What Economic Factors are the Reason for the Decline of Retailers such as JC-Penney and Staples - Term Paper Example

What Economic Factors is the Reason for the Decline of Retailers and Department Stores such as JC Penney and Staples? ABSTRACT The report explores the key economic factors that have major influences on the organisations, particularly the companies associated with retail and department chain stores. Based on an in-depth understanding and analysis of the organisation in the current retail and department stores business industry, the report has revealed few major economic aspects leading to the decline of multinationals such as J.C. Penney Inc. and Staples Inc. With due regard to key question of the research, a set of key economic factors including changing GDP growth rate has been identified along with a lower household income and wage, increase rate of unemployment and higher rate of Consumer Purchase Index (CPI) or inflation rates. The following discussion herein details about the impact of each factor along with their consequences that led JCP and Staples to face radical decline on their financial and business goals. INTRODUCTION External economic factors have often been argued to influence operational efficiencies of contemporary organisations that further cause negative implications for the organisations’ competitive sustainability within the industry context1. In this regard, the economic factors can be considered as one of the major influencing factors having strong negative impacts on the organisations while performing business operations in the overseas markets2. For instance, business decline of few leading retailers and departmental stores such as J.C. Penney Company Inc. (JCP) and Staples Inc. (Staples) has been witnessed as the recent illustrations of impacts caused by economic factors on business stability and sustenance. Emphasising the influence of economic factors, the primary objective of this report is to identify and critically analyse the key economic factors responsible for the decline of retailers and department stores such as J C Penney and Staples. In this regard, the report also tends to assess each key economic factor to have a major influence on the multinationals while performing their business functions in the overseas locations. In addition, the report also critically discusses the negative scenarios faced by these widely renowned retailer and departmental stores owing to the economic factors operating in their external business environment. IDENTIFICATION OF THE ECONOMIC FACTORS HAVING NEGATIVE IMPACT ON RETAIL AND DEPARTMENTAL STORES SUCH AS J.C. PENNEY AND STAPLES The emergence of globalisation has been observed to improve the business performance of the firms irrespective of their inhabiting business industry. In relation to the present emergence of commercialisation, organisations, particularly the multinational corporations are often observed to be facilitated by different external environmental factors including political, economic, socio-cultural, technological and environmental elements at large. Contextually, the economic environment of the global countries has witnessed apparent unfavourable conditions due to the rapid fluctuations observed in the economic development process. In today’s unconventional scenario of the global economy, organisations are often recognised to experience a number of threats due to the unabated trend of the economic indicators. With reference to a recent publication from OECD, it was observed that there are quite a few economic indicators imposing strong negative impacts on the sustainability and competitive features of organisations3. Correspondingly, few of the commonly identified and strongly influential economic indicators have been assessed critically in the following section. Changing Rate of Gross Domestic Product (GDP) Growth. Gross Domestic Product (GDP) is typically regarded as one of the most essential measures adopted by economists with regard to the current economic health of the countries. The consistent growth of GDP generally defines a strong economy and subsequently delivers support the organisations when adjusting with their capital expenditure on inventory along with other financial investments types in response to the GDP output of the global nations. However, GDP is also often disregarded as a flawless economic indicator due to its drastic negative impacts4. It is in this context that changes in the GDP growth rate can be misleading due to the excessive spending level of the government or the use of different quantitative easing programs creating significant risks for the foreign marketers while entering into an overseas market. In the context of JCP, the rapid fluctuation of GDP growth rate had imposed major challenges across its more than 1000 departmental stores located in different overseas markets. The growing instability of economic condition of the foreign countries had also been observed to play a crucial role in weakening the GDP annual outcomes that led JCP to face major economic crisis when conducting its global operations5. In addition, the instability in growth rate of GDP is also observed to have a major influence on the retail organisations to plan their inventory cost along with the capital investment for different functional purposes. In relation to the quantitative mechanism, the annual output of GDP growth typically demonstrates the results already experienced by the nations. Thus, it has almost no forecasting ability in ensuring continuously increasing output, which can impose major risks for the multinationals when performing trade in the overseas locations6. In relation to the JCP, the changing growth rate of GDP had been further witnessed to impose radical influences on the company to plan effective capital expenditure of inventories in different developing nations across the world that might cause a decline in its overall business performance7. The retail subsidiaries of Staples located in different developing countries had been observed to face significant decline due to the wavering GDP outcomes. It was in the similar context that the changes observed in the GDP annual outcome for the developing nations had further reduced the investment capability of JCP and imposed major economic challenges to the company. In the similar context, the changes in the GDP annual outcome along with uncertain failure of its growth had further imposed major challenges to Staples in its different financial investment and inventory planning processes associated with the company’s retail operations8. Income and Wages. Economists have identified that the individual earnings should increase for keeping up with the average cost of living if the economic outcome of the country performs efficiently. However, the marketers have also been observed to cut pay rates or lay off employees while the individual earnings face a considerable decline. Moreover, the declining or undeveloped average cost of living of the individuals can also reproduce