Real Estate Management - Level 1
Business Management SV1020
The effect of the Euro on ‘The Carphone Warehouse’ Plc
Prepared by
Seyanthan Sivapalan
Introduction
Report Objective:
This report analyses the effects, of the possible introduction of the Euro, on ‘The Carphone Warehouse’ group. Also suggested is a strategic plan of action for the company to implement, should a single European currency be introduced.
Brief History of The Carphone Warehouse group plc:
The Carphone Warehouse was first established in 1989, as a small one-man operation run from an office, simply as a retailer of automotive-cellular solutions and services. The business moved from strength to strength; exponentially expanding its range of products and its customer base as time went on.
Today in 2004 the company still offer the same core products & services within the communications industry, but now to an enormous market. The Carphone Warehouse is one of the fastest growing retailers in history, which has been largely down to its focus and success of providing unrivalled high levels of customer service.
It now operates over 500 stores across the U.K. in addition to over 600 stores across the continent, all of which have been established over the past 10 years. Despite the huge number of outlets, the group has no plans to stop here; an extra one hundred stores are planned by the close of each of the two coming financial years. The company’s main foci in terms of European expansion are France and Spain.
An Introduction to the Euro:
The ‘Euro’ was the name given to the single European currency which was first introduced on the 1st of January 1999. At the time of the introduction, 11 European countries embraced the single currency: Austria, Belgium, Luxembourg, Finland, France, Germany, Ireland, Italy, Holland, Portugal and Spain. Four E.U countries opted out of the single currency: Britain, Denmark, Greece and Sweden.
Due to the huge scale of the conversion operation, the countries involved were given three years time, in which they were to implement full incorporation of the currency. On January 1st 2002, the Euro currency would be finally introduced. It was also decided that by June 30th 2002 the individual countries old currencies would no longer be legal tender.
”The successful development of the euro is central to the realisation of a Europe in which people, services, capital and goods can move freely. This is history in the making. It is the largest monetary changeover the world has ever seen – join us in celebrating and finding out more about our new currency.” (European Central Bank)
Advantages & Disadvantages
Naturally there are many implications of the introduction of the single European currency on all businesses operating in or with Europe. There are a both benefits and constraints, upon the businesses. Follows are the key points that the company must bear in mind when considering the Euro’s effects.
Benefits
● Creates more overall economic stability
The fundamental advantage of the introduction of the Euro is that the company will enjoy greater economic stability, brought about by the higher stability of the Euro (inflation is more controlled and less dynamic). As individual currencies will no longer exist, there will be no fluctuating exchange rates between countries and therefore levels of economic uncertainty are significantly reduced.
Currently, the majority of handsets purchased from the company are supplied by the Finish manufacturer; Nokia. With the single currency, Carphone Warehouse will be able to easily forecast and accurately budget cash flows so that the business as a whole can be more efficiently managed and directed.
● Transaction costs will be cut
The single currency will allow the company to pay suppliers within the E.U in Euros which will cut transaction costs heavily that are brought about in exchange rates. By cutting these costs, importing becomes more efficient in terms of cost and time so that ultimately a larger profit is achievable.
● Business enjoys less “red tape”; therefore potential for international growth becomes immense
The single currency will allow consumers & businesses to buy & sell goods and services abroad without paying commissions in the form of exchange rates. This saving will effectively mean that there are no trade barriers across international business; and so the potential for growth abroad is immense. The single currency would facilitate further expansion abroad as easy as expansion within the U.K. The company will therefore have a genuine opportunity to capture a large market share across the continent and ultimately increase the economic welfare of the company and its shareholders.
● Lower interest rates & more investment
“The stability pact (the main points of which were agreed at the Dublin summit of European heads of state or government in December 1996) will force EU countries into a system of fiscal responsibility which will enhance the Euros international credibility.” (EMU)
This stability pact will ensure optimum conditions for more investment, more jobs and lower interest rates. These factors will mean that the economy is stronger and that on the whole the consumers will have higher levels of disposable income, and so there is potential for increased revenues and ultimately higher profitability for the company.
● Price transparency
Price transparency will benefit the company in that the buyers will be able to directly compare prices of supplies across Europe and source the best deals. The ability to directly compare across the continent will make suppliers more competitive and therefore will increase profit margins for the company. Again this will have a positive effect upon the dividend for shareholders of the company.
● Improved cross – border operations
The main problem for a company looking to expand abroad is setting up. To organise new head offices internationally is time consuming and more importantly an additional overhead for the company. However, the single currency will make cross border operations far easier as all payments and sales will be taken in the same currency. So for example, head office of the company in the U.K will be able to pay its French retail employees without incurring further cost or time delays.
● Investment capital more obtainable
Should the directors of company implement an expansion programme or investment into the business, additional capital may be required outside of the businesses reserves. Less red tape will mean that funding can be obtained from Banks across Europe more easily. There is also the option of easily issuing more shares in international operations to raise further funding for growth.
Constraints
We have so far looked closely at the advantages offered to the Carphone Warehouse by the implementation of the Euro, but there are however a few distinct disadvantages as well which must be critically appraised. The main points are as follows.
