My Notes - Alcohol Industry Overview PDF

Overview: Week 7 - The Alcohol Industry Part 1 - The Business of Alcohol Alcohol: Has been a business and political The politics of spirits: Two examples Gin was an early example of the impact of trade policy and unintended consequences in alcohol policy Rum’s history and develo...

Overview: Week 7 - The Alcohol Industry Part 1 - The Business of Alcohol Alcohol: Has been a business and political The politics of spirits: Two examples Gin was an early example of the impact of trade policy and unintended consequences in alcohol policy Rum’s history and development has always been influenced by politics Gin Craze 16th/17th century in England For many years alcohol (people drinking wine) had been mixed with juniper berries and other herbs, both for flavouring and medicinal (healing) purposes As people began to figure out how to distill things in a purer spirit, pure alcohol, then things like the juniper berries were used to add more flavour to make it more palatable 16th century - Dutch created “genever” which is the British shortened to gin (combined sometimes wine, sometimes alcohol with not just juniper berries, but other herbs) It was inexpensive to make and proved very popular, but also political Late 1600s - William III becomes King of England but he was from Holland He comes over from Holland, and brings taste for gin England and French always fighting; William III annoyed by people in England who drinks French wine and French brandy; French making money He places large tariffs on French brandy and wine and gave tax breaks to British distillers of gin William III introduced gin and begins to make it very easy to get a license for gin People drink gin from mug - lots of drunkenness; Gin Lane - back lane in England where there are many gin shops; bad gin People struggle with public drunkenness and despair In the picture - Mary is a mother; spent most money on gin; she is drunk and the baby falls out of her lap and dies; Mary was arrested and hung Gin became very inexpensive (cheaper than beer) and was regularly abused This led to a backlash that included temperance movements (total prohibition) and new government licencing to control production The Gin Act of 1751 - difficult to get license to make gin, excise tax so gin becomes more expensive; consumer would go back to drinking beer 1800s - gin recovered as a popular drink; mixed with quinine water (made from bark of tree) as an anti-malaria potion; this became gin and tonic; British can get malaria in warm countries  British army, British Navy, and British Civil Service says all the people they’re sending out to these far flung imperial places need to take quinine - which tastes awful; would not drink it So, they dumped it into gin and put Seltzer into it too Rum - Most Political of all the Alcohols Rum is distilled from molasses, a by-product of sugar manufacturing Late 1600s but especially 1700s - rum becomes popular History suggests African slaves figured out that rum can be distilled from molasses Large sugar plantations were created in both French and British colonies in the Caribbean These required cheap plentiful labour, which led to a dramatic increase in the importation of African slaves French colonies in the Caribbean would produce sugar and rum - within the mercantilist triangle it was designed to be traded within the French trading system - part of that system was in New France (Canada today) Louisburg - tip of Cape Breton - there’s a big French fortress and it was a waste station (things would come from caribbean and be shipped off to France including big barrels of rum; Some of the rum would stay in the french colony When Parks Canada took over fortress called Louis - they brought in rum from former British colonies now and bottled it at the fortress and called it Fortress Rum Rum’s Impact Starting in 1731 - the British navy were entitled under British naval regulations to have a pint of Jamaican rum for every 1.5 men Every day you had to drink it - you were watched Sailor rum ration decreased over time, but the tradition lasted until the 1970s Same thing happened in the Canadian navy during the same time Rum remained political for much of its history Caribbean Islands produced a lot of British rum - American colonies, which were British colonies, had plantations and thought of making rum - British said no - Americans started to produce whiskey or bourbon Cuba Spanish colony; Spanish sugar plantations 1880s - The Bacardi family - founder of Facundo Bacardi - has a big rum production facility in Cuba - has been supplier of rum to Spanish royalty He built successful business in Cuba Beginning of the 20th century - he’s doing a lot of business; business with American tourists - wanting Coca Cola He combines Rum and Coke called - “Cuba Libre” which took on a different twist after the Cuban Revolution  1950s - Communist Revolution - Fidel Castro take over the government of Cuba; overthrows the Batista government that was largely supported by Americans and especially American criminal elements Castro - nationalized all distilleries without compensation Bacardi family finds that their historic properties in Cuba have been lost to this upstart Marxist who has taken over their property Bacardi family fled to Puerto Rico (American protectorate) and other locations - they grew to become a huge global producer of rum They have thrived but continue to seek compensation from Cuba because they stole their distillery This is Political - very large expatriate Cuban community in the United States, particularly in Florida and in New Jersey; There is a significant Puerto Rican community with ties to the Bacardi Corporation Foundation and they have a tremendous influence in American politics When various American presidents like Bill Clinton, Bush, and Obama have said the embargo against Cuba doesn’t make sense in the 21st century, they are faced with a very efficient political protest that says no lessening of the embargo until we get our property back  Part Two - “Every day’s a Sunday” - The Temperance movement and Prohibition Prohibition: Restraining the liquor trade Prohibition - the act or practice of forbidding by law the manufacture, storage (whether in barrels or in bottles), transportation, sale, possession, and consumption of alcoholic beverages Largely based on Protestant church moral beliefs in Western countries (England, United States, Canada), but also on economic argument Prohibition movements in Canada Influenced by both British and American examples Largely a Protestant movement - in Quebec where the Roman Catholic Church was most powerful Second half of the 1800s - Canadian organizations such as The Dominion Alliance for the Total Suppression of the Liquor Traffic and the Women’s Christian Temperance Union regularly campaigned against the consumption, the sale, the production of alcohol within the Canadian jurisdictions Women’s Christian Temperance Union - Prominent role for women, tied to the suffrage movements - women allowed to vote in elections Negative effects of alcohol on the men in the society were disproportionately felt by women who either were deprived or were the victims of things like domestic violence tied to drunkenness - only way to settle is to give votes to women to vote to get rid of Booze The Politics of Prohibition John A. MacDonald - Conservative; First Prime Minister of Canada - well known for the consumption of alcohol - not interested in prohibition Liberals favoured this reformed measure The 1898 Referendum Wilfred Laurier in 1896- first liberal Prime Minister in quite some time; becomes the first French Canadian Prime Minister Built coalition between English Canadian Protestants and French Canadian liberal supporters who supported him because he was the first French Canadian to become Prime Minister Political support in English Canada very most favoured prohibition - Quebec did not want - Laurier first choice is to do nothing He has a non binding referendum in 1898 ○ 278,380 in favour of Prohibition ○ 264,693 against it  ○ Every province except Quebec saw a yes vote, but Quebec was over 80% against ○ In Canada - votes in favour 51.3% ○ Rate of participation - 43.9% Wilfred Laurier - not important - many did not vote - he says provinces can decide whatever they want WW1 and Prohibition In 1901 - P.E.I. introduced prohibition, which would last until 1948 Other provinces began to do so in World War - seen as patriotic duty, and conserving grain for food rather than wasting it on alcohol Only Quebec did not