Business Objectives (Edexcel A Level Economics A)

Draw a revenue maximisation diagram for Greggs

Extract B

Greggs aiming for ‘coffee shop experience’

Greggs is looking to increase its branded coffee shop market share after the British bakery chain achieved record profits and overtook Starbucks in the amount of coffee it served in the UK. Although Greggs will continue to focus on the food-to-go market,
it will be investing in better coffee machines and providing WiFi. It wants one in three new outlets to have more seating. The company believes that it has the ability to take market share in two ways, by expanding its coffee range and at the same time enhancing the coffee shop experience. Greggs is modelling its plan on rival chain Pret A Manger, which has changed from focusing on food-to-go sales to mainly eating in. Greggs has transformed itself from an unremarkable seller of bread and pastries into one of the UK’s most popular food-on-the-go chains, in part thanks to its embrace of vegan, gluten-free
and healthy options as well as clever marketing that have changed its image.

(Source: adapted from Financial Times, 3 March 2020 https://www.ft.com/ content/6fb6d73a-5d24-11ea-8033-fa40a0d65a98)

With reference to Extract C and the failure of Thomas Cook, explain what is meant by the 'principal-agent problem'

Extract C

Why did Thomas Cook shut down?

Thomas Cook Group plc ceased trading on 23 September 2019. The collapse of Thomas Cook left 600000 travellers stranded overseas and approximately 21000 worldwide employees were left without a job. Thomas Cook’s management said that the failure of rescue talks between banks, shareholders and the UK Government meant it had no choice but to shut down
the business. But in truth the tour operator’s problems go back much further. A disastrous merger in 2007, increased debts, the internet revolution in holiday booking and Brexit uncertainty all contributed to the failure of the business.
In 2007 it merged with MyTravel. Thomas Cook directors had an objective of rapid company growth over short-term profitability. The merger was supposed to create a European giant, promising £75 million-a-year cost savings and a springboard to
challenge emerging internet rivals. In reality, Thomas Cook was merging with a company that had only made a profit once in the previous six years, and the deal left the Group with huge debts. In May 2019, the firm reported a £1.5 billion loss. The role of the management in Thomas Cook’s collapse is being investigated by the UK Government. Thomas Cook executives’ salaries and bonuses have been questioned.
Directors received salaries totalling £20 million in the five years before its collapse. The Chief Executive Officer (CEO) earned a £500000 cash bonus in 2017 and about £8.5 million in his five years with the company. It seems that around £4 million of this
was in the form of shares. The share price reached £1.46 in 2018, but each share is now worthless. The CEO said that the directors had worked “exhaustively” to rescue Thomas Cook and create a long-term turnaround strategy. “It is a matter of profound regret to me and the rest of the board that we were not successful.” The UK prime minister admitted that the government refused to grant £150 million as a subsidy to help rescue Thomas Cook in the short run. The UK prime minister stated: “Clearly, that is a lot of taxpayers’ money and sets up, as people will appreciate, a moral hazard in the case of future such commercial difficulties that companies face. I have questions about whether it’s right that the directors, or whoever, the board, should pay themselves large sums when businesses can go down the tubes like that. One is driven to reflect on whether the directors of these companies are properly incentivised to sort such matters out”.

(Source adapted from: https://www.theguardian.com/business/2019/sep/23/thomas-cook- as-the-world-turned-the-sun-ceased-to-shine-on-venerable-tour-operator and https://www.ft.com/content/a7dd2554-de23-11e9-b112-9624ec9edc59)