Discuss the advantages and disadvantages of British membership of the Euro for a UK supermarket retailer operating throughout the EU.

Recently, 11 of the 15 European Union (EU) states incorporated the single currency into their domestic economies. However, the UK was one of the four states who chose not to join. Although the British public is largely against the Euro, for fear of losing sovereignty, many British firms, including supermarket chains, are in favour of it. These firms therefore believe that the advantages of the Euro outweigh the disadvantages.

Firstly, a prominent advantage of the Euro, would be a reduction in transaction costs. This mainly would involve the elimination of exchange rates; it is estimated that this would allow the firm to cut its total costs by around 0.5%. Firms would no longer have to convert foreign currencies such as the Italian Lira into British sterling. Subsequently, this would also allow firms, such as supermarkets to save time and money, through easier accounting and banking. Lower unit costs can have numerous knock on effects, the firm can benefit from higher profit margins, meaning more money for investment or higher dividends for shareholders. Or prices could be reduced allowing the supermarket to become more competitive. This would be particularly useful for a chain such as Asda who are seeking to increase their market share. A single currency would also mean that foreign suppliers are more willing to do business, as they too don’t have to deal with the hassle of exchange rates; fluctuations etc. This can also help to reduce costs, as economies of scale would be able to be more readily achieved, as the supermarket can benefit from a greater variety of suppliers who are likely to become more competitive, also meaning lower prices.

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The removal of exchange rates also removes any uncertainty of how much a firm will have to pay, or receive due to fluctuations. This would mean the supermarkets would become more confident with trading with other member states. Consequently, electronic stock control would be made easier. One reason for this, is because some firms try to avoid the high prices by stockpiling products, which can result in additional costs such as storing the stock and waste. Just In Time stock control may also become more feasible, depending on the location of store, supplier etc. The exclusion of exchange and having a single currency, would also make easier and improve forecasting and predictions as all figures would in the same currency and profits would not be reduced because of poor exchange rates. This would come in useful when trying to justify a controversial/risky decision to stakeholders.

Furthermore, a single currency and interest rates, which are controlled by the European Central Bank (ECB) may encourage firms to operate in a wider market. This would have countless benefits in the long term for a firm. A larger target market of around 400 million means improved brand recognition, increase in customers, thus more revenue and profits to assist in further expansion. Although, firms should be cautious not to have diseconomies of scale, such as; concerning too wide a span of control or long chain of command resulting in poor communication.

British membership of the Euro, would also make Pan European marketing possible. For example a standardised price could be accomplished, although this may limit price discrimination. This would also allow for similar advertising and packaging, depending upon how diverse the culture of each member state is. For example, Sainsbury’s low fat range of products slogan is “Be good to yourself!”, market research would have to be conducted to identify whether this would catch on in countries such as Poland.

There are however disadvantages to such firms as supermarkets in incorporating the Euro into the British economy. One of the main aspects of this would be the initial costs involved, which may reach hundreds of millions of pounds. Changeover costs have already been incurred by Marks & Spencer. These have included tills displaying dual prices, computers and software and also the costs of training staff. It could also possibly lead to opportunity costs, where time has been spent on implementing the new changes, may mean less production and output eventually leading to a fall in profits. Firms should ensure they have sufficient finance/collateral to allow for this large capital expenditure.

Another disadvantage for the firm would be transparent prices, where firms have previously charged different prices for identical products in different countries. This has been particularly apparent in the automobile industry, where prices have been excessive in the UK allowing for greater profits. Although this would of course be beneficial for the consumer. However it would make the market more competitive, meaning prices may have to be reduced further, again leading to less profit. Window dressing would also be less feasible as all figures are in the same currency. Also, due to interest rates being decided by the ECB, the Bank of England would not be able to help firms in times of high inflation, for example inflation is expected to rise 1.5% to 5.5% in the near future in the UK. This increase may not match inflation in other EU states and so interest rates may not be altered.

Overall, the benefits to a supermarket would depend largely upon the extent in which they trade in Europe. Also, dependent upon the importance of price in the marketing mix. For example, many supermarket goods are price inelastic e.g. Bread, so they may not be particularly affected as an increase in costs can lead to higher prices which the consumer will be willing to pay. The ambition of shareholders will also determine the success of the firm.