WECO111: Microeconomic Principles - Myer to Exit Top Ryde City Shopping Centre as Part of Transformation Plan | Case Study Assignment Help

Case Study Assignment

Myer to exit Top Ryde City shopping centre as part of transformation plan- Sue Mitchell, The Sydney Morning Herald, May 5, 2015

It was one of the first new department stores opened by Myer after its $2.3 billion float in 2009. Now Myer's Top Ryde store could be the first of as many as 20 stores earmarked for closure as part of a transformation plan aimed at securing the 115-year-old retailer's future.

Myer is planning to close its four-year-old store in the Top Ryde City shopping centre and hand the space over to major chains such as Coles or Kmart as part of a $40 million redevelopment of the centre.

According to a development application lodged in March with City of Ryde Council, Top Ryde City plans to replace the two-level Myer store with a supermarket, a major tenant and a "mini- major" such as H&M, Zara or Uniqlo.

Myer and Top Ryde City shopping centre manager Peter Reece confirmed that the centre was considering a range of refurbishment options, but said no decision had been made on which opportunity to pursue.

"We're aware the plans for the refurbishment of the centre are progressing and we'll continue to work with the landlord on any proposed changes at the centre," a Myer spokeswoman said.

The Sydney shopping mall was one of 12 new leases signed by Myer at the time of its 2009 initial public offering, when the retailer was highlighting its growth prospects. Under former chief executive Bernie Brookes, Myer planned to open as many as 15 new stores in six years, lifting store numbers from 65 to 80 by 2015, and saw scope to move to more than 100 stores "longer term".

Two years later, as online sales boomed and overseas retailers such as Zara and Topshop entered the market, Myer was forced to scale back new-store plans and close or shrink existing stores.

Over the last three years Myer has closed six stores when leases expired – Elizabeth, Fremantle, Forest Hill, Dandenong, Hurstville and Tuggeranong. It has also handed back space at Warringah and Miranda and abandoned plans for new stores at Green Hills, Woden and Plenty Valley.

Analysts and investors believe Myer may need to close another seven to 20 existing stores, shrinking its store network to between 48 and 60 stores and sacrificing more than $100 million in annual sales.

As part of a strategic review by new chief executive Richard Umbers, Myer is reviewing all its assets, including the store network and supply chain, and plans to update the market before the end of the year.

Investors fear the cost of exiting 20 and 30-year leases could be more than $300 million. Myer's total lease liabilities are around $3 billion and its weighted average lease expiry is estimated to be around 15 years, or 12 years excluding long leases on prime central business district stores.

"You can't get out of these leases without incurring huge penalty costs," said one fund manager, who declined to be named.

"They have some stores that they don't want and some stores that are too big with dead floors," said another fund manager. "I estimate they have 10 to 20 per cent too much space."

However, property sources suggested that in some centres landlords would be more than happy to replace Myer with fast-growing retailers such as Zara, H&M, Forever 21 and Uniqlo, which are capable of generating stronger foot traffic.

Myer's 10,550 square metre Top Ryde store opened with great fanfare in 2010, but the shopping centre collapsed six months later, forcing its owner, Bevillesta, into receivership. Private equity firm Blackstone Group paid $341 million in 2012 for the debt but does not manage the asset. The centre is now facing increased competition from the nearby Macquarie Centre at North Ryde.

Analysts estimate that Myer's Top Ryde store is barely profitable and sales have fallen to around $20 million a year from forecast sales of $30 million. The lease is believed to run until 2030 and Myer is estimated to be paying a gross rent around $2.5 million a year. But if the redevelopment is approved and new tenants are found, Myer could exit the centre for around $1.7 million, or six months’ rent.

Top Ryde's Mr Reece declined to reveal the terms of Myer's lease or possible exit costs.

"We are always assessing innovative options that will secure our current customers and attract new customers from a growing part of Sydney," he said.

Task:

Question 01 – Calculation Questions

The following incomplete tables shows two competitive firms’ various costs of producing output.

a) Fill in the table for FIRM Armani

b) Fill in the table for FIRM Bvlgari

c) Assume the market for this product is perfectly competitive and the current market price is $24.Determine the quantity produced by each firm and their economic profit/loss.

d) What will happen to this market in the long run and why?

Question 02 uses the same data from Question 01.

a) Now suppose that the market price falls to $12. Do both firms make economic profit? Explain why.

b) If one or both of them makes an economic loss, would they shut down temporarily?

c) Assume these two firms now are actually two factories of one corporation, and the corporation can

operate either of them at a time. Using the two tables above, determine which factory should be in

operation to produce up to a certain level of output. What is this level of output?

d) Explain your answer in (c).

e) 1 mark – take a photograph of an example of a firm’s costs. Share your example on social media (Twitter,

Question 03 – Theory Question

Assume that the world market for rice is perfectly competitive.

a) Use a landscaped A4 page to demonstrate the world market for rice in long run equilibrium conditions. The market for rice is to be on the left, and a representative farm (firm) is to be on the right.

b) Explain and discuss the long run conditions above.

c) Illustrate on this diagram, the short run impact of a scientific discovery that rice consumption will increase your life expectancy.

d) Explain and discuss your answer to (c).