March 1918 - the federal government stopped the manufacture and importation of liquor - part of series of reforms that they introduced to win the war Loopholes - can convince doctor you need alcohol for medical reasons “Demon Run”: Alcohol in the Trenches Canadian army part of British Army Canadian soldiers received a daily rum ration - they liked this Considered essential as a morale-booster for men faced daily with death and living in horrendous conditions Used for medicinal purposes In English Canada - prohibition; in France and Belgium, Canadian soldiers having it daily Prohibitionist movement in Canada starts to say this is terrible - starts to press the Canadian government of Robert Borden Robert Borden - says to British to back off on rum ration - they said no - Canadian army and soldiers said no Tim Cook - the best historian of the Canadian army in WW1 - tells the story of a regiment who lost their colonel - they get new colonel - doesn’t like alcohol - everyone gets tea instead of rum Everyone decided if they don’t have rum they don’t go back to trenches Bring another colonel who’s much more amenable to the rum rash Prohibition After the war - soldiers came back home to almost total prohibition Quebec went back to selling alcohol - not that they stopped during the federal law Began to see problems with prohibition Crime rates skyrocket - black market Break-ins; domestic violence Well to do white middle class guy with alcohol - police would smash your bottle and tell you that you are bad and send you home Working class guy or person of colour - jail  Soldiers - why can’t I have drink - they just fought war Companies like Seagrams and Waterloo make whiskey stored in their warehouses and ship them to the U.S.; Bootlegging idea The American Experience Prohibitions were successful in passing the 18th amendments to the U.S. constitution in 1920 Alcohol - illegal until 1933 when the 21st amendment repealed the 18th Ken Burns - famous documentary on PBS noted: ○ On the whole, the initial economic effects of Prohibition were largely negative. The closing of the breweries, distilleries and saloons led to the elimination of thousands of jobs, and in turn thousands more jobs were eliminated for barrel makers, truckers, waitress, and other related traders Lack of Success A history of Labatt’s brewery notes that in Canada the impact on business was severe: ○ “The doors of 35 Ontario breweries had gone dark. Across the nation, prohibition had a similarly devastating effect on a once vibrant industry. The personal fortunes of many brewers were lost, legacies vanished, and hundreds of well-paying jobs disappeared.” Alcohol business - underground thriving black market - crime End of Prohibition 1927 - Ontario ends prohibition, replacing it with government control Over time the laws became more liberal For some years prohibition remained in the U.S. making Canada a tourist destination for American drinkers and the U.S. a market for smugglers from Canada Legal in Canada - illegal in U.S. LCBO G. Howard Ferguson - premier of Ontario at the time - conservative He stated this when he was writing this in his Liquor Control Act: ○ Liquor Control Act was - “To allow people to exercise a God-given freedom under reasonable restrictions.” ○ Purpose of LCBO - “promote temperance, sobriety, personal liberty and, above all, to restore respect for the law.” Government control was needed Evolution of LCBO 1947 - cocktail bars 1958 - the end of passports 1962 - the end of pass cards Wine displays were allowed in the later 60s  Part Three - Trends in the Alcohol Industry Brand Growth The global market controlled by a small number of MNEs The largest, AB InBev, had annual revenue of $45.6 billion U.S. in 2017 2004 - InBev created through a merger of AmBev and Interbrew, an amalgam of Latin America, Canadian, and European brewery interests 2008 - Anheuser - Busch was acquired, and acquisitions of Grupo Modela in 2012 and South Korea Oriental Brewing in 2014 helped international penetration 2016 - a merger was negotiated with African rival SABMiller to create AB InBev ○ Purchased the one in South Africa ○ Used to aggressively sell beer and sweetened beers targeted to women in the south African market The AB InBev merger was the 3rd largest in corporate history, establishing a dominant market position at an estimated ⅓ of all beer sold worldwide Differences between Alcohol MNEs and others Unlike many MNEs, the growth of Alcohol major companies is often driven by heritage brands and familiar names Budweiser - United Kingdom popular beer; associated with U.S. but marketed aggressively into the British market Technology can be a factor, but name recognition is more important Tensions between health and profit Alcohol has clear health implications Governments want to control levels of consumption, but company profits rely on increased consumption This had meant some level of restriction on advertising in most countries Restricting Advertising 2 methods countries can employ to limit advertising of alcohol: ○ Voluntary codes of conduct from producers for advertising (Ex. limiting advertising targeted at children, drink responsibly) - Much less effective; difficult to enforce ○ Restrictions by law or regulation (government comes in and passes laws and regulations on what you can and cannot do when advertising products) Voluntary are much less effective than regulatory Loi Évin: France’s Regulation of Alcohol Marketing Brought in by France in early 1990s in attempt to control both smoking and alcohol consumption - voluntary code of conduct is concern A high level of community and medical concern led to the adoption of legislation to prohibit advertising on television, in cinemas and all sponsorship The advertising that is allowed, in print media for adults and on some radio channels and billboard, is restricted to information about the product, no images of people or lifestyle Loi Évin No advertising should be targeted at young people No advertising on television and in cinemas No sponsorship of cultural or sport events is permitted When advertising is permitted: content controlled Messages and images should refer only to the qualities of the products ○ Degree, origin, composition, means of production, and patterns of production Health message must be included on each advertisement to the effect that ‘I’abus d’alcohool’est dangereux pour la santé (alcohol abuse is dangerous to health) Law’s Success More successful with tobacco control Limited in success for alcohol: Producers used political influence and power to lobby effectively to have some of those restrictions rolled back to slightly expand the ways in which they were able to promote their products MNEs and Regulation Tensions between health concerns and drive for profits Smaller jurisdictions (non-western jurisdictions) can find it hard to impose regulation because of the power of the wealth and influence of the MNEs Even in large jurisdictions lobbying can limit regulatory success of a product people very much still want to buy  Gradual catch up and enduring leadership in the global wine industry Abstract Different catch up between: 1960-2010 Until end of the 1980s - France and Italy dominated the international market for wine Threatened dominance of wine industry: ○ Less consumption in traditional countries ○ Rise of new consumers ○ Rise of large distributors USA and Australia first gained market share, and later Chile and South Africa followed, increasing their exports and revenue at the cost of the traditional leaders Australia - slowed down Argentina and New Zealand enter market Introduction Focus of catching-up studies on emerging countries: ○ Electronics, software, pharmaceutical and telecommunications Economic growth in Japan and South Korea in the 1980s and 1990s; India and China too Agro-food industry - considerable opportunities for technological upgrades; plays important role in developing countries UNCTAD (2009) - identifies group of dynamic and competitive middle-income countries - Argentina, Brazil, Chile, Thailand and Malaysia - exporters of high quality, processed products Researchers believe: primary commodities are being upgraded, turning basic products into high-quality, processed goods with higher value and more technological dynamism The Theoretical Framework According to Abramovitz (1986) - catch-up is more than just adopting new technologies; it requires building “technological congruence” with leading countries and developing “social capabilities” Technological congruence - latecomer countries