Where else can you buy groceries for the week, shop for Kirkland jeans and buy a new computer? Only at Costco.
The wholesale store has always offered a wide variety of products, but it seems like shoppers know what they want. Last quarter Costco sales rose 6 percent, but profit dropped 15 percent because customers indulged in meat products, not electronics.
For some reason customers did not seem to want a new flat-screen TV to go with their rotisserie chicken.
Costco sells some groceries, specifically meat products for small profit margins. Sometimes they offer the products at a loss just to get customers in the door. But this strategy only works if customers purchase more expensive goods with higher profit margins, like flat-screen TVs.
Rotisserie chickens are a prime example. Costco sold 70 million birds last year at $4.99 each. They have the price point set in stone despite rising chicken prices. In the past year the profit margin on each rotisserie chicken sold has dropped 20 cents because of rising chicken prices. Thats $14 million that Costco misses out on for not adjusting it's chicken price.
And it would all be worth it if shoppers' attention spans were shorter. Perhaps the firm needs to reorganize stores to distract grocery shoppers with expensive electronics.
Mickey Gorman
Friday, March 7, 2014
Tuesday, March 4, 2014
Robot Economics: Good or Bad?
The movies, I Robot, Transformers and
even Star Wars have given us real
life look-ins into what the world would be like should robots possess an
independent role in society and take jobs in the world economy. Now, in 2014,
robots have obtained a growing role in the United States economy. Some economists
in the U.S. are worried about the potential for a robot economics “takeover”.
At the same time, analysts and critics are laughing at the notion of a robotic coup
in the labor market. So how should we actually feel about this? I would say,
somewhere in between.
In recent years, robots have increasingly
replaced unskilled jobs in factories and low-end manufacturing. As a result,
many factories have been able to increase their production numbers, and therefore
profit at levels that had never been possible before robotic use. At the same
time, robotic usage takes away jobs in these sectors, and is even starting to
sneak into the middle-class job sector.
A recent study estimated that there
are 10 million robots used worldwide. Their use makes sense for large factory
owners in manufacturing industries. Robots do not have sick days. They do not
require or need employment benefits. And they are consistent in production. To
further the argument for their use, many economists point to the Internet and
digital technology revolution as a similar way in which human jobs were phased
out, and then reinvented in some way using the innovations. Essentially, today,
email and smartphone apps have expedited tasks that used to require human
management. At the same time, the baby boom generation is reaching retirement
age. Robots, although not in all cases, may have the ability to replace many
diminishing jobs.
The overall argument made is that
the increase in efficiency from robots will lead to an increase in income and
wages for employees. The increased income will lead to increased spending which
will in turn boost the economy. At the same time, not everyone will be able to
profit from robotic manufacturing. Regardless, the question as to how robots
should be used in manufacturing has yet to be determined. It is likely a
question that will never have an exact answer, but instead will work itself out
through the coming years.
Sources:
Monday, March 3, 2014
Economic Evolution
With Polar Vortex 3 hitting Lexington in the beginning of March, again the idea of climate change, let alone global warming, seems intangible. This is why the term climate change is key. There is no scientific debate as to whether or not CO2 emissions produced by human industry are altering the earth's climate; climate change is a"an inescapable truth," as The Economist calls it. But the continual division over how to combat this issue stems from two opposing ideologies about man's relationship with his environment. One is that the environment must be protected even at the cost of economic opportunity. The other is that economic growth must be promoted even at the potential harm of the environment.
Environmental economics attempts to bridge this dichotomy. Environmental economics is a sub-field of economics that studies environmental issues such as the extraction and allocation of natural resources, land use, and carbon policy. This field of study is distinguished from ecological economics, which views the economic system as much a part of the planet's ecosystem as any other. This view of the economy becomes another way to reconcile these two ideologies.
But regardless of how governments come down this spectrum, countries are responding to climate change by passing more specific laws aimed at cutting carbon emissions. According to The Economist, half of the 66 countries surveyed by a published review of national climate legislation passed environmental laws or energy efficiency acts in 2013. Whether or not they will be effective is another matter.
The EPA's National Center for Environmental Economics suggests that market based approaches to greenhouse gas policy are most effective at reducing greenhouse gas emissions on a national scale. Market based approaches essentially leave method of reducing emissions to the emitter and incentivize emitters to do comply with the standard by developing low cost ways to reduce pollution. Some market based strategies include tradable permits (cap and trade) or emissions taxes. I think that while the global impact of these kinds of strategies is still uncertain because of how long term this issue is, we are definitely in a period of intense economic evolution. Over the past 2 centuries our economy has been progressing towards more development, more growth, and more consumption. Now we are going to have to adapt to the natural forces responding to these economic patterns.
Janey Fugate
Sunday, March 2, 2014
Bitcoin
What happened it Bitcoin? A few months ago it was seen as
the gold of the future and now it seems like it will flame out by years end.
Bitcoin is a decentralized, peer-to-peer cryptocurrency
developed in 2009 by an individual or group under the name Satoshi Nakamoto.
Bitcoin has generated substantial media attention over the past 18 months due
to its surging popularity and controversy surrounding its use in illegal
transactions.
Unlike a traditional currency, Bitcoin is not maintained or
manipulated by a central bank. Rather, it is maintained by a decentralized
network of individual hosts (referred to as nodes). Individuals secure
transactions using digital signatures, which can be thought of as the
mathematical analogue of a physical signature. One of the most significant
characteristics of Bitcoin is the ability to maintain anonymity as a user; when
transactions take place, they take place between mathematical identities in the
Bitcoin network that are not associated with real-world identities. Bitcoins
are stored by associating them with cryptographically generated addresses,
which can be stored via web services, hardware, or on paper printouts.
