Inflation
Inflation leads to malinvestments. When prices rise, certain investments go up faster as to compare to when prices are stable.
However, higher inflation which causes prices of housing to rise may help canary wharf increase their wealth, as they are in the property market they lease premises to businesses such as HSBC bank.
Taxation
If corporation tax increases it will affect Canary Wharf, as their profit maximisation will decrease. Canary Wharf will have to achieve an increase in their sales to reach their targets.
Social
Looking at the social aspects of the external environment Canary Wharf has been holding its Green Canary Day – a series of events, displays and exhibition stands in and around the estate offering information on what Canary Wharf and related organisations do to help the environment, as well as advice on what people can do individually to help create a greener working place. This is a positive quality as it brings changes in the society.
Canary wharf has also been in association with The Metropolitan Police Authority, Canary Wharf Group is hosting community football events. The aim of the event is to promote the police and fire services to members of the local Tower Hamlets community, comprising mainly of people from Asian backgrounds. Representatives of the services will be handing out leaflets and will be on hand to provide information and promote the benefits of joining these valuable professions.
Canary wharf has considered the social responsibility which has ethics and morals involved. The business has gained loyalty by customers by carry out these activities.
Porters 5 forces
We will now analyse Canary Wharf by using porters 5 forces. Porter’s model is based on the insight that a corporate strategy should meet the opportunities and threats in the organisation and threats in the organisations.
Bargaining Power of Suppliers
Canary Wharf has suppliers for building and construction. The market for these types of suppliers is fragmented. Canary Wharf has power to barging with suppliers as they have more choice over their competitors. The level of capital that the company uses to build must be used carefully therefore to choose the right effective supplier could determine the power of the suppliers as well.
Bargaining Power of Customers/Businesses
Canary Wharf has referent power in terms of how businesses build their premises and the capacity used. Also the price of the renting service Canary Whalf has power to barging as it is located in a successful area where it attracts customers. And also the values of buildings in the area are worth at a high value.
Threat of substitutes
Businesses such as HSBC have the power to locate in their best interests. The threat of substitutes is that business could not rent from companies such as Canary Wharf and open its own premises, which is a cost effective methods as it’s a fixed assets of the company. Business could also choose to locate in other leasing companies such as the Oracle, Telford & Wrekin Council. However in this scenario the threat is not that great as the location determines businesses decisions.
Threat of new entrants
The threat of new entrants does not have much of impinge on Canary Whalf. The reason for this is Canary Whalf is one of the most high and effective business districts, which has gained competitor advantage. However new entrants could enter the market but it won’t be able to compete with its competitors such as Canary wharf as the company has a high market share: therefore companies won’t be able to compete as the competition is high, so they would re consider entering the market, but there is always a risk that new entrants could enter the market therefore Canary wharf must have strategies to continue leading the market. The threat of new entries will depend on the extent to which there are barriers to entry, which is this market there are barriers.
Competitor Rivalry within the industry
The higher the competition the more pressure Canary Wharf in terms of prices, margins, and hence, on profitability. Canary Wharf main competitive rivalry will be the price that these premises are leased for businesses. As the market prices of properties as increased within the last 5 years the value of properties are worth more, therefore the prices set for leasing is beneficial to Canary Wharf, as it also is located in a valuable area. However competitors of Canary Wharf have competition base prices, so companies are competing with Canary Wharf. Canary Wharf must ensure that they gin competitor advantage through effective economies of scale, and that the prices are benefited to both Canary Wharf and Businesses.
Financial Performance of Canary Wharf
Looking at the annual report of Canary Wharf, the company has invested into properties worth over 4,182.8 million, resulting a 142.3 million gain for the year. I will use financial ratios to anlayse the performance of Canary wharf.
Canary Wharf has at current five buildings under construction totalling 3.1 million sq ft of which 99% is covered by agreements for lease subject to the tenants’ ability to sub-let back to the group up to 0.67 million sq ft of which 0.15 million sq ft is for a minimum period of 5 years. This has also increased the companies fixed asset (see appendix 3.1).
Looking at Canary Wharf Market Value of property portfolio the company has £5,811.5 million against £5,584.7 million at 30 June 2002, a reduction of £553.8 million or 8.7% excluding additions in the year. There has been a decrease in market value due to external environment of interest rates increasing which leads properties to decrease in value and also due to the company being tied up in its investment.
Appendix 3.1
We can see that Canary Wharf has increased in its properties held for development from 178.7 to 223.8 million: however overall the value of the company has increased due to an increase in its fixed assets.
Appendix 2.1 and 3.3
The first appendix the company has made a loss of (9.5) million for the financial year, this has resulted in an increase in the Creditors amount falling within one year, which this is money owing to their suppliers. The company has invested more capital but shareholders have not benefited fully yet. However once constructions are completed the company will maximise profit.
I will be using financial ratios now to anlayse the performance of Canary wharf.
The first ratio that I will use to analyse the performance of the company is: Gross Profit ratio. This ratio will measure the profitability in buying and leasing before any other expenses taken out.
Gross Profit = Gross Profit/Sales X 100
Year Ended 30 June 2003 Year ended 30 June 2002
199.9/250.3 X 100 = 79.9% 167.6/206.8 X 100 = 81.0%
Looking at this ratio we can see that Canary Wharf has decreased in their Gross profit by 1.1 % the reason for this is that the company has had an increase in the cost of sales. The reason the cost has increased is due to an increase in management costs.
It is important that Canary Wharf keep the cost of sales low as possible, this has affected the net profit as expenses are not taken out.
The second ratio that i am going to use is: ROCE (Return on Capital Employed). This ratio analyses the relationship between the net profit generated by the business and the long term capital invested in the business.
ROCE = Net profit before interest and taxation / Share capital + reserves + Long term Loan X 100