need similar conditions to the leaders, such as market size, available resources, and consumer preferences Social capabilities - technical skills, education systems, and institutions that support technological growth Since Abramovitz - innovation studies in developing countries have shifted from focusing on resources and advantages to institutional factors, capabilities, and creating competitive advantages Catch-up involves creating adaptation and innovation, creating unique paths  Perez and Soete (1998) and Lee and Malerba (2017) - argue that windows of opportunity open when there are changes in market demand, new consumers, or government regulations Incumbents may struggle to adapt to new technologies, markets and regulations due to their prior investments and established routines In Wine Industry - catch-up started in mid-1990s ○ Catch-up process is smaller because it’s a supplier-dominated sector with gradual technological change Since 1957 - European wine producers have benefited from government subsidies and market protections ○ Innovation programs help maintain their leadership Asian markets may become significant exporters in the future Evolution of the Global Wine Industry 1960s - main European producers were: ○ France, Italy, Spain, Germany and Portugal ○ 63% of world wine production by volume ○ France and Italy alone - 47% Wine consumption reached - 124 litres in France and 108 litres in Italy, well above the world average of 7.2 litres 11% of world wine production was exported, with France, Italy, Portugal and Spain accounting for almost 40% of the total global market Share of wine production in NW countries: ○ USA - 2.9% ○ Australia - 0.7% ○ Chile - 1.7% Argentina - 7.4% of world wine production by volume Mid-1970s - slowdown in demand of wine Wine popular in UK and North European consumers Japan experienced growth in demand of wine of about 2000% in period of 1961-2009 France and Italy remain the top global producers and exporters, holding the first two positions in both volume and value The gradual, but not yet completed, catch-up cycle of the NW early followers In the late 1970s - shift in global wine demand and consumer tastes favoured the expansion of New World Wine producers 1976 “Judgment of Paris” - saw Californian wines outperform French wines in a blind tasting, boosting the reputation of NW producers Old World countries like France and Italy saw a decline in domestic wine consumption, leading to a shift towards premium wines  UK, USA, and Nordic countries experienced rising demand for wine, creating new opportunities for NW producers UK regulatory changes allowed supermarkets to sell wine, which benefited Australian wine exports NW countries like Australia and California - responded by producing large volumes of branded premium wines at lower prices Wine quality definition - shifted from being based on terroir to being driven by consumer perceptions and expert ratings By the 1990s and 2000s - NW producers like Chile, South Africa, Argentina, and New Zealand emerged as significant players in global wine exports 2002 - South Africa reformed its wine industry in the late 1990s, creating South African Wine and Brand Corporation (SAWB) 2007 - Chile consolidated its winery associations forming Vinos de Chile Chile established research consortia such as Vinnova and Tecnovid, to foster collaboration between industry and academia The Old World Cycle of Sustained Leadership Mid-2000s - After over 20 years of losing market share, Old World wine-producing countries began a comeback in international markets NW and OW countries increased exports during this time, but OW countries saw more growth in the value of their exports, except for New Zealand and Argentina Italy and Spain’s bottled wine exports growing more than Australia’s Italy - grew its market share by 1.7% from 2000 to 2010, a rate comparable to Chile’s Italian sparkling wine exports surged by 288%, second only to South Africa among the top wine producers France continued to lose market share globally - prestigious wines still thrive Italy, Spain, and to a lesser extent France adopted a customer - driven production model instead of the traditional supplier-driven approach ○ Non-competitive wine farmers quitting and more professional winemakers emerging Focus shifted to quality and price - replacing inefficient practices OW adapted by improving both production and marketing strategies French popular wine producers struggled because their regional wine names are not well-known abroad Wine for terroir regions - inelastic demand Italy - wines with a geographic indication (AOC) now make up over 70% of production, while non-AOC wines have fallen from 42% to 25% between 2005 and 2012 AOC system criticized - contributing to the loss of competitiveness in OW countries Late 1990s - EU policymakers questioned strict wine regulations and made efforts to reform them  2008 - major reform implemented making industry more competitive ○ Aimed to fix experimentation and innovation ○ Allowed market forces to determine wine quality, hoping efficient wineries would thrive and weaker producers would exit ○ Shifted from regulation supply to supporting marketing, promotion, and investment ○ Helps efficient producers and promotes individual and collective marketing efforts ○ Maintained importance of terroir in the EU wine industry A New Catch-up cycle:Entry of the NW latecomers Since the mid-2000s - New Zealand and Argentina have gained a stronger position in the global wine market, while Australia's wine exports have slowed Shift within New World countries due to: ○ Exchange rates ○ 2007 financial crisis ○ Longer-term structural issues Australia issue - appreciation of its exchange rate, driven by a commodity boom, which raised the price of its premium wines in key markets like the U.S., reducing competitiveness Australia ○ moving towards a more regionalized research system ○ marketing strategies will better serve small-scale and fine-wine producers ○ Decentralization and product differentiation are now top priorities for the Australian wine industry’s governing bodies New Zealand and Argentina have succeeded in the global wine market New Zealand ○ Focused on premium and super-premium wines, benefiting from consumer preferences for wines from cooler climates compared to Australia ○ Wine Institute of New Zealand (WINZ) and foreign investment helped with success ○ Geographic appellations - promoted the connections between its top wines and their terroir ○ 2009 - New Zealand ranked 3rd in the global export of super-premium still wines, with 7% of the market, ahead of Australia and Spain (3%) but behind France and Italy ○ New Zealand has experienced the highest growth in wine value (1.8%) over the past decade, followed by Italy Argentina - shifted from producing low-cost wines for domestic consumption to quality wines for export  2010 - Argentina overtook both Spain and Chile in the US wine market Large foreign investment after 2002 financial crisis, a favourable exchange rate, and major institutional changes in its main wine-producing regions, Mendoza and San Juan contributed to Argentina’s success The newly emerging Asian Markets: will there be a new window of opportunity and another catch-up cycle? Asian markets, particularly China, are becoming the new frontier for both Old World (OW) and New World (NW) wine producers, but China may also emerge as a future competitor In the past decade, China’s domestic wine consumption has grown faster than any other country, although per capita consumption remains low Total wine consumption in China is now comparable to that of traditional wine-producing countries Strong demand for luxury French wines and Australian super-premium wines China’s domestic wine production is increasing, but consumption is growing even faster Yantai Changyu Pioneer Wine - 5th position among the largest wine companies worldwide  Buzzkillers: A Brief History of the LCBO Once an illegal substance The decision to make it available to those deemed responsible enough to consume it LCBO - first day of business on June 1, 1927 After 11 years of prohibition, customer lined up to buy legal liquor Original system - designed to make the experience of purchasing alcohol feel as shameful as possible and allow the province to pry into the private habit of Ontarians Stores located away from main streets, resembled banks Clerks were stationed behind wire grills LCBO employees determined whether they were moral enough to deserve an annual purchasing limit If the customer passed, they would be given a passport-sized permit book To make a purchase, they filled out an order form and took it to a clerk If the clerk felt the customer was purchasing to much, he made a note in the permit book, and the order was partially or fully refused Those purchasing too much would lose their permit and find themselves added to the provincial “interdiction” list LCBO officials believed that superior customer service was reflected not in sales volume but in the “prevalence of good social conditions in the surrounding community and absence of drunkenness and of complaints from neglected dependents.” System was highly prejudicial - women and visible minorities were effectively prevented from working in stores, while members of First Nations weren’t allowed to hold permits until 1959. 