Analysis Of Bmw In Uk Market Economics Essay
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Analysis of BMW in UK market 2007-2009
Headquartered in Munich, Germany, BMW Group is one of the leading auto manufacturers in the world. With three of the strongest premium brands in the car industry ---BMW, MINI and Rolls-Royce, BMW targets at the high-end market. BMW (UK) is a subsidiary of BMW Group. Being the third largest market for BMW Group worldwide, UK is the only country where all the three premium brands are presented (BMW UK Fact Sheet 2009).
This essay intends to use micro and macro tools to analyze BMW's sales volumes in UK from 2007 to Q3 2009, and to find out dominating factors accounting for changes in the company's performance. Microeconomics Investigation mainly focuses on the influence of three determinants of demand. Macroeconomics Investigation selects five variables---GDP growth, VAT, interest rate, CPI inflation and average earnings for analysis, and also predicts BMW's performance in the near future based on the tendency of macroeconomics environment. Finally, the essay gives three suggestions that the company can consider.
Data in this essay is from BMW's quarterly reports and Annual reports, UK Office for National Statistics, SMMT (The Society of Motor Manufacturers and Traders), fuel reports released by AA Public Affair and Inflation Report issued by Bank of England. In addition, in order to provide updated information, references in this essay are mainly from authoritative newspaper and press, such as The Times, The Sunday Time and Times Online.
I Sales Review
Figure 1. BMW UK quarterly sales volume (Source: BMW Quarterly Reports and Annual Report 2007, 2008)
Between 2007 and 2009, BMW has experienced great changes in sales volumes in UK market. From the graph, we can see that sales volume rose steadily in the first three quarters of 2007. However, it fluctuated and stood at 44,770 units in Q2 2008. Then a slump followed and sales volume reached a trough of 23,982 units at the end of 2008. Finally, the first three quarters in 2009 witnessed a recovery of sales volumes, which stayed at 39,039 units by the end of Q3 2009.
Now, we'd like to analyze the reasons behind the changes in BMW's sales volumes in UK based on the micro and macro investigation.
II Microeconomics Investigation
Determinants of demands played an important role in sales volumes. There are three determinants as follows:
According to John Sloman and Mark Sutcliffe (2004), determinants of price elasticity of demand are number and closeness of substitute goods and the proportion of income spent on the good.
BMW cars are price elastic measured by the above two aspects. First of all, in the UK auto market, Mercedes-Benz, a manufacturer of luxury automobiles, is a major substitute of BMW. Mercedes-Benz's market share in UK in 2008 and 2007 is 3.45% and 3.33% respectively, while market share of BMW is 5.28% and 4.94% (Auto Industry 2009). The two companies' market shares are quite close. Moreover, Mercedes-Benz launched new E-class to compete with BMW 5-series (Freeman 2003). Therefore, if BMW's price rises, customers will probably switch to Mercedes-Benz.
Secondly, the higher the proportion of income we spend on a good, the more elastic will be the demand (Sloman & Sutcliffe 2004) Car is an expensive item for household and customers usually take a loan to buy one. Moreover, priced premium, BMW costs more money to buy. Therefore, the income effect is bigger and the demand is more price elastic.
Since demand for BMW cars is price elastic, changes in the price will lead to proportionately change in the quantity demand. From 2007 to 2009, significant price reduction occurred to BMW after Q4 2008, because UK auto market was heavily hit by the credit crunch, and dealers had no choice but to cut price in the hope of selling more cars (Bown 2008). According to broadspeed.com, a website introduces the best discounts available from 300 dealerships, the average discount for BMW was 8% -10% before the financial crisis, but now price reduction was up to 30% (Bown 2008). Therefore, due to the effect of Law of Demand, discounts of BMW cars lead to higher demand, which explains the rise of sales volume from Q4 2008 to Q3 2009.
Customers' demands for BMW cars change in response to fuel price because cars and fuel are complementary goods.
