Question

n this chapter, we have noted how businesses are dynamic and constantly looking to exploit new opportunities that involve changing the way they operate production. What might not have been a success for some firms does not mean to say that there are no other firms that will be able to benefit. This article shows how problems faced by one firm in making sufficient profits are not necessarily shared by other firms as the use of factor inputs is changed.    

Best Buy Fails to Break UK Market.

US electrical retailer, Best Buy, made an attempt to enter the UK electrical retail market in 2010. The retailer is known across the united states for its high-quality sales staff and discount prices and attempted to bring its business model to the crowded UK market which features the likes of Currys, Argos, Dixons, and Comet.

The plans to enter the UK market arose when Best Buy Inc. brought half of the Carphone Warehouse's retail interests. Plans were made to open up to 200 so-called 'Big-Box' stores throughout the UK within the first one opening in Thurrock, Essex in April 2010. However, facing strong competition a lack of brand recognition by UK consumers, and the rapid growth of online retailing from firms like Amazon, Best Buy found things difficult and by January 2012 a decision was made to close down its 11bricks and mortar retail operations following losses of around 62 million pounds.

The decision to close down was made after consideration was given to commit more capital to its operations in an attempt to secure the advantages of large-scale production - economies of scale. In the end, the cost of such an investment in relation to the expected benefits in a market which was challenging (given the economic situation in the UK, the income elasticity of demand for electrical goods in general, and the increasing use of online as the medium of choice for shoppers), meant that option was discounted.

The decision to close down operations will have been takin in the light of the expected costs of trying to maintain its presence on the high street and the future of the industry as a whole. it would not have been taken lightly as reports suggested closing down would cost Best Buy and Carphone Warehouse around 100 million pounds.

One option being considered was selling its stores to the UK's fourth-largest supermarket group by share, Morrisons. Morrisons was reported to have expressed interest in acquiring the stores, mostly in large out-of-town retail sites, for its Kiddicare brand of baby, infant, and small children's products such as toys, pushchairs, costs, and so on.

The reports caused interest in the markets and some surprise given the challenges that exist in that market for some of the reasons that Best Buy found life difficult. An increasing trend to purchase goods online and the economic climate had already seen retailers like Mothercare and its Early Learning Centre stores facing declining sales and profits. Kiddicare had been an almost exclusively online operation and so the decision by Morrisons to move into the bricks and mortar sector was seen as a high-risk move.

Question:

Why might Carphone Warehouse and Best Buy incur a cost of as much as £100 million’ in closing down the stores?

Please provide me with right answer to this

Answer 1

Winding up is the process of dissolving a company. While winding up, a company ceases to do business as usual. Its sole purpose is to sell off stock, pay off creditors, and distribute any remaining assets to partners or shareholders. For the purspose of winding up, a company will have to incurr various costs as the company will be required to follow various government procedures. The company will be required to file a petition before the court. Subsequnetly, the company will have to engage various professionals to conduct audits to satisfy legal requirements for winding up. The company will also be required to incurr costs associated with selling off the assets. If a company is closing down, the company might be liable to pay renumerations to its employees depending on the country's labour laws and contract with the employees. There are certain instances when the company is required to advertise the winding up petition in the Gazette. For big coompanies like Carphone Warehouse and BestBuy, these costs can be really high. The company will have a large number of employees who would have to be discharged as per the terms of the contract. Further, the company will have a large value of assets which will requires costs for selling off. This might be particularly high for retail outlets which will have a large number of assets with a relatively low value. These assets will also be incredibly difficult to sell. In this case, the companies had incurred high cost to establish itself in the UK market. Moving out of that will be difficult and time consuming, thereby increasing the cost for the companies.