Real Estate, The Economy, and News: Commodities

Showing posts with label Commodities. Show all posts

Friday, September 25, 2015

Grocery Chain Haggen's Bust May Have Little Effect on Competitors' Prices

Grocery chain Haggen Inc., which spent approximately $1.4 billion last year in a dramatic expansion along the West Coast, was forced to file for bankruptcy this month, undoing everything it had accomplished over the past several months. While Haggen believed that its buy-outs of several dozen Albertsons, Vons, and Safeway supermarkets would help the Northwest-based company grow, in Shan Li and Andrew Khoury's L.A. Times article, it is explained why their business plan may have been flawed from the start.

According to experts, Haggen's purchases were doomed to fail from the beginning. Not only was the cost of purchasing and converting 146 supermarkets of various brands remarkably high for the 18-store chain, but Haggen's prices were seen as too high for the quality of produce being provided. According to the founder of DJL Research, a research firm specifically for supermarkets, no one believed that Haggen had any chance of success with their large acquisition.

Analysts go on to claim that Haggen's prices were determined too much by the prices already in place at the purchased supermarkets. Instead of doing their own research, they chose prices similar to those of rivals like Albertsons or Safeway. Haggen is known for its higher quality meats, seafood, and organic produce, which would normally be reason enough to qualify higher prices than their competitors'. However, complaints from customers seemed to all point to less than fabulous service and produce of lower quality than advertised.

Perhaps the lack of proper business planning in the stores was due to the stresses Haggen experienced because of the buy-outs. Albertsons, one of the former owners of some of the stores, broke off their tenuous business relationship shortly after the purchase. Albertsons opened lawsuits against Haggen, stating that $41 million worth of inventory had not been paid for, and in response, Haggen sued Albertsons, claiming that the competitor was consistently working behind the scenes to push Haggen out of the market. Perhaps Haggen's legal struggles interfered with its ability to run its newly obtained markets properly, Now that Haggen plans to pull back and keep only its 37 stores in Washington and Oregon, its reputation for high-quality may one day be restored.

For the over 8,000 Haggen employees in California alone, the bankruptcy will hit hard, The Local 324 United Food and Commercial Workers Union is rightfully upset, especially after having filed recent grievances against Haggen for layoffs and reduced hours. For others in the community who do not work for Haggen, however, economic analysts and regular shoppers alike do not expect to be affected by the closures. Since there is enough competition going on in the community, between Ralphs, Wal-Mart, and other stores, they believe that prices will not likely rise significantly. Who knows? In the end, perhaps Haggen will earn enough money from the sale of the closed stores to get back on their feet in their Northwest home base.

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Friday, August 21, 2015

Devaluation of the Yuan Affects California's Economy

To shopping centers throughout the Southland, busloads of Chinese tourists are a necessary and regularly expected source of income. Especially in summer months, some places like the Beverly Center get an average of 70 such buses per month, full of tourists ready to spend. Shan Li, Samantha Masunaga, and Andrew Khouri wrote recently in their L.A. Times article about how recent devaluation of the Chinese yuan could have positive and negative effects on various California businesses.

Where 2.2 million Chinese tourists to the U.S. spent nearly $24 billion in 2014, 12.6% more than in 2013, many expect that such spending will likely slow down in the coming months. Up until recently, tourists found that their money would stretch much further on brand-name products in California than in China, but as the yuan loses value, that is beginning to change. Furthermore, even as a decrease in tourism hurts stores and shopping centers, it also affects sales on a larger scale. For certain luxury brands, like Coach, a decrease in sales to tourists leads to a decrease in earning, which causes stock prices to fall.

The current economic trifecta in China (slowing of the economy, devaluation of the currency, and a crackdown on political corruption) has led tourists to become more careful with their spending, according to Li, Masunaga, and Khouri. However, they point out that while the yuan loss in value hurts local retailers, it can actually be quite helpful for importers. For U.S. businesses that import Chinese products, the devaluation of the yuan means that the dollar stretches much further than it did before. Since importers will take advantage of this situation and increase purchasing, experts predict that California's ports will get plenty of use in the coming months. This will help to provide jobs for dockworkers, truck drivers, and warehouse workers.

Unfortunately for exporters, such positive outcomes are not likely. They are expected to suffer far more than local businesses due to the fact that import taxes in China can range as high as 20 to 30%.
Some tourists who come to the U.S. regularly anyway to visit family or send their children to summer camp may continue shopping in the U.S. for such luxury goods, but it wouldn't make economic sense for Chinese companies to continue importing American goods when the value of the yuan is so far outweighed by the value of the dollar. Costs would be much higher, especially on top of the exorbitant import taxes, and so it would be unlikely that American exporters would find business improving while the yuan's devaluation continues.

As Louis Glickman once said, "The best investment on Earth is earth." Analysts expect that as the yuan's value continues to plunge, Chinese investors will slow down the purchase of American products and focus on American real estate. Since the dollar remains relatively steady, many such investors will prefer to "park" their money in a building, rather than hold onto the quickly-devaluing cash. The increasing prevalence of property investment could help to dull the effects of the reduction in retail. However, economists warn that China's economy is connected to our own. If China's economy starts to fail, then that won't be good news for the U.S.