a feeble environment in which the annual investment might not be able to effectively perform giving rise to numerous challenges for the marketers9. For instance, lower level of individual income and wages across the developing markets targeted by JCP and Staples, were observed hindering their scope to obtain better returns on investment. Correspondingly, observations reveal that the moderate and lower income level of the population in the developing countries obstructed purchasing capability at the per-capita level, which further resulted in major economic threats for JCP as well as Staples. As similar to JCP, Staples had also been observed as dramatically affected due to the lower income level and wage rates of the population in majority of developing countries. The extensive investment associated with inventory and management cost further reduced the capability of Stables to gain expected financial returns from its retail operations. In this regard, the income level and wage of population might have imposed major influences on the organisations to achieve their determined financial goals in different global markets10. Accordingly, with regard to the major economic challenges faced by both JCP and Staples, it can be affirmed that the individual income level and wage rates can further impose radical challenges to the organisations that also convey the decline of the overall business performances in similar retail organisations. Unemployment Rate. Rate of employment may also have a major influence on the countries to build a strong economic condition and promote industrial stability thereon. In relation to the changing trend of the modern business environment, the percentage of labour market and its characteristics have major impacts organisational functions to build their long-term sustainability. Correspondingly, the emergence of unemployment rate can drastically influence the organisation to stimulate its market share and face radical challenges. The higher rate of unemployment generally lowers the consumer spending, which further influences the business performance of the retailers to a substantial extent11. In the context of JCP and Staples, the emerging rate of unemployment and gaps in the characteristics of the labour market with the requirements of the organisations can also be considered as a major economic factor that had radically reduced the spending level of the consumers in different developing nations. More significantly, the increasing rate of unemployment in the developing nations have further been observed to hinder a stable GDP growth along with stocks and housing markets that further imposed radical impacts on both JCP and Staples. Moreover, the increasing unemployment rate, particularly in the developing countries had also been identified to mislead both JCP and Staples facing challenges while making their investment decisions regarding the cost of inventories and operational functions, further imposing a major decline in their financial performances12. Higher Rate of Consumer Price Index (CPI). Consumer Price Index (CPI) of a particular market has further been observed to have major influences on the organisations to accomplish their financial goals and objectives successfully. CPI generally tends to represent the increasing living cost of the population, which is commonly referred as inflation. Such an occurrence is further asserted to lower the value of currency than the average compensatory income levels of the consumers. The scenario therefore, leads to a decline in the purchasing power of the consumers along with their standard of living. Moreover, the scenario also imposes negative impacts on the annual GDP outcome along with job growth level within a particular labour market13. As can be apparently observed in the case of JCP and Staples, the higher rate of CPI with regard to the average living cost of population had also been observed as one of the key reasons behind the decline of these two retail and department store companies. For instance, JCP faced major challenges due to the increasing inflation rates in different developed and developing nations. The higher rate of CPI has also been observed to reduce the consumers’ purchasing power, which had imposed radically impacts on the organisation to perform its wide range of departmental stores. Correspondingly, the lower level of standard cost of living of the population across the developed and developing markets had also negatively affected Staples to increase its annual sales and further impose major decline regarding the financial performance of the company14. CRITICAL EVALUATION OF THE FACTORS LEADING TO THE DECLINE OF RETAILERS AND DEPARTMENT STORES The following discussion tends to evaluate the impact of the key economic factors leading to the decline of both JCP and Staples from the global retail and departmental store business arena. From a critical point of view, discussion in this section would consider the challenges faced by JCP and Staples to assert the economic factors responsible for the decline in retailers and departmental stores. Evaluating Economic Factors Leading to the Decline of JCP. The decline of business performance of JCP has been one of the major events that were caused due to the various external environmental factors. In this context, the primary economic indicators, such as changing trends in the annual GDP growth rate, have been observed to impose major challenges to the company’s smooth functioning. According to a recent observation, JCP has been observed as one of the leading entities in the retail and department store industry having a wide department store chain across the different geographical locations. However, the changing growth rate of annual GDP outcome along with moderate or lower progression of per capita income level in various emerging markets have been identified to impose major risks to the company. The slower or less progression in GDP growth has also been recognised to lower the annual sales growth of JCP, which further led the company to incur major losses in its capital expenditure on inventories. Nevertheless, the majority of the retail stores of JCP are identified as located in the suburban areas with a moderate or low-level income population, which had further been witnessed to create a major impact on the company, hindering its scope to gain adequate advantages as desired. Therefore, the aspects associated with GDP growth rate along with annual household income level of the population located in different developing and suburban areas can be identified as few of the key economic factors leading to the decline of JCP15. With due regard to the decline of JCP, it has also been identified that the lower level of individual income and wage have also negatively influenced JCP to stimulate its financial performances in the competitive departmental store industry sector. The lower income and wages of the population in the developing countries or the suburban areas have also been observed to impose major risks