The future of Bitcoin is extremely uncertain. In December,
the currency had returned over 5,000% year-to-date, and reached its peak at $1,147.25
on December 4th, according to Coindesk.com. The rapid rise in value,
growing from $99 at the beginning of October to its peak in December, led many
investors to conclude that Bitcoin is a highly overvalued asset bubble. Certain
investors are attracted by its anonymity, the ability to transfer funds
directly between users, and the upper limit on its supply, which prevents any
institution from inflating away its value by printing more.
Last Friday Bitcoin took a huge hit, as exchange center Mt.
Gox filed for bankruptcy and announced that they had lost over 100,000 of its
own Bitcoin and 750,000 that belong to customers. In total, the loss approached
$500 million. US Senator Joe Manchin wants the currency banned, calling it “highly
unstable and disruptive to our economy” and an aid to “illicit activity.”
Bitcoin gained a lot of its traction from the Silk Road, an illegal drug website
that was shut down in October but was running again in November. Users liked
that they could use the Bitcoin to buy their drugs and no one could track them.
Today the price of Bitcoin sits around $560 and has been on a
steady decline over the past month. Some say that Bitcoin is going to come back
from its latest fall even stronger. Barry Silbert, CEO of SecondMarket, which
operates an investment fund for owners of Bitcoins, says, “If you look at the
short history of Bitcoin, there’s been a series of bubbles and busts, there’s
been a series of disruptions, there have been hacks, there have been thefts.
And really, after every single event, Bitcoin has emerged stronger.”
While it’s impossible to predict the future value of Bitcoin,
its surging popularity and increasing legitimacy make it an exciting new
technological phenomenon that is going to be interesting to see how it
recovers.
Sam Campbell
Coindesk.com
Wsj.com
What $51 Billion Gets You at the Olympics: Corruption
Soviet-Style Winter
Games
Vladimir Putin campaigned in 2007 at the International Olympic
Committee meeting in Guatemala to host the 2014 Winter Games in Sochi Russia. Sochi,
for Putin and Russia, would be a showcase to broadcast the progress of the
nation over two decades since the fall of the Soviet Union. He promised to
spend the unprecedented sum of $12 billion on the Games.
Following the end of the Olympic Games in February of 2014,
the Games ballooned to a final cost of $51 billion. Divide this sum by the
number of events in the Winter Games, and each event averaged at a cost of $520
million. Salt Lake City cost a total $2 billion and Vancouver cost $7 billion. Putin’s
international demonstration rescinded into Soviet characteristics: excessive
budgets fueled by corruption while attempting to boost national fervor. The
costs of some of the facilities of the game are shown below.
Corruption
In my opinion there are two reasons for the corruption
of Sochi: Russia having a resource economy and the inherent ability to act
dishonestly in the construction industry.
Russia receives over half of its national income from the
sale of hydrocarbons. These revenues make the Russian economy very reliant on
one very particular natural resource, therefore requiring heavy government intervention
to regulate the industry. With more government intervention, corruption
increases because of the lack of quality institutions to regulate the industry.
When individuals can scheme and collude to rake in profits through the existing
system, entrepreneurship and innovation is stymied. Russia has long been a
resource economy, which seems to make Russian politics and business inherently
corrupt (Look to the OPEC countries for more examples).
Combine the inherent nature of Russian corruption with the
promise to spend billions of dollars for the Winter Olympics and a corrupt industry
enters the market, construction. Construction has often been cited as the most
corrupt industry in the world as costs of fraud have been estimated to reach $1.5
trillion by 2025 according to Grant Thornton, an accounting firm. As mentioned
with the regulation of resources with weak institutions, construction also
requires heavy government involvement which creates corruption. Permits need to
be given out, and bids need to be won. When more individuals are involved in
the process, more corruption is possibly conjured. Known as the Tullock
Paradox, it is easy to bribe somebody when the bribe is much less than the cost
of the project. This is how the projected cost of Sochi skyrocketed from $12 billion to
the final cost of $50 billion.
So all of this spending is good for the economy, right?
Olympic Hangover
The Games will be over after the Paralympic Games finish
later in March. By that time, all of the spectators will be gone but the roads,
the hotels, and the venues will all still be in Sochi, most all of which are
permanent. There will be significant costs to maintaining the arenas and
facilities that will need to be funded by tourist revenues. However, Moody Investor Service predicts that
infrastructure maintenance in Sochi will surpass tourist revenue in the future.
For example, Sochi would need to double its current annual volume of tourists
to 5 million just to fill up hotels.
What makes the hangover all too predictable is the lack of
direction on behalf of the Russia to have a developed plan to make its
financial investment worthwhile. There aren’t any apparent plans. Atlanta
benefited from its spending by improving roads and its airport. London
benefitted from recognizing the benefit of using temporary structures for its
events. Temporary doesn’t cost as much to create as permanent, and doesn’t cost
anything to maintain in the long run.
Sochi was the pinnacle of tourist destinations for Russians
during the Soviet Era, a historical reputation that Putin wants to establish
globally. But Sochi isn’t a Westerner’s vision of a vacation. It’s in an
extremely volatile area, close to the Caucasus region (think Chechnya). While
Russians may visit, it’s still quite a distance to travel to for Americans and
even some Europeans.
The lack of future tourist revenues, a stagnating Russian economy, and $51 billion is excessive costs leaves the Russian taxpayer with quite an extra burden to cover. Was the national fervor worth it?
-Wilson Hallett
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