● Initial cost of operation
The initial cost of converting to the Euro for the company would be very high. To change existing systems to accept the Euro for over 500 stores in the UK will be very costly. There will also be significant training costs for staff, incurred in preparation, to accept the Euro.
● Loss of control on interest rates
The Bank of England currently sets the base interest rate, which is based upon the country’s economic conditions at the time. However if the Euro were implemented, a central European bank would set interest rates. For example, if the UK economy was strong after the Euro was introduced and the other Europeans countries were weak, the central bank may decide to increase interest rates to stimulate investment. This would have a negative effect on the UK economy and will indirectly affect The Carphone Warehouse. When interest rates rise, in general consumers will have less disposable income to spend on the types of product the company has to offer; therefore it is possible that the company will experience a fall in sales because of uncontrollable externalities.
● Possibility of recession
If the UK were to fall into a state of recession in the economy, it may be more difficult for the government to help bring the country out of it. This is because of EU legislation that states members should not exceed the agreed deficits. If the U.K was brought into recession and was unable to come out of it for a long period of time then there would be many costs. This would lead to further unemployment and decreased consumer spending both of which would generate a severe cut in sales revenue potentially for the Carphone Warehouse.
Preparing for the Euro
It is vital that the company effectively prepares itself for the changeover to the single currency well in advance to avoid unnecessary costs. The changeover will be a huge operation and in order to effectively manage it, it should be broken down into the following functions: customers, suppliers, products, distribution channels, human resources, accounting, financing and information systems.
First of all, the directors should arrange for a meeting to accomplish the following:
- To review the key events and employ an external advisor to provide more information on the euro itself so that the implications can be fully understood.
- To discuss the strategic and technical issues associated with the business and to outline the functions that will be affected. These are Retail outlets, ordering systems, tills and computer systems to name just a few.
- The meeting should invite senior management across both the retail operations across the UK and head office to invite suggestions regarding how they believe their individual departments will be affected.
- To ultimately determine the scope of the euro changeover on The Carphone Warehouse
- To appoint a suitable project manager/managing.
The project managers still have several duties. This will be to monitor all developments relating to the introduction of the euro in the U.K and also the company’s preparations. It will also be their responsibility to ensure that sufficient information is passed onto all employees and to introduce training programmes to develop the company’s employees in respect to the euro. To set and ensure that all deadlines are met so that the changeover to the Euro is carried out smoothly and efficiently.
The company management need to understand the organisational challenges of the Euro but more importantly identify potential to modernise the organisation in terms of how it is run. Much of this potential will be realised by employees by all levels across the company. Therefore I believe that the company should appoint all managers of each department to:
- Organise an introductory talk about the Euro itself
- Identify issues and potential changes on the department to provide positive feedback
- Identify external change that will affect The Carphone Warehouse
Once these points have been investigated, all conclusions should be reported back to a Euro changeover manager appointed by the company.
Finally, once sufficient information has been gathered regarding the impact of the Euro internally on the business; a final report should be published which explains how:
● The business is going to optimise opportunities for improvement, and minimise threats
● The changeover is going to be organised for each internal department in the most efficient way
● The introduction of the Euro is going to improve the overall efficiency of the company
Once the report has been completed, a budget will need to be formed showing times for all changes implemented. When these are complete, the business plan should be presented to both the directors and the public shareholders of The Carphone Warehouse Plc for approval.
Conclusion
Based upon the benefits and constraints of the euro mentioned above, I would recommend that the company embrace the implementation of the Euro. I strongly believe that the Euro will increase overall prospects for international growth, reduce costs and overheads whilst at the same time reducing risk. Not only will savings be made on exchange rates and transportation costs but the Carphone Warehouse will also be able to negotiate better deals from suppliers because of price transparency and increased competition.
It is vital to plan for unexpected circumstance prior to entering the single currency so that any unforeseen problems can be dealt with as efficiently as possible with minimal damage to the company. This will involve ensuring the initial cost of preparing the systems to accept the Euro is kept to an absolute bare minimum as these costs will never be recouped through sales.
The two major disadvantages of the Euro regard to the possibility of increased interest rates. There is no way of tackling this, apart from limiting borrowing from banks and to ensure the company does not carry unnecessary debtors. This will ensure maximum chance of survival during a recession.
In order to present the company’s opinions to the government, who ultimately make the decision, we need to make them as fully aware of our viewpoint as possible. Once the report has been published it should be presented by the directors to government, to illustrate the degree to which the Euro will benefit the company.
~Appendix~
Many sources were use in the collection of research for this report. The majority of which were web-based, details as follows.
The company’s own web site provided much useful background information about the company.
http://www.hm-treasury.gov.uk/ The treasury’s main website that contains various relevant press releases and important speeches by officials, on the subject of the Euro.
The treasury’s official public resource on the Euro, which contains several reports on preparations for the Euro.
The EUbusiness web site is an independent online business information service about the European Union, that has specific advice for retailers on the introduction of the Euro.
The BBC’s business news site with many relevant articles.