1958 - no more permit books; replaced by wallet cards, which remained in effect for 4 more years Eventually, liquor was allowed to be displayed on the sales floor: small wine displays appeared in 1958, followed by catalogues in 1965 Radical Reinvention of customer service debuted in Weston in February 1969: ○ Customer will enter through a turnstile ○ Select the bottles of his choice ○ Leave through 1 of 5 desks ○ 2 walls lined with rum and Canadian whiskeys ○ 3 islands and shelves loaded with liquors, brandies and other hard exotics ○ Product consultants 1973 - all stores would convert to self-service; took 20 years for the last counter-service locations to be phased out Steve Paikin report on the 60th anniversary of the LCBO on CBC in 1987 ○ Staff ridiculed customers for drinking problems ○ Historian Donald Creighton complained in 1977 that staff were “ignorant of the merits of rival brands and firms, and even of the quantities of different wine-producing regions. They have never heard of vintages. And at the checkout counters they parcel up bottles as if they were bags of sugar or cartons of salt.” ○ LCBO retail experienced lurched toward its current form when former Metro Toronto police chief Jack Ackroyd was appointed chairman in the mid-1980s  Brand stretch: How alcohol brands are pushing marketing boundaries Alcohol companies link their brands to non-alcoholic products to extend their marketing reach ○ Examples: Ice creams Umbrellas Food tie-ins Branded clothing and merchandise Commercial use of brands developed during the industrial revolution of the 18th and 19th centuries and many of today’s famous consumer brands ○ Coca-Cola ○ Bass beer ○ Quaker Oats ○ Kodak ○ Heinz ○ Prudential Insurance Period following WW2 - growth of brands really took off Alcohol brands embedded in UK environment: ○ Smirnoff ○ Bacardi ○ Budweiser ○ Stella Artois ○ Blossom Hill Research conducted in Wales: ○ Children as young as 10 are also familiar with alcohol brands ○ Conducted with 400 ten and eleven year old school children, found that nearly ⅘ (79%) recognized the brand Carlsberg as an alcoholic beverage, a higher proportion than those who recognized bands for food products more commonly associated with children namely Ben and Jerry’s ice cream and Mr Kipling cakes Marketing techniques ○ Television ○ Radio ○ Cinema Recent years - shift away from traditional forms of advertising to “below the line” activities: ○ Competitions ○ Promotions ○ Celebrity endorsements ○ Social media  “Brand extensions” or “brand sketching” is used Brand extensions has received little consideration to date Brand sketching can be achieved through 2 means: ○ Through line extensions - brand name applied to a product in one of the company’s existing categories (Ex. Coke and Diet Coke, Starbucks’ development of a premium coffee liqueur) More than ½ of all new products introduced each year are all extensions - lower risks and promotional costs associated with new product development Examples of Line Extensions in the Alcohol Industry: ○ Brands have introduced lower calorie or “light” beers (Ex. Bud Light, Miller Lite and Coors Light) ○ New citrus-flavoured beers (Ex. Carling Zest) - for female market Likely in response to the UK Government’s decision to reduce duty on lower strength beers, extensions into lower-alcohol varieties have also appeared - Carling C2 (2% abv) and Carlsberg Citrus (2.8% abv) ○ Increased profits ○ According to The Grocer Magazine - 10.4% of Jack Daniel’s overall brand growth in 2012/2013 was entirely a consequence of its recent launch of Jack Daniel’s Tennessee Honey Second means of brand stretching - Category extensions ○ Company applies an existing brand name to a new product category ○ Example: Virgin - extended from music into airlines, radio stations, beverages and financial services ○ Caterpillar - extending from heavy machinery into clothing and shoes ○ Ikea - extending from furniture to hotels ○ Yamaha - offering motorbikes and sports equipment in an extension to its original musical instrument business Debate: Are brand extensions effective? ○ Can cause erosion of the core brand ○ New product might attract existing customers away from the original ○ Might insinuate that the core brand has problems ○ Ex. Reis and Reis (1998) In the U.S. in 1990 - Coors launched spring water under its brand name that was discounted within two years - consumers do not associate the qualities of drinking water with the characteristics of beer Successful category extensions generate on average 5% increased return to shareholders Brand is stretched through alcohol-branded merchandise (ABM) ○ T-shirts ○ Jackets ○ Baseball caps  ○ Glasses ○ Mugs Media reports in 2013 - Heineken is in the early stages of building its “first global ecommerce hub” Young people who own ABM are significantly more likely to have initiated drinking than peers who do not The Australian Medical Association’s investigation into the alcohol industry’s marketing practices report a “proliferation of alcohol-flavoured foods” Jim Beam’s extension into this area: ○ Flavoured potato chips ○ Pretzels ○ Domino’s pizzas ○ Confectionary and other food items in supermarket and other retail stores Category extensions are not widespread across the alcohol industry but are instead limited to a discrete set of brands Norway banned cigarette advertising in 1975 In the UK, alcohol category extensions are allowed as long as they comply with the Portman Group’s Code of Practice on the Naming, Packaging, and Promotion of Alcoholic Drinks 2013 ruling by the Independent Complaints Panel (ICP) - Burts Guinness-flavoured crisps did not breach the Code, as they were aimed at adults and did not appeal specifically to under-18s Concerns persist that alcohol brand extensions, especially to products popular with children, could foster early brand familiarity and loyalty to alcohol brands Raises fear that if stricter alcohol marketing regulations are introduced in UK, the alcohol industry may increasingly use brand extensions as a way to circumvent these extensions - tactic referred to as “displacement” or “surrogate” India - ban on direct alcohol advertising has led companies like Kingfisher and Bacardi to use brand extensions in non-alcoholic sectors Marketing consultants warn that UK alcohol brands should prepare for future restrictions by developing similar strategies  Overview: Week 8 - Travel and Tourism Industries Part 1: Seeing and Selling the World - The Business of Tourism Roman Holiday Rome is able to have a tourist industry in the period of the Roman Empire because Rome is very strong and rich (Rome’s power and empire made tourism possible) In order to have tourism as part of your economy you need to have: ○ Security to travel without fear ○ Resources to do so (wherewithal for people to travel) Take one of them away its a problem - reason why there are problems in periods of war, economic recession, and COVID-19 The Romans developed a version of the Grand Tour ○ Their extent of the Roman Empire is massive ○ Romans could go anywhere there; Roman citizen had the right to travel there A Roman version of the Grand Tour developed to include southern Italy, Greece, Troy and Egypt to cruise the Nile ○ Romans built trips to include spas, baths, etc. Pilgrimages Christianity, Buddhism and Islam all featured (or feature) a call for pilgrimage These journeys were also sight-seeing opportunities and businesses sprang up to organize and conduct the trips Other businesses included inns and food and drink provisions Picture: Pilgrims on voyage to Mecca The Grand Tour Begins in the 17th century, especially in England Later 1600s Custom for young gentlemen - early 20s, sometimes late teens ○ They finished education ○ They were going to be educated in the