Archive for the 'Costs, Revenues and Profit' Category

Feb 28 2012

Rising costs and falling demand put the pinch on the food delivery industry

Gas pushes up cost for Triangle delivery restaurants – Economy – NewsObserver.com

Read the article below and answer the discussion questions that follow:

Do you love the convenience of having your pepperoni pizza or egg foo young delivered right to your door?

If gas prices continue to rise in the next few months, it might cost you more for the privilege depending on where you order.

Triangle-area delivery restaurants worry about the impact higher gas prices could have on their businesses. It’s a concern that is felt among these restaurants nationwide.

On Sunday, the average price for regular unleaded gas in North Carolina was about $3.71, according to AAA. The website raleighgasprices.com listed prices as low at $3.54 in Fuquay-Varina and as high as $3.89 in Cary.

HotBox Pizza on Hillsborough Street charges $2 for a delivery to help offset the costs of gas for its drivers. While owner James McCaskill said there are no imminent plans to raise that fee, he does worry that it could cost more to get food shipments in.

“For us to deliver the pizza, there’s a cost,” McCaskill said. “We have to pay for our drivers and the wear and tear on their car and essentially to help pay for the gas they use to deliver the pizzas.”

Bruno Rodriguez, owner of Amante Gourmet Pizza in Durham, said back in 2008 when gas hovered around $4 a gallon, the effects weren’t so bad because the hike was short lived. But he’s more worried about it in 2012 during a time when roughly 60 percent of his orders are for delivery.

“I think we’re coming slowly out of a recession, but I think with gas prices around $4, I think it’s going to be longer lived so that definitely will have an impact,” he said. “People will tend to not order many deliveries.”

Rodriguez said Amante charges $1.40 for deliveries in the Bull City, and he probably spends about $40 or $50 a week on gas for deliveries. Fortunately for him, he has a small Toyota, but he isn’t ruling out raising his delivery charge 20 or 30 cents if things get worse.

Shanghai Express, across from N.C. State University on Hillsborough Street, serves primarily college students.

“The economy is no good, so business definitely goes down,” said manager Jinlong Wang, who estimates about half of his orders are deliveries. “Their parents pay their tuition. But when economy no good, parents have no money and (students) have no money too.”

Many experts are debating whether gas could reach $5 a gallon by this summer. That could potentially cripple many businesses.

“If it stays there for too long, it will be a problem,” Rodriguez said. “I think sales are going to go down.”

Rodriguez said the key to keeping gas prices reasonable is not action by lawmakers in Washington, but in how all Americans act.

“It’s up to us to control how much we drive, how hard we drive, what kind of cars do we drive. I’m not sure Washington can do much except drill more in more dangerousplaces,” he said.

Discussion Questions:

  1. How do rising gas prices affect the short-run costs of running a delivery service for local restaurants in North Carolina?
  2. Why were the high gas prices in 2008 less of a concern that the rising gas prices in 2012 for these restaurants?
  3. Assume the restaurant delivery industry is perfectly competitive and at the beginning of 2012 was in a long-run equilibrium. Using two diagrams, one for the restaurant delivery industry and one for a single restaurant in the industry, illustrate the effect of rising gas prices on the individual firms in the short-run.
  4. Assume gas prices remain high throughout 2012 and into 2013. How will the industry adjust to higher gas prices in the long-run? Illustrate the long-run adjustment in your graphs.
  5. “The economy is no good, so business definitely goes down.” Which determinant of demand for restaurant meals is described here? How does the bad economy affect the restaurant industry and firms in the industry? In new diagrams, show the effect of the poor economy on the market and a single restaurant in the market. 

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Feb 27 2012

A closer look at Apple’s iPad and iPhone – “made in America”?

I have two  interesting stories on Apple and the iPad to reflect on today.

First, ABC’s Nightline recently became the first Western journalists actually welcomed into an Apple assembly plant in China. The show recently aired a 15 minute feature on working conditions inside Apple’s Foxconn factory in Shenzhen, China last week. Watch the video and then scroll down for what may be some additional surprising news about Apple’s operations in China.

Next, the story that has gone unreported lately is a University of California study titled “Capturing Value in Global Networks: Apple’s iPad and iPhone”. The study’s most interesting finding, in my opinion, is the tiny percentage of the total value of Apple’s iPhone and iPad that actually goes to the Chinese manufacturers of the products. The charts below, from the study, show how the value is divided among the various groups involved it their production and sales:

The Economist provides the analysis:

The chart shows a geographical breakdown of the retail price of an iPad. The main rewards go to American shareholders and workers. Apple’s profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and memory chips, whose profits account for 7% of an iPad’s value. The main financial benefit to China is wages paid to workers for assembling the product and for manufacturing some inputs—equivalent to only 2% of the retail price.

A student today asked why Apple doesn’t produce its products in the United States, where an economic downturn has left 14 million American out of work for the last three or four years. If iPads and iPhones were just made in America, jobs could be created, households would have more income to spend on Apples products, and both the country and the economy would benefit.

The data in the UC study indicates that in fact, more than half the value of an iPad or iPhone does end up in the hands of Americans. But Apple could never achieve the low costs and high profits that it does by assembling its products in the US. After watching the Nightline video above, it should be clear that the type of production involved in Apple factories’ is very low-skilled and labor-intensive. Using American labor, with its unions, minimum wages and 40 hour work weeks, would require Apple to employ such large numbers of workers and raise the company’s variable cost to such a level that the firm’s profits would be reduced significantly and its sales would fall dramatically. Apple would lose out to foreign producers of smart phones and tablet computers, such as LG, Samsung, Sony and others, which would continue assembling their goods with Chinese labor.

Ultimately, any gain to the low-skilled American workers (presuming Apple could even find enough to do the work of the 400,000 Chinese employed in the production of Apple products in China), would be offset by a loss of profits enjoyed by the millions of Americans who hold shares in Apple Computer and the thousands of American who are employed engineering and designing its products, as the firm’s sales would slip in the face of lower-cost competitors.

So this student’s question identifies an interesting paradox: America, with its large pool of unemployed workers, will never be attractive as a place to produce labor-intensive products such as phones and tablet computers, due to the vast wage differential between the US and China. And even if one firm did decide to produce its products in America, the gains to low-skilled workers who may find minimum wage work in the new assembly plants would be off-set by losses to the firms’ shareholders and the high-skilled workers whose jobs would be lost as sales decline due to the lower prices offered by lower-cost competitors.

The lesson here is two-fold: First, Apple and other American technology companies should continue using Chinese labor to assemble their products, and second, America is better off for it: lower costs mean cheaper products and higher sales, thus greater employment in the high-skilled sectors of the US economy, and more profits and returns on the investments of shareholders in American corporations. Americans are richer and enjoy a higher standard of living thanks to the millions of Chinese working in factories assembling the goods we consume.

Keep in mind, this analysis did not even consider the effect on the Chinese economy and the millions of Chinese workers (whose lives are much harder than the typical American) should companies like Apple shut down their Chinese manufacturing plants. That’s a whole other blog post!

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