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Tuesday, May 19, 2015

Maintenance Issues at California's Refineries Lead to Gasoline Price Increase

5/1/15 - Drivers throughout California have been noticing gas prices climbing swiftly over the past few weeks, and they don't like it. In the last week by itself, prices have gone up by almost 34 cents, 6 cents of which happened over the course of a single day. Is this due to the state of the economy, or to supply-and-demand, or due to something much harder to control? Samantha Masunaga and Andrew Khouri, in their L.A. Times article, conclude that the increasing prices are mainly due to mechanical issues in gasoline refineries around the state.

California's refineries produce most of the gasoline used within the state, since production and delivery of California's “cleaner-burning blend” can be too expensive for out-of-state refineries to consider it economically viable. Furthermore, since the refineries produce as much gasoline as possible, any break in the production chain can cause massive issues throughout the system. Even if one factory would have to close down for repairs, the amount of gasoline in California would fall, making the available gasoline that much more expensive. The system leaves very little room for delays.

Unfortunately, refineries have been forced to stop or lessen production in order to perform maintenance work, whether planned or otherwise. After a February explosion at Exxon Mobil Corp.'s refinery in Torrance as well as some other, minor, issues elsewhere, the supply of gasoline is running low, thus forcing up the prices. Although the oil-refining companies are producing less, they still have contracts that obligate them to provide a certain amount of gasoline to customers, such as gas stations. In order to do this, they are forced to pad their supplies with purchases of gasoline from other refineries.

Many are upset about the price increases mainly due to the shock of it. When the price of a tank of gas increases by $20 to $30 in a month, it is hard to see it coming. To make matters worse, companies that purchase gasoline from other refineries during a time of low production try to keep such transactions secret, so as to not case a “pop” in the market. On the other side of the argument are the average Californians, who use gasoline and want some way to be able to predict when prices will go up. When a company has to purchase gasoline from another refinery, it is pretty obvious that they are having some issue with production.

The average person has had to cut down on certain “unnecessary” expenditures in order to put more money toward filling up the tank. Some have been forced to cut items when grocery shopping, and others have stopped eating out at restaurants. While gasoline prices are still, on average, below what they were this time last year, some areas are feeling far worse effects. A big cause of this, as Khouri and Masunaga point out, is that the market full of secrecy. If people know when companies are planning to purchase large amounts of gasoline from other sources, they will be able to more easily predict fluctuations and therefore plan out their gasoline purchases in a more beneficial manner. Gasoline has almost become like stocks, constantly changing and difficult to predict successfully. That could all change if refineries develop some transparency and give customers a fighting chance.

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Major Theater Chains Face Investigations Into Anti-Trust Violations

4/17/15 - Competition is a necessary part of economics. Without competition, a company or group of companies could gain control of a market and charge outrageous prices for goods and services, against which consumers may have no recourse. When competitors arise, such companies are forced to lower prices since consumers will be able to choose. As supply increases, prices must decrease, or the companies risk allowing demand to decrease.

A monopoly is when a single company gains complete control of a market or commodity. A cartel is when a group of companies have control over the market and agree among themselves on what prices to set. A trust is a group of companies that work together to force other, usually smaller, companies out of the market. Each of these is regulated by the federal government and is prevented as much as possible, so as to allow smaller companies the ability to be economically competitive. In his article, Richard Verrier looks into recent investigations into anti-trust violations by several major movie theater chains like AMC, Regal, and Cinemark.

Many complaints and lawsuits have been filed over the years by owners of smaller theaters, who claim that the major theaters have been involved in a practice called “clearance,” in which the smaller theaters are prevented from playing newly released movies. Is this practice considered a violation of anti-trust laws, though? While a Supreme Court decision in 1948 required that movie studios give up ownership in movie theaters, larger theaters still have the financial clout necessary to have some control over where popular movies will be played first.

Thus, the Department of Justice's anti-trust division has been spurred into action in an attempt to determine if clearances are against federal law. To the large chains, it's simply a matter of economic reasoning. The film studios have the supply, and the movie theaters have the demand. If a company like AMC wants a specific movie from the studio, it will effectively be providing more revenue to the studio, because the purchase of the film will involve hundreds of theaters across the country, while the purchase by a small company like IPic Entertainment will only involve a dozen or so. The studio will be more willing to give in to AMC's requests, because AMC provides more business.

With the Department of Justice on the case, we can assume that the matter will eventually be settled. The conclusion of this argument, however, could mean big things for small businesses. If the DoJ concludes that the major theater companies are not breaking any laws, then the small companies will be at a distinct disadvantage. If the DoJ rules that the major companies are breaking anti-trust laws through the use of clearances, then governmental entities may get more involved in economic issues that are out of their jurisdiction. What will it come down to: the natural order of economics, or the imposed order of government regulation?