ways of the world ○ Seen as future leaders of England They were sent for 2-3 years at a time to tour France (Paris), Italy (Venice, Rome, Florence), Greece, and Prague Used tour guide hired by their parents (tour guide is well educated but not wealthy) They saw the sights, especially classic architecture and art; learn languages Only rich could afford this - banks would arrange letter of credits with other European banks to allow them access to money to spend on these trips Fades Away: French Revolution and Napoleonic Wars made it less safe to travel When war ended, the world had changed Industrialism had brought a whole new group of people that wanted to travel They only wanted to travel for 2-3 weeks Railways end this period Echoes of The Grand Tour At the end of the 19th century, wealthy Americans would send their children or accompany their children to live in England and learn the culture there Thomas Cook Travel Guy in the 1840s - British Temperance advocate Develops the idea that he will take followers; he speaks about temperance Hobby: Talking about temperance (lectures) New Railways in places like Lecicester allow him to buy tickets and resell those tickets to his followers so they can follow him around while he gives his lectures He puts together tours - takes groups of people to Paris, Egypt, Middle East Introduced travelers checks - needed prosperity to travel and access funds while you travel The company was eventually inherited by John Cook who turned things over to Cook’s grandsons in 1899 1928 - the family sold Thomas Cook Travel to a Belgium Company Belgium Company was famous for operating a train voyage called the Orient Express which left Europe and took you down to Turkey -luxurious and famous journey WW2 - German Nazis conquered Belgium and took over all institutions including Thomas Cook Travel British government could not have the company owned by the German Nazis British government used British railways to take over Thomas Cook and begin operating it After the war, the railways were nationalized, and so was Thomas Cook Travel - owned by the British Government 1970s - Privatization waves 2019 - Declared Bankruptcy - difficult to compete with internet book trips Post WW2 Travel and Tourism New jet plane technology makes travel easier 1970s - especially in Western Europe and North America, airline deregulation suddenly made air travel very inexpensive  After 1990 - There was the advent of discount carriers which meant that long distance jet flights were within the reach of most of the population by that time in the western world End of the Cold War meant new destinations and new potential travelers How Important is Travel and Tourism to the Global Economy? The World Travel and Tourism Council determined that in 2019, prior to the pandemic, Travel & Tourism (including its direct, indirect, and induced impacts) accounted for 10.5% of all jobs (334 million) and 10.4% of global GDP (US $10.3 trillion) International visitor spending amounted to US $1.91 trillion in 2019 The World Travel & Tourism Council (WTTC) is projecting a record -breaking year for Travel & Tourism in 2024, with the sector’s global economic contribution set to reach an all-time high of $11.1 trillion  Part 2 - Tools of Tourism - Commercial Cruises Cruise Ships Titanic to Queen Mary 1844 - the Peninsular and Oriental Steam Navigation Company ○ The idea of passenger cruise ships, where the voyage was not just the means of travel but part of the attraction began ○ Mediterranean cruise They had been sailing from England to Mediterranean destination delivering mail and people for some time, but in 1844 launched the cruise idea Advertising sea routes to destinations such as Gibraltar, Malta and Athens, sailing from Southampton Mauretania and Lusitania End of 1800s and beginning of 1900s Cunard Line of England owned by Samuel Kinard - Canadian Made his money with a contract to deliver the mail from England to North America and leverage that - he used steam ships to do it Maurentania and Lusitania launched in 1906 ○ Largest ships ever built at the time ○ Redefined the way you would travel from Europe to North America and vice versa ○ Carried 50% more passengers than their largest competitors ○ Designed for speed in response to competing shipping lines ○ Started the tradition of dressing for dinner and advertised the romance of the voyage ○ Carried 552 1st class ○ 460 2nd class ○ 1,186 3rd class = 2,198 passengers ○ Lusitania torpedoed on May 7, 1915 by a German U-boat (submarine suspecting of carrying goods for the British military) killing nearly 1,200 (many Americans) of the 1,959 people on board (sinking) ○ Germans laughed it off ○ British - propaganda coup for them since they used it to attempt to try and get the Americans into WW1 ○ Troop carrying ships once America entered war Titanic Symbolized the importance of luxury travel White Star Line built the Titanic in Belfast First trip was a social event The French and English in a race to build new luxury ships after the two above  First class ○ Gymnasium ○ Library ○ Swimming pools ○ Restaurants ○ Luxurious cabins Trip to New York The “Unsinkable” Traveling in First Class: ○ Business, theatre and social leaders ○ American millionaire John Jacob Astor IV and his wife Madeleine Force Astor ○ Isidor Straus from Macy’s - owner; big department store in New York ○ Charles Melville Hayes - President of the Grand Trunk Railway Ship left Southampton, England and headed across to New York 3rd class passengers were accorded far fewer amenities Sinking of the Titanic The Titanic left Southampton, England, on April 10, 1912 Stopped at Cherbourg, France, and Queenstown, Ireland, and took more passengers and mail and then set sail for New York At 11:40 PM on Sunday April 14, the ship struck an iceberg - they were warned it was in the area - communication through telegraph Titanic had gone down in only 2 hours and 40 minutes 1,500 people died Survivors picked up by other ships Bodies were taken to Halifax Titanic cemetery The Industry Continues Trans ocean cruises remain the only method of travel for many years Early air travel was difficult, so ships remained the choice The Olympia, the sister ship of the Titanic, continued to make the voyages across the North Atlantic 1960s - jet plans got bigger and able to travel longer distances - compete with ships Transatlantic and transpacific cruises declined in number 1980s - Cunard Lines is still operating ○ Transatlantic cruise ○ Passenger voyage ○ Get on in New York and sail to England ○ People afraid to fly  Small clientele of ocean crossers by offering a cruise experience on the Queen Elizabeth 2 Cruise Lines Cruise ship business changed from taking you from point A to point B - instead the business is cruising around Floating hotels Hospitality staff in addition to the usual ship’s crew Caribbean, Alaskan, Mediterranean, and other tours are the focus rather than a journey to a destination Facilities include night clubs, sports facilities, etc. Expansion of the Cruise Industry 1970 - about 500,000 people went on cruises 2013 - more than 20 million The Love Boat, a tv series which ran from 1977 to 1986, helped to popularize the idea of taking a vacation at sea on a ship - ABC Network in the United States - set on Princess Lion Ships - couples would meet trying to revive their marriage on the ship Characters on the show were designed to be regular Americans - not wealthy COVID-19 and Cruise Lines Cruises were hard hit by COVID-19 Industry had to shut down Cruise ships were not docked Picture - Manila Bay - anchored - engines were on  Part 3 - Tools of Tourism - Commercial Aviation Commercial Aviation First paying passenger flight January 1, 1914, the St. Petersburg - Tampa Airboat Line became the world’s first scheduled passenger airline service, operating between St. Petersburg and Tampa, Florida The first flight’s pilot was Tony Jannus First passenger was Abram C. Pheil a mayor of St. Petersburg who had bought the trip at a charity action for $400 A service ran for several months, but limited to one passenger a time After a few months it stopped Summer 1914 - WW1 starts - will have a huge impact on commercial aviation - war accelerates technical innovation Both sides of the war were aggressive to figure out how they can use airplanes to prosecute military action Bigger faster planes developed People trained to fly, repair, and build planes When war ended - large available pools of workers Air Travel By the 1930s - They are actually flying flights from the west coast of the