Question 04 – Theory Question

Question 03 continues from Question 04 above.

a) Re-draw your diagram in (3.c). Illustrate on this new diagram what would happen in the long run.

b) Explain and discuss your answer to (4.a).

c) Explain and discuss what could prevent your answer to (4.b) from occurring and why.

d) Explain and discuss what strategies a firm in this situation could adopt to retain what it is losing in (4.a) and (4.b).

e) 1 mark – take a photograph of an example of a firm in perfect competition. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqperfectcomp). Include a screenshot of your social media posting – your screenshot should be just half an A4 page).

Question 05 – Case-Study Question

This question is based on the newspaper article in the assignment folder. Assume that ‘Myer’ is a company that has many stores scattered throughout Australia, including Top Ryde. These ‘Myer’ stores compete with several other stores of other firms in a Monopolistically Competitive clothing market.

a) Differentiate a fixed cost from a variable cost. According to the article, for the ‘Myer’ store in Top Ryde, what is a possible fixed cost, and what is a possible variable cost?

b) Draw fully-labelled diagrams of average fixed cost, total fixed cost and total variable cost.

c) Explain why each curve in (b) is shaped as such.

d) Show and explain the difference in impact on marginal cost if there was a change in the cost of operating the signage outside the store compared to a change in casual wages.

Question 06 – Case-Study Question

This question is based on the newspaper article in the assignment folder. Assume that ‘Myer’ is a company that has many stores scattered throughout Australia, including Top Ryde. These ‘Myer’ stores compete with several other stores of other firms in a Monopolistically Competitive clothing market.

a) Draw a fully-labelled, half-an-A4-page diagram of the ‘Myer’ store in Top Ryde that would continue to operate in the short run even if making losses in the short run.

b) Explain briefly your answer in part (a):

i. Why you drew the ATC curve in this position;

ii. Why you drew the AVC curve in this position;

iii. Why you do not need to draw the AFC curve.

c) Explain briefly your answer in part (a):

i. Why the ‘Myer’ store in Top Ryde would chose not to shut down;

ii. Why the ‘Myer’ store in Top Ryde cannot exit the market;

iii. How the ‘Myer’ store decides the price and the quantity if it continues to remain open.

d) If the ‘Myer’ store were to shut down what is the loss equal to? Explain why. According to the article, why is the ‘Myer’’ store unable to shut down, even if it wanted to?

e) 1 mark –take a photograph of an example of a firm (/s) in monopolistic competition. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqmoncomp). Include a screenshot of your social media posting – your screenshot should be just half an A4 page)

Question 07 – Research Question

Suppose that ‘Myer’ sells two brands of perfume: Bvlgari Perfume and Armani Perfume. You are given the following data, use the mid-point formula for any calculations of elasticity. All data are per day.

a) What is price elasticity of demand and what are the factors that influence the price elasticity of demand of perfume? How is price elasticity of demand calculated?

b) Assume that we are only considering the data above. Is it possible to pinpoint the exact and single reason why the quantity demanded of Bvgalri Perfume has changed between December 14 and December 15? If so, explain what happened. If not, explain why. Remember to consider ceteris paribus

conditions.

c) Calculate the price elasticity of demand for Bvgalri Perfume between December 14 and December 15.

d) Assume that we are only considering the data above. Is it possible to pinpoint the exact and single reason why the quantity demanded of Armani Perfume has changed between December 16 and December 17? If so, explain what happened. If not, explain why. Remember to consider ceteris paribus

conditions.

Question 08 – Research Question

Suppose that ‘Myer’ sells two brands of perfume: Bvlgari Perfume and Armani Perfume. You are given the following data, use the mid-point formula for any calculations of elasticity. All data are per day.

a) What is cross-price elasticity? Calculate the cross-price elasticity of demand for Armani Perfume between December 14 and December 15. Comment on your result.

b) What is income elasticity? Calculate the income elasticity of demand for both goods between December 15 and December 16. Comment on your result.

c) Both ‘Myer’ and ‘David Jones’ sell Bvlgari Perfume and Armani Perfume. With reference to the characteristics of an oligopoly, explain why ‘Myer’ and ‘David Jones’ can be considered to be an oligopoly in this context.

d) Explain, with reference to any model of oligopoly, why Bylgari Perfumes are priced nearly identically in both ‘Myer’ and ‘David Jones’, and why Armani Perfumes are prices nearly identically in both ‘Myer’ and ‘David Jones’.

e) 1 mark – take a photograph of an example of a firm in an oligopoly. Share your example on social media (Twitter, Facebook, Instagram, Weibo, QQ, etc.) using the hashtags: #mqecon111 and #mqoligopoly). Include a screenshot of your social media posting – your screenshot should be just half an A4 page).

