in question is required. Examples here might include specialist tools, machinery and equipment for the manufacturing industry. The equipment in question may be a part for a machine that cuts material, for example, the housing for a laser guided cutting tool. The part may be highly specialised and only used on that one machine. Another example comes from the motor industry. Body parts for motor vehicles are pressed from steel plate, and each body part - the wing, bonnet, etc is slightly different and the press that makes the part is also unique. A company contracted to make the press therefore may only make one of the items but it may be a complex and time consuming task!
For a company making school uniforms, what would be the most appropriate production method? It could be either job or batch production. For example, a clothing manufacturer might have a standard design for a school polo shirt. It may be dyed different colours, but ultimately is the same item. However, it could then pass on to a specialist unit that embroiders different school logos onto the shirt to give it that individually.