United States to places like Hawaii Transpacific flights were expanding although still rare Boeing Clipper - The Clipper 314 Capable of comfortably flying 74 passengers and 10 crew to distances of up to 3,500 miles Can land in ocean if it needs to refuel There are: ○ Bedrooms ○ Dining Rooms ○ Bar WW2 interrupts the expansion of commercial air travel, but also advances the technology Clippers were gifted to the American military by Pan Am in order to facilitate American combat in the Pacific Short after the end of the war, they began using jet engines to expand the flying routes The Boeing 747 The 747 was conceived while air travel was increasing in the 1960s Would carry large numbers of passengers over large distances Goes into service in 1970 Now possible for airlines around the world to carry passengers at a reasonable fare further than ever before, more than 8,000 miles without refueling Qantas - Australian airline - have facility - 1 example of every model of plane that Qantas has flown 707 - standard commercial jet before the 747 Airports redesigned to construct them - extend runways The status of the industry: Precovid and post 2004 - 2019: ○ Total number of commercial flights in the world rose from 23.8 million to 38.9 million ○ COVID-19 restrictions reduced this but projections still suggest levels over 21 million for 2020 and over 30 million for 2021 Statistics indicate air travel continues to get safer, but also indicate the cost to the environment is significant  80 hrs on World’s Largest Cruise Ship - Icon of the Seas Miami to Caribbean Population of 10,000 people There are 2-story suites 22 restaurants Facilities: ○ Park ○ Aquadome ○ Ice Rink ○ Best room on board has its own slide and movie theatre - ultimate family room Prices higher than $30,000 First stop - Special star class check-in desk - bags are collected for prompt delivery to suites - bypass all lines Cruise cards and wristbands - room keys 1,200 ft in length - same as Empire State Building laid on its side The Royal Promenade - deck 17 - suite area Previous largest ship was Wonder of the Sea Icon loft suite ○ 658 sqft ○ Room service ○ Welcome bottle of Moet ○ Coffee machine ○ Mineral water ○ Fridge full ○ Comfy corner sofa ○ Washroom complete with shower ○ Wardrobe ○ Free unlimited laundry Raw Suite and Ultimate Family townhouse - $8,000 a week Empire Supper Club - brand new venue which celebrates the glitz and the glamour of 1930s New York; 8 course; $200 additional per person; Jazz musicians Royal Theatre - front of ship - decks 4 and 5 - Wizard of Oz - special reserved seating Starbucks on cruise Balcony - 173 inch private space - dining table - 2 sunlounges 7 Icon Suites on board - 173 inches - largest on board 8 neighbourhoods ○ Suite Neighbourhood ○ Thrill Island - back of ship - deck 16 - world’s largest waterpark on sea - all inclusive - 6 waterslides - tallest waterslide at sea - Threatening Bolt  ○ Chill Island - over 3 decks - 15 (Royal Bay - 40,000 gallons of water) to 17 deck - busiest place on ship ○ Central Park - over 10,000 plants ○ Royal Promenade - centerpiece is 46 ft. height and 175 ton pearl ○ Surfside - back side of ship - Deck 7 - for younger families - Ultimate Family Suite Townhouse ○ Aquadome - Decks 14 and 15 - Aqua Theatre - in the rear - Relaxing area ○ The Hideaway - brand new space for Royal Caribbean - very back of ship - Deck 15 - adults only - beach club vibe - swimming pool - 135 ft. above the ocean Icon Loft Royal Sweet - most luxurious cabin on board - $77,039 Ice rink - Ice show - Starburst Desserted - milkshake bar -milk shake - $18 Royal Promenade first introduced in 1999 on Voyager of the Seas; 360 ft. long; Rover the ship 6 -month-old Chief dog officer Main dining room - Across Decks 3-5 248,000 gross tonne ship At Cozumel, Mexico  The History of Commercial Flight: How Global Travel Took Off Flying - one of the fastest, most convenient, and safest forms of long-distance travel Went from being exclusively for the wealthy to the mainstream and affordable option they are today The First Commercial Flight Took off May 1908 Wilbur Wright carried Charles Furnas just 2000 ft. across the beach at Kitty Hawk, North Carolina 1 year later, the first airline in the world, the German airship company DELAG, was founded 1914 - world’s first scheduled passenger service, an airboat piloted by Tony Jannus, set off from St. Petersburg, Florida, and landed at Tampa - 17 miles away Service ran for 4 months A New Era of Aviation 1920s - commercial flights carrying paying passengers started to become common Introduction of the multi-engine airplane - the Lawson C-2 - build for carrying passengers Start-up airline carriers being established: ○ KLM in the Netherlands (1919) ○ Colombia’s Avianca (1919) ○ Qantas in Australia (1920) ○ Czech Airlines (1923) Aircraft would land frequently to refuel Fly at lower altitudes due to unpressurized cabins Traveling was noisy, cold, and expensive Lengthy flying times Turbulence Air sickness - airlines hired nurses to reduce anxiety and tend to those affected 1935 - one of the world’s oldest airlines, Qantas, operated its first international passenger flight, traveling from Brisbane (Australia) to Singapore From there, British-owned Imperial Airways connected this flight to the UK - set the wheels in motion for creating a regular travel route between Australia and the UK in the coming decades Flying - dangerous; for the rich Smithsonian National Air and Space Museum: ○ Number of airline passengers grew from just 6,000 in 1930 to nearly ½ a million by 1934 Innovation That Revolutionized Air Travel Douglas DC-3 in 1935 also had big impact on the future of commercial flight Propeller-driven airliner Larger and improved aircraft Faster and more reliable Carry up to 32 passengers Cruising speed of 207 mph with a range of 1,500 miles Made it popular with well-established airlines like: ○ Delta ○ TWA ○ American ○ United 1940s - WW2 meant commercial aviation developments slowed considerably End of decade - Pan Am began operating its fleet of Boeing 307s, which featured the first-ever pressurized cabin Can go at an altitude of 20,000 ft. Pan Am’s iconic New York-London route The Golden Age of Air Travel 1950s and 1960s - jet engine aircraft; upsurge in commercial flights, airline carriers, and international flying routes Inflight perks: ○ Silver-service meals ○ Fine wines Pan Am was a front-runner in pioneering and marketing the very best air travel had to offer First airline to fly worldwide - jet aircraft; computerized reservation systems 1960s - work began on creating the world’s first supersonic aircraft and what would eventually become an iconic symbol of commercial flight - the Concorde ○ Concorde ○ Offers transatlantic flights in just 3.5 hours ○ Expensive The Rise of the No-frill Airline 1966 - British-owned Laker Airways were founded by Freddie Laker One of the first airlines to start offering a budget alternative by adjusting its inflight offer Offers lower fares by reducing inflight services and luxuries such as free meals Reduces fuel consumption and engine wear by introducing the reduced thrust take-off technique - faster climbs to obtain flying altitude in as little time as possible 1980s recession - airline went bankrupt  Paved a way for budget travel Today: ○ World’s largest low-cost carrier is Southwest Airlines in the U.S. ○ Ryanair and EasyJet have tapped into the no-frills market Air Travel for the Masses Boeing 747 - larger and more economical aircraft; cheaper to travel First-class cabins Sophisticated onboard bars Exclusive-use airport lounges Could still travel in style 1980s and 1990s - budget airlines Ryanair and EasyJet launched; £20 to travel Security Tightening in the 2000s 9/11 had huge effects on air travel Security at airports was increased Passengers without a ticket at US airports could not accompany friends and family through security to the gate Cockpit security was heightened - passengers used to be able to visit the flight deck and speak to pilots After 2001 - cockpit doors were locked with only the pilots controlling who could enter A New Era for Air Travel According to the Bureau of Transportation Statistics: ○ Took until 2004 for air passenger numbers to reach pre-9/11 levels and until 2007 to reach a record high Low-cost careers were experiencing increased demand during this period Booking websites popularity surged By 2009 - figures from the tourism research company PhoCusWright reported that ½ of all travel-related bookings were being made online Throughout 2010s - passenger numbers continued to surge End of decade - volume of travelers using commercial airlines was at an all-time high The Post-pandemic Era: Flying into a New Age for Aviation Prior to the pandemic, the International Air Transport Association predicted: ○ The number of airline passengers could reach 7.2 billion by 2035 ○ Industry is still full of optimism even with COVID-19  The Rise of the All-Inclusive Resort Earns billions of dollars each year Typical clientele: families from the U.S. and Europe - beaches along the Mediterranean or Caribbean Appeal now extends to customers and hospitality providers across Asia Conversation with FP economics columnist Adam Tooze on the podcast Ones and Tooze What’s the history of resort hotels? How did they get their start? 