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Global Economy Feeling the Effects of America's Powerful Dollar

4/13/15 - Over the past nine months, the value of the dollar has increased dramatically, and Americans are loving it. While the average person is now able to get much further in other countries with the same amount of money as in previous years, Tom Petruno's L.A. Times article predicts that the dollar's raised value will have negative repercussions for the global economy and even the American economy in the long run. Devaluation of currency is becoming a trend around the world, and that will be bad for everyone.

The value of a euro has decreased by 25%, now at just $1.09, from $1.37 a year ago. In countries that don't use the euro, the difference is even greater: 30% in Sweden, 40% in Brazil, and 61% in Russia. This causes more Americans to change their vacation plans, leading to a preference for foreign, rather than domestic, travel destinations. While this is helpful in providing revenue for other countries, American tourist destinations like California and New York find it harder to bring in foreign visitors, as costs are rising from their perspective.

Petruno's research shows that the rising value of the dollar may not be due to an improvement in the American economy, but rather a devaluation of comparative currencies. When the currency of a country lowers in value, prices of goods go down, which causes consumers to purchase more of these “on sale” goods. Petruno believes that this phenomenon of devaluing currency is actually being assisted by federal governments in an attempt to increase demand and aid economic growth. Unfortunately, if this continues, each country will have to devalue their currency more and more to compete with each other, and America will be one of the only consumers in a sea of low prices, which will in turn harm the selling power of American companies.

Fortunately for Californian companies, a large amount of foreign investment comes from China. Since the value of China's currency has remained relatively steady compared to that of the dollar, Chinese tourists to the L.A. area have maintained a consistent degree of purchasing power. U.S. imports are up, and although the costs for these imports have lowered, more importing means less investment in domestic production.

U.S. companies lose money by reduced competitiveness against foreign companies, but more immediately, lose money due to the conversion factor between currencies. As the dollar's value goes up, and the value of foreign currency goes down, American companies are forced to accept less money from a sale than would have been earned previously. However, this has a lesser effect on the American economy as a whole, since the U.S. economy does not rely heavily on exports.

Although the value of the dollar is up, businesses are making less money because of the aforementioned competition and reduced foreign sales. Because of this, quarterly earnings are down, and stocks may begin to plunge because of it. Even in the European stock market, which has been on the rise, American investors receive reduced returns on their investments as the falling value of the euro removes some of the value of the stock.

Petruno concludes that the devaluation game is a slippery slope. Best-case scenario is that demand will move to other countries, improving the global economy without hurting American companies enough to start another recession. Worst-case scenario is that the currencies will be forced into a downward spiral, leading to debt defaults by foreign governments and leading to trouble in the economies of every country. Devaluation is a wild card, according to Petruno, and it can be difficult to predict exactly what will happen because of it. He concludes that it all may come down to whatever China decides —whether to give in to devaluation or keep up the value of its currency.

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Decreased Chinese Demand Harmful to American Exporters

3/6/15 - Labor strikes at ports on the West Coast and the current strength of the American dollar are both contributing greatly to exporters and other businesses that rely on exports. However, Don Lee claims in his Los Angeles Time article that China's slowing economy is causing even more damage to the American market. The strong dollar is not a good thing for most exporters because it makes their products more expensive overseas, in their target market.

While the U.S. economy as a whole seems to be pretty steady, many worry about the effects of significant Chinese withdrawal from American imports. Last year, American exports to China grew only 1.6% while American imports from China grew 5.7%. This trade deficit is bad news for scrap-metal exporters in California, Midwestern manufacturers, and cotton farmers in the Mississippi Delta.

As China's economic growth slows, amid increasing production around the world, China is forced to reduce foreign imports and focus instead on domestic businesses. Even American companies with locations in China are finding it difficult to compete with private Chinese contractors. Fortunately for America, the decrease in trade with China is being somewhat balanced out by increased exports to other countries, including Mexico and Canada. Trade, which has been involved in about one-third of America's economy in recent years, has started to become less-viable as an economic practice.

China is switching from a majorly goods-based economy to more service-based, and according to some of Lee's sources, this may not be a bad thing. Yes, it will have negative effects on businesses and companies reliant on imports and exports, but as a whole, the American economy does better off with services, like finance, accounting, and entertainment. Such service-based businesses are affected to a much lesser extent by the strength of the dollar, which is beneficial for everyone involved.

Besides the slowdown of China's economy, the Chinese president has been cracking down on corruption, forcing government officials to cut back on gifts and parties. Because of this, exporters of such products as fine wines and premium fruits have lost a sizable number of their usual customers. A combination of the new strength of the dollar and an increase in productivity by many countries has driven the prices of commodities down, which could hurt goods-based economies.

According to Lee, the export of agricultural products by California fell 9% last year, due greatly to China's changing economy. Farm shipments on their own plunged by 30%, and other products like grapes and nuts felt dramatic drops in price. The economy as a whole seems to be holding up, but it looks like it is just a matter of time before we are forced to make changes to our economy, or face devastating consequences.

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