The fall of sales volume in Q4 2007 is partly caused by the soaring fuel price. According to Petrol and Diesel Price Archive 2007 (AA Public Affairs 2007), crude oil price jumped to $90 a barrel in November, a record high throughout the year; and in December, with the price of oil still above $90 a barrel, the potential for continuing high prices remains. The price of unleaded and diesel also reached a high level by the end of 2007, which was 102.8p and 108.0p per liter respectively. Customers' demands for a new car from Q2 to Q3 2008 were also constrained by fuel price. Fuel Prices 2008 (AA Public Affairs 2008) reported that petrol and diesel prices peaked at 119.7 p per liter and 133.25 p per liter respectively and the price of oil hit a record high of $147 mid month. Therefore, the spiraling fuel cost dampened customers' desires to buy a car. However, we'll find that BMW sales volumes plummeted during Q3 and Q4 2008 despite of falling fuel price. The reason is mainly about fragile economic environment which gives rise to customers' uncertainty about economic growth. So, even though fuel price decreased, they were reluctant to buy a BMW car. We will further discuss it in the macro part.
Fuel prices are mid-month snapshots, oil is end-of-month closing price except for December
Figure 2. 2008 fuel price (source: AA Public Affairs)
Taste and Preference
Mini is an iconic British marquee owned by BMW (Buckley 2008), which has strong brand heritage and possesses a special place in the heart of British people. So customers have a favorable taste and preference towards Mini, which encourage them to purchase Mini cars. Preference for Mini plays a more obvious role in the increasing sales volume during the first and second quarter 2008. According to The Times, during that period of time, sales of other auto companies in UK market fell, such as Ford, GM and Volkswagen, but BMW's sales climbed by 2.2%, which was mainly contributed by 21.1% increase in the sales of Mini (Buckley 2008)
III Macroeconomics Investigation
Macro environment exerts significant influence on BMW's sales volume, and the following five elements should be paid attention to.
3.1 GDP Growth
GDP is a significant indicator of a country's economic growth. It influences customers' confidence about national economy.
Figure 3. Real GDP quarterly growth (Source: UK Office for National Statistics)
From the above graph, we can see that throughout 2007 and in the first quarter of 2008, GDP quarterly growth rates stayed stable. However, heavily hit by the credit crunch, UK witnessed a slump in GDP growth rate since the second quarter of 2008 and it reached a trough at -2.5% in the first quarter of 2009. Then, GDP growth rate recovered in the following two quarters.
The stable GDP growth rates in 2007 and Q1 2008 were reflected in little change of BMW UK's sales volume. Between Q2 to Q4 2008, customers became uncertain about employment and the future of the economy. Households usually take out loans to buy a new car, because car is a large and expensive item. So auto industry is likely to be the first that is hit by the economic downturn, because customers feel reluctant to increase their borrowings (Buckley 2008). It is obvious that car business is heavily hurt by the weak economic climate, especially brands targeting at the high end. The most likely decision for customers is not to buy a new car at the moment, because they don't know what is going to happen in the near future (McNicoll 2008). BMW is a premium automobile manufacturer, so its sales volume was inevitably impacted by credit crunch, as many customers abandoned or delayed the decision to buy a car from BMW. But when GDP quarterly growth rate rose since the first quarter of 2009, customers' commercial confidence restored. BMW benefited from the economic recovery, which is reflected by the increasing sales volume in the three quarters of 2009.
According to Inflation Report November 2009 released by the Bank of England, GDP growth rate is projected to rise in the following several years, which is favorable to BMW.