3 convergent strands in the history of the modern resort ○ Idea of seaside living Goes back to the Romans who had resort towns all along the coasts of what is now modern Italy - disappeared with the collapse of the Roman Empire 18th century onward - Europeans visiting seaside, notably in Britain, then also in Germany - Heiligendamm in Mecklenburg was the first German resort on the Baltic 19th century - railways; had a lot of seaside resorts 1930s - regular paid holidays Youtube film - first cohort of French people who, from Paris, took the train to the Normandy Atlantic coast and bathed during the ‘36 Popular Front government, which they had their first paid week of vacation ○ Spa Roman origins Called “spa” because the Romans had a curative bathing complex in what is now the Belgian town of Spa Mineral springs Egyptians, many Mediterranean cultures, non-European cultures, and other Eurasian cultures had bathing cultures When does the modern all-inclusive resort come into existence? In Britain; most developed of the European countries in the 1930s, in the legendary Butlin’s holiday camps 1950s - Club Med - founds the modern concept of the all-inclusive, part-focused enclosed resort I’m curious how the business model of the modern resort works exactly. How does the all-inclusive concept work for both sides of the transaction exactly? Addresses the holdup problem ○ Holdup problem: problem of your reluctance to enter into a contract when you don’t know whether one party to the contract will subsequently revise the terms of the del in a very unfavourable way ○ Fear that you will sign up to go to a resort and you are in a food desert, shops are miles away, and they’ll gouge you when you get there because they restaurants will be too expensive ○ This is the American airport business model ○ Europe they resolve this issue: They say that in British airports nothing will cost more than it does in the high street, so come and do shopping in the airport ○ All-inclusive model eliminates the holdup problem ○ European model is to increase the volume of sales at this particular point at your standard price Profit margins are almost twice as high for the all-inclusive deal What can we say about the economic effect on the communities that these resorts are situated in? Advocates of the model say: ○ Because you get bigger business, in the end there are more jobs created by this kind of model ○ 860 all-inclusive resorts all over the world; ½ are in Caribbean ○ Tourism-generating business Critics say: ○ Why is it that in a situation like the Caribbean, you do this enclosure? ○ Part of it is basically pandering to a bunch of racist or racialized stereotypes about people needing a comfort zone, not wanting to be “distracted” by the particularities of the local region, and just wanting to enjoy the paradise of the beautiful water and needing this enclosed bubble in which to do that Cultural and Political point of view - extraordinary kind of colonial In economic terms - the consequences of that can be very severe in that for some of the resort systems in the Caribbean: ○ 20%-30% of the revenue generated from the resort stays local; the rest flows back to foreign investors, owners, or companies supplying goods from abroad ○ Local communities usually see little economic benefit Many resorts and cruises create “bubbles” of North American or European lifestyles in local Caribbean settings, offering an experience largely detached from the local culture Tourism could feel exploitative  He think its an ambiguous model Obvious solution: localize as much as possible to attract local investment and to build supply chains, which actually rely heavily on local economies The people visiting these resorts in places such as Turkey and the Caribbean tend to be Americans and Europeans. Is the concept of a vacation of this sort itself an inherently Western one? May have been historically No longer is Popular global model of tourism Chinese resort business is huge Macau - great Asian gambling center ○ Look at the origin of the 30 million people who visit Macau 90% are from Asia 85% of those are from Hong Kong and mainland China Vegas gets 40 million visitors a year Mexico - 66 million visitors Chinese tropical island of Hainan - 99 million visitors a year  Exchange - Heard on the Street: The Math Behind the Megaships - The cruise industry is bringing a whole new meaning to the phrase “economics of scale” Before “The Love Boat” cruises were derided as being for the “newly wed and nearly dead” More expensive than today Most cruises today: Middle-class Americans or Europeans Tax havens are used and thousands of workers from developing countries are employed - has helped keep the cost of cruises down Secret formula - economies of scale of modern vessels and cruise ports 1980 - Cruise Lines International Association data made available - 1.4 million oceangoing cruise passengers “The Love Boat” ABC show set aboard the MS Pacific Princess began its 9 season run in 1977 Next year - industry expects 36 million passengers More than ⅓ of revenue can come from onboard spending such as drinks, spa treatments, specialty restaurants and gambling Royal Caribbean’s Icon of the Seas Largest passenger ship Maximum capacity of 7,600 people, not including the 2,350 crew members Size of 5 Titanics One captain One bridge team One engineering team Carnival - world’s largest cruise company 20 decks 12 times the internal area of the Pacific Princess 7 pools 6 waterslides Dozens of places to eat, drink, gamble, exercise or listen to live music Zip-line Bumper cars Rock-climbing walls Minigolf Powered by clean liquefied natural gas Specially coated hull to reduce friction Can hook up to shore power Treats its own waste Can produce nearly all of its water through desalination Bigger ships downsides: begin to limit your ability to get into certain places To get around that and save money and boost revenue: ○ Cruise lines have even leased their own private islands a short sail from Florida cruise ports ○ New names: Castaway Cay and Perfect Day at CocoCay Pacific Princess Pacific Princess - among the earliest purpose-built cruise ships Before that, converted ocean liners were used that had been made obsolete by intercontinental jet travel in the 1960s The Pacific Princess burned cheap, dirty bunker fuel and carried about 600 passengers Carnival Affected by pandemic Took the opportunity to sell or “recycle” a number of older, smaller vessels Expects to hit an international Maritime Organization target for reducing the greenhouse-gas intensity of ships by 2026 2020-2022 - some 38 ships across the industry were taken out of service, and their average age was 6 years younger than those retired in the preceding 3-year span, according to Cruise Industry News Hyper-efficiency is nearing its limit Inflation has affected the industry too Cruises caused some grumbling by charging more mandatory onboard gratuities Norwegian Cruise Lines garnered attention earlier this year for cost-saving steps like reducing turndown service for non-premium cabins and swapping 9-ounce burgers for 7-ounce ones All 3 major operates have seen their shares rebound by an average of 85% just this year  Overview: Week 9 - Global Finance Part 1 - The History of Global Finance Money Definition from the Oxford English Dictionary ○ Any generally accepted medium of exchange which enables a society to trade goods without the need for barter; any objects or tokens regarded as a store of value and used as a medium of exchange Coins and banknotes collectively are a medium of exchange. Later also more widely: any written, printed, or electronic record of ownership of the values represented by coins and notes which is generally accepted as equivalent to or exchangeable for these We must agree the