Question 1:

a) Graph showing the rice market and representative firm in the long run

b) In the figure above, the market for rice is shown on the left panel and the representative firm is on the right panel. The demand and supply of rice in the market determines the price in the perfectly competitive market which is shown on the left panel and this price is passed on the firms in the right panel. In the long run, the firms in the rice market can earn only normal profits as is shown by the LAC=LMC=MR=AR at the point of equilibrium.

c) When there is a scientific discovery that rice consumption increases life expectancy, this would shift the demand curve to the right as shown in the figure below.

d) The scientific discovery of increase in life expectancy due to rice consumption will shift the demand curve to the right which will increase the price from P to P’ as shown in the figure above. This price is passed on the firms in the market as shown in the right panel (as firms in the perfect competition are price takers). At this new price P’, the existing firms in the market will enjoy a higher revenue than their costs and will earn super normal profit in the immediate short run as shown by the shaded area (green) as supply cannot be increased immediately in the short run.

Question 4:

a) Long run adjustments after the scientific discovery:

b)In the above figure we can see that the firms are earning normal profits in the long run again. This is mainly due to the fact, after seeing the super normal profits earned by the existing firms, new firms will enter the market to produce rice and this will decrease the super normal profits earned by the existing firms. As new firms enter the market, the cost conditions for producing rice would increase, and the supply would increase in the market which would shift the supply curve to the right as shown the figure above In the perfectly competitive market we know that firms are price takers and there are perfect information in the market and as such earning of super normal profits in the short run spreads in the market which will attract more firms in the market (as there is nor barriers to entry or exit). All of these, will increase the supply which will shift the supply curve to the right to SS1 and the increasing cost conditions will diminish the super normal profits and the firms (both the existing and new firms) would earn only normal profits in the long run as shown in the above figure.

c)If the rice industry is facing increasing cost conditions such that the entry of new firms into the industry causes production costs to increase and also the resource prices such as the seeds, fertilisers and other inputs that would shift to the longer run average cost curve of each firm upward direction which will increase the minimum efficient scale of production (the minimum point of LAC). The presence of increasing cost conditions in the long run, the industry would face a shift in the supply curve in such a way that they LAC of existing rice firms and new firms face increasing cost conditions. Another condition that would prevent normal profits in the long run is a lack of information to the new suppliers that would prevent them from entering into the market (to capture some part of the open normal profits earned by the existing firms.

d)Strategies that could be adopted by a firm to retain need supernormal profits earned due to the scientific discover, is to keep the costs to the minimal ground (such that is profits are retained). It can also prevent the spread of information about the supernormal profits to other prospective suppliers of rice. As firms are price takers in perfect competition, there is nothing it can do with the price determined by the market. Price acts as a signal to entry and exit of firms. The only thing that the firms can do is to control its quantity and minimise its costs such that is profits are maintained.

Question 5:

a)Fixed costs are those costs that are fixated in the short run and does not change with the level of production of the firm. Whereas variable costs are those costs that vary with the level of production of the firm. Examples of fixer cost include land, office space, capital equipment et cetera; examples of variable costs include raw materials required, labour involved in the production which vary with the level of production. For Myer store in top ride, the possible fixer cost is the office space, the floor space that is rented or leased out for opening up the Myer store. Variable costs for Myer store would include the various staff employed at their stores.

b)Fully labelled a diagram of average fixed cost , total costs, total fixed and total variable costs are included below.

c)Average fixer cost is a rectangular hyperbola that keeps on decreasing with the level of production increasing, but it never touches the x-axis. This is mainly because average fixed cost is calculated as the fixed costs divided by the output produced. Similarly the total fixed cost of production is the parallel line to the x-axis as it is constant throughout due to the fact that fixer cost of production do not vary with the level of output. The total variable costs on the other hand starts from the origin and increases with each level of output produced.

d)If there is a change in the cost of operating of signage outside the store, this would amount to a change in fixed costs and would the fixed costs would increase from FC1 to FC1. But if there is an increase in casual wages, then total variable costs would shift upwards from TVC1 to TVC 2 and this would shift the total costs curve.

Question 6:

a) Operation of Myer store in the short run even when making losses. (shown diagrammatically below)

b)(i) ATC is above the AR curve in the figure because, the firm is making losses in the short run.

(ii) AVC is drawn below the AR curve since the firm is atleast able to cover its variable costs in the short run

(iii) We do not need a AFC curve because the difference between the two curves, AVC and ATC shows the Average Fixed Costs and we need not include a separate curve for that.

c)(i) Myer firm would not choose to shut down the store in Top Ryde, because, it is able to cover its variable costs of production in the short run and only the fixed costs are not covered.

(ii) Myer Store cannot exit the market because its resources are locked in the various established stores and there would be high penalty fees if the land owners charge penalty for closing down the stores

(iii) Myer would have to charge the price at a point between two points where P=AVC (shut down point) and P= ATC (break even point) such that some portion of the fixed costs would be covered in order to sustain the long run.