Figure 4. GDP projection based on market interest rate expectation and 200 billion pounds asset purchase (Source: Inflation Report November 2009, Bank of England)
According to HM Revenue & Customs (2008), the standard rate of VAT was temporarily reduced to 15% on 1 December 2008 and it would return to 17.5% on 1 January 2010. It means that customers can save more money to buy a new car. As Peter Lawton from What Car? magazine said, customers would be attracted to buy a mid and high-priced car in view of Scrappage Scheme and VAT savings (Bridge 2009). For example, one BMW 1 Series ES (19,940 pounds) goes much cheaper, starting at 20,631 pounds, which would increase to 23,429.50 pounds after Scrappage Scheme ends and VAT rises. In consideration of the savings they can get, customers would be induced to purchase a BMW car. Therefore, the sales volume increased during the first three quarters of 2009.
VAT rate will reverse to 17.5% from the beginning of 2010; it is quite likely that customers will seize the last opportunity to buy a BMW car before it's too late. So, the sales volume in Q4 2009 is projected to rise.
3.3 Interest Rate
Figure 5. Interest Rate (Source: This is money.co.uk)
Figure 6. Interest Rate Aug 08 to March 09 (Source: Bank of England, cited in BBC News 2009)
From Figure 5, we can see that there is no big difference in interest rate in 2007, but it has been decreasing since Dec 2007, and was axed heavily since Nov 2008, which stood at historic low---0.5%, reduced six times from Oct 2008.
Interest rate cut results in two aspects which lead to the recovery in BMW's sales volume since Q4 2008. First of all, savers are faced with drop in the return on their money, so they are reluctant to put money aside in banking accounts, but are more willing to spend it on durable goods, such as cars, especially when they consider VAT cut and Scrappage Scheme. Secondly, customers are tempted to choose Tracker Loans for car purchase which is in line with base rate, thus their mortgage payment is reduced. In addition, along with interest rate cut, Bank of England extended Quantitative Easing. According to BBC News (2009), the Bank initially adds £75bn, and Chancellor Alistair Darling has given it permission to extend this to up to £150bn. The idea is that if the amount of money in the system is boosted, commercial banks will find it easier to lend. Thus, it is beneficial for economic revival, which will in turn boost automobile industry. Thanks to the monetary policy, BMW witnessed an increase in sales volume from Q4 2008 to Q3 2009.
3.4 CPI Inflation and Average Earnings
CPI and average earnings are closely related, because high CPI inflation devalues money earned, reduces purchasing power and increases living cost; thus, it discourages spending. Therefore, we'd like to analyze them together.
From Figure 7 and Figure 8, we can see that CPI inflation increased in the first quarter of 2007, but there was a reduction in the following two quarters and it remained stable finally. In 2008, CPI inflation rose continuously and peaked at 5.2 percent in September. Then, it slumped during the first three quarters of 2009 and recovered in September. Finally, CPI inflation was 1.9 per cent in November, up from 1.5 per cent in October.
Figure 7. CPI Inflation 2007 (Source: This is money.co.uk)
Figure 8. Annual inflation rates - Nov 2007 to Nov 2009
(Source: UK Office for National Statistics)
In terms of Average Earnings (including bonus), it is found that during 2007, fluctuation in average earnings growth rate is in line with that in CPI inflation rate, which also peaked in February, reached the lowest point in July and remained stable during the last quarter. Therefore, CPI inflation rate didn't devalue the extra money that customers earned. With growing average earnings, customers had higher demand for buying BMW cars, so sales volumes increased.
CPI inflation rate stayed at a high level throughout 2008, especially in September when it peaked at 5.1%; whereas, growth rate of average earnings declined slowly. So customers' purchasing power was dampened. What's worse, due to the impact of credit crunch, customers were further discouraged to buy a high-priced BMW car. Therefore, BMW witnessed a plummeting sales volume in UK market from Q2 2008 to Q4 2008.
As for 2009, relatively low CPI inflation rate contributes to increasing sales volume. But sales volumes and average earnings are not in perfect match in the first quarter of 2009, because sales rose while average earnings growth rate fell below 0%. Therefore, we can reach a conclusion that in Q1 2009, the dominating reasons behind BMW's performance are significant price cut, VAT reduction and low interest rate, all of which have been previously mentioned.