to the company and further lead to the decline in its retail operations. It was primarily owing to the fact that the lower or moderate level of individual income in a particular market is likely to reduce the purchasing capability that imposes major threats for the marketers. In this regard, the lower income level and wages of population in the developing countries can also be considered as one of the key economic factors leading to the decline of JCP to sustain its leading position16. As similar to the lower income level and diminished wage factor, increasing unemployment rate in the overseas locations also imply major threats for the marketers to achieve their financial goals. The increasing unemployment rates, particularly in the under developed and developing areas, have further been witnessed to imposed major risks on JCP to establish its long-term sustainability in the competitive department store industry. The lower or less progression in employment rate is also often observed to reduce the purchasing capability of the customers, which further leads to the overall decline in the annual outcome of the marketers. In the context of JCP, the organisation has been observed to face similar type of issues carried out by the increasing unemployment rate across different developing and suburban areas17. Evaluating Economic Factors Leading to the Decline of Staples. In the context of Staples, globally renowned retailers have also been observed to face major challenges caused by different economic factors. With regard to the recent business performance, Staples has also been observed to be a leading organisation in performing its exceptional retailing operations across more than 25 nations. However, the factors associated with increasing volatility in the current GDP growth rate can also be considered as a major economic factor leading to the decline of annual sales by the company. The volatility in the GDP growth rate experienced in different suburban and developing markets has substantially reduced its annual turnover and led the company to face major decline of its sales across different local and overseas markets18. The continuous increase observed in the inflation rate, in response to the average living cost of the consumers, has also been witnessed to convey major risks for Staples that further led the company to face a massive decline in its retail operations. In this regard, the higher rate of CPI in different overseas markets, particularly in the developing countries, has been observed to reduce the organisational competency to target new segments of population for its extensive products and services. The increasing rate of CPI or continuous inflation growth has also been recognised to convey substantial financial loss for Staples. According to the observation of business performances in developing countries, Staples has been critically observed to face the risk of making profits in response to the company’s annual investment and thereby, face decline in its financial performances19. In addition to the key reasons underpinning the decline of retail businesses, the lower rate of individual income and wage can also be regarded as one of the major economic dimensions for the retail marketers. In relation to the case of Staples, the retail stores located in the suburban areas has been substantially identified to face major challenges due to the lower rate of income level of the population. The factor has also been observed to influence Staples to gain profit or build its strong market share to compete with the other rivals. Although an increasing rate of inflation encourages continuous investment and spending of the customers, it has also been observed to impose considerable impacts on Staples’ competitive sustainability in the market, by decreasing economic value of developing countries as compared to the highly developed nations. In this regard, the company had to face major financial challenges due to the increasing rate inflation or rising CPI in the developing countries. Furthermore, the growing interest rate of the outward logistics as well as lower corporate profit faced by Staples in the overseas markets had further imposed major risks of business decline for the company. The unabated changes of the legal codes along with dissimilarities of regulatory processes of the overseas nations and suburban areas also led to a significant reduction in the annual sales of the organisation that further transpired major complexities for Staple to gain its profitability20. CONCLUSION According to the above discussion, it has been identified that the economic factors have major influence on the long-term sustainability of the organisations. Although the factors can be considered a set of strong dimensions towards increasing business performances, in various cases, these factors might lead the organisations to face a major decline. With regard to the current business scenario, the organisations from retail industry are likely to face challenges due to the numbers of key economic factors that have been discussed earlier. According to the modern business phenomenon, the influence of economic factors has been widely accepted to influence the organisations to achieve their desired financial and business objectives. With reference to the aforesaid discussion, it has been observed that the factors including changing GDP growth rate, lower income level and wage along with increasing rate of unemployment in the suburban and developing countries have negatively influenced the business performance of both JCP and Staple. Moreover, the rising trend of living cost of the population or increasing inflation rate of the overseas markets have further imposed major challenges to both the multinationals. Nevertheless, the factors had been observed to convey major decline in both the organisations in terms of increasing business efficiency. Hence, it can be stated that the factors associated with the economic condition of the global nations were few of the major aspects leading to the decline of both JCP and Staple. Conclusively, the findings of the study revealed that the unabated fluctuation of GDP along with lower income rate and increasing unemployment level had significantly reduced the capability of both the organisations to remain their sustainable position in the competitive retail and department store industry. References Bartholomew, D. - J. C. Penney Company, Inc. Equity Valuation and Analysis. Internet site: http://mmoore.ba.ttu.edu/ValuationReports/Summer2007/JC-Penney.pdf (Accessed April 19, 2014). OECD­ - The Economic Impact of Counterfeiting and Piracy. Internet Site: http://www.oecd.org/industry/ind/38707619.pdf (Accessed April 19, 2014). Rodriguez, H. “Procurement Matters: The Economic Impact of Local Suppliers.” Civic Economics (2007): 1-12. Ritzberger, K. “A Ranking of Journals in Economics and Related Fields.” German Economic Review 9.4(2008): 402-430. Salat, N.V. “Are Good Ideas Enough? 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