Figure 9. Average Earnings, 2005-2007 (Source: UK Office for National Statistics)
Figure 10. Average Earnings, 2007-2009 (Source: UK Office for National Statistics)
CPI inflation is predicted to rise due to lots of inflationary pressure. According to This is money.co.uk (2009), there is a doubled increase in the oil price since the beginning of the year. And there is concern that huge stimulus scheme and quantitative easing may boost rise in price. In addition, reversal of VAT back to 17.5% in January 2010 adds more inflationary pressure. Therefore, in this respect, it is not easy for sales volume to increase.
IV Possible Strategies in the Near Future
Based on the previous analysis and in view of future prediction, three recommendations can be considered.
4.1 Keep Price Increase to Minimum
As we mentioned before, demand for BMW cars is price elastic, so price cut on the condition that it doesn't damage BMW's premium image will increase demand. From January 2010, VAT will return to 17.5% and CPI inflation is expected to rise, so price of raw materials will increase and employees will ask for salary increase to offset inflation effect. Thus, there is great possibility that price of BMW cars will increase. What BMW needs to do is to keep price increase to minimum. Besides implementing effective cost management, BMW can outsource to foreign countries and Romania would be a good choice. Besides Romania's advantage of location, language, culture and competitive cost, currency exchange rate of GON against GBP didn't change a lot over the past year in comparison to INR/GBP and RMB/GBP. So, it can help stabilize cost, and BMW will be able to avoid big increase in price, which can boost demand.
Figure 11. RON/GBP exchange rate (source: www.tititudorancea.com)
4.2 Promoting Financing Programs
Though high CPI inflation makes customers less unwilling to spend, there is exception. If interest rate remains at low level, rich people don't want to put money aside in savings, because money will devalue under the impact of inflation. Usually, they tend to buy durable goods, such as cars, instead. Since BMW has its own Financial Service function, they can work out attractive financing schemes to attract customers.
BMW Financial Service has already introduced effective financing programs, such as "Balloon Payout" program for business customers. Under this program, customers can reclaim up to 50% of VAT on regular rental (BMW UK Financial Service 2009). Effective financial contract and credit financing can also be tempting to customers and encourage them to buy BMW cars.
4.3 Develop Eco-friendly Cars
There is an upward trend in fuel price, which will dampen customers' demand for a new car. So, a fuel-efficient car is regarded to be customers' preference nowadays. Moreover, as unveiled by British government plans on April 16, 2009, UK motorists who buy hybrid and electric cars will receive subsidies of up to £5,000 (Mostrous 2009), which is a big incentive for customers to buy an eco-friendly car. Therefore, if BMW can develop cars which can reduce fuel consumption, it will attract more customers and help secure BMW's leading position in the premium auto market.
Figure 12. 2009 fuel price (Source: Fuel Report, AA Public Affairs---the voice of UK motorists)
BMW's performance in UK market is interrelated with micro and macroeconomics factors. Based on our analysis, it is found that the key to the rising sales in 2007 is the increase in average earnings. In 2008, British's preference with Mini contributes to the rise in sales at the beginning of the year. However, the rest part of 2008 was heavily influenced by the macro environment. Credit Crunch gave rise to the plummeting GDP growth rate, which reinforced customers' uncertainty about economy. What's worse, high CPI inflation rate further discouraged customers from spending, not to mention buy a BMW car. As for 2009, thanks to VAT cut, Scrappage Scheme, recovery in GDP growth and low interest rate, customers were tempted to spend, which is beneficiary to BMW. Looking forward into the near future, GDP growth rate shows signs of revival, which may provide BMW with a favorable macro environment. Whereas, reversal of VAT and possible rising CPI inflation add more challenges to BMW. Therefore, three suggestions can be considered---minimizing price increase, promoting effective financing programs and developing eco-friendly cars.
The future is full of uncertainties. In order to secure success, it is very important for BMW to weigh out the influence of micro and macro elements and take effective strategies accordingly.
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