value attributed to money More Specifically Coins: valued for metal content or modern coins are representative tokens (doesn’t have 25 cents of metal in it) Paper Money: issued to represent value. From ancient China to modern societies Digital currency: exchanged as information, rather than physical money (Bitcoin is not money, it is an investment) All of these work only with a shared consensus of value Kinds of Money Commodity money: gold and silver coins, but also things like shells, grain or other items of agreed value Token Money: coins or paper that can be exchanged for the face value of gold or silver. The “gold standard” is an example Fiat money: money issued by a government that is not backed by gold or another commodity but rather by declaration of the issuing government Potosi and Silver Potosi is a place in South America - conquered by the Spanish Spanish found huge mountain - stones and minerals in the mountain was rich with silver Spanish started very large campaign - enslaved the local population to work - constantly mining and refining silver Colonial power of Spain increased dramatically - lot of money  Jack Weatherford (popular historian) - “Potosi was the first city of capitalism, for it supplied the primary ingredient of capitalism - money” Impact The influx of gold and especially silver from South and Central America changed the economies of the world. Spain one of the wealthiest countries in the world The transition to cash in Europe helped facilitate the development of a capitalism based on the exchange of money rather than barter Drove countries like England, France, and Holland to find their own sources of wealth - struggled to find gold and silver Spanish silver changed the nature of trade with China and other parts of Asia It also drove other European countries to seek their own colonial opportunities An aside! Local people of Potosi did not benefit from the wealth of silver; local people were enslaved; benefit of mineral wealth went to Spain Eventually people in Bolivia and surrounding area managed to free themselves from Spanish colonial power - by that point vast storehouse of silver had been largely extracted Potosi in Bolivia and the surrounding area are now one of the world's leading sources of lithium, an essential part of modern batteries for use in electric cars and other devices How, and for whom, that resource is developed will be the next chapter in Potosi’s influence on capitalism Image - lithium rich salt pond Land around lithium ponds is being purchased - mostly by Chinese and American companies in order to leverage the benefits of exploiting lithium What is a Bank?: Banks and Central Banks 2 kinds of banks: ○ Central Banks ○ Chartered Banks (Banks that we as a population deposit money in and have it available to spend) Central Banks ○ First real central bank - The Bank of England formed in 1694 ○ Became the model for most Central Banks ○ It was initially designed as a tool to raise money for the government to finance a navy ○ Long series of wars with the French - needed money ○ They created a bank and 1.2 million pounds were raised  ○ Became the bank for the government accounts Bank of England By the end of the 18th century - 1799 - the bank had issued British currency, managed public debt and had become “the bankers bank” holding enough gold to cover currency issued by itself and other banks in England Bank of England - basement has bars of gold to support the currencies going on Bank of England - is political to a certain extent - not a branch to the government - officials are not elected they are appointed - manage the economy Other Central Banks USA - the Federal Reserve - created December 23, 1913 It was created as a response to several financial crises that happened - post American Civil War period - particularly in the first 10 or so years in the 20th century Crisis of 1907 - the banks in New York City found themselves in a critical situation; entered into real estate transactions that did not go as planned, and therefore faced a situation where they may not be able to meet a cash call; they did not have enough cash or assets to cover the deposits that had been made in their banks Everyone wants their money now - run on a bank (Silicon Valley experienced this) New York banks looked at the government and said fix this Government - how do we get 32 million dollars to the banks in a way that resolves this crisis? ○ Americans were suspicious of big national institutions especially around money ○ America approached one person -John Pierpoint Morgan - everyone trusted him - they gave him $30 million dollars to fix the banking system and he did ○ He went to the bank leaderships and said either your bank failed we are taking the accounts in your bank and moving them to this bank and giving them money in order to survive, you are doing good, or the bank needs some cash and a stern talking to Someone in Congress asks - What are we going to do when JP Morgan dies? ○ Had to create a Central Bank United States Federal Reserve - has 3 roles ○ Maximize employment ○ Stabilize crisis - try and control inflation and get it out of economy ○ Moderate long term interest rates It regulated banks and supervised banks if necessity arose, approved financial mergers, tried to stabilize the financial system  Political history of Federal Reserve ○ 2024 - they found themselves in some unwanted political attention because the Republican candidate for president would like to change control mechanisms around what Federal Reserve does which they have resisted and which other political people have also resisted Centralize control of monetary system Regulate banks Lender of last resort for banks Set interest rates The Bank of Canada Bank of Canada similar kind of story ○ First Canadian governments were happy to let the Bank of Montreal control most things ○ Under British model of control and deferred largely to the British in policy making in those areas Federal Reserve Act of 1913 in the United States not copied in Canada The Great Depression changed things ○ Wanted to inflate the economy As long as we stayed on the gold standard that was impossible to do 1931 - Shortly after the British did the same thing, Canada abandoned the gold standard; moved onto fiat currency system - allowed government of Canada to slowly begin to inflate the Canadian economy 1933 - Royal Commission was established to study the issue - thought a Central Bank was a good idea 1935 - Bank of Canada established ○ Would control Canada’s monetary supply - how much money circulates in the Canadian economy ○ Attempting to monitor inflation Initially controlled by private interests (by the banks and with some government representation) 1938 - the federal government removed the private sector from the Bank of Canada and created an arm’s length institution- Bank of Canada is a government institution free of political influence The government of the day appoints the governor of the Bank of Canada; usually in practice steps back and lets them do what they need to do Control of currency Standardized currency established by 1950 Interesting exception - In Canada, early 1960s - when the government thought it was necessary to inflate economy facing unemployment - Bank of Canada governor declined  this (to print more money) - they fired him - only time that happened - not met well politically Separate bankers are viewed separate from politics for the most part Chartered Banks in Canada Sort of banks most of us are familiar with They take deposits and make loans - huge role in capitalist economy - sound effective banking system Banks collect that money and issues loans/mortgages to businesses and individuals Essential in the development of the English Industrial Revolution - were funded by banks The banks operate under charters issued by the federal government Originally banks issued their own bills, supported by their holding of gold and other assets Why are banks so important in a capitalist economy? Chartered Banks in British North America 1817 - Bank of Montreal established 1832 - Bank of Nova Scotia established Heavily regulated from the beginning - suspicion if the Canadian economy was strong enough to support banks Replaced by a Conservative idea of what banks should/should not do (different than Americans)- Canadian banking system developed branch baking system ○ Small group of banks (Big 5) ○ Rather than have different banks spread across the country like the Americans, Big 5 control everything and open branches across Canada ○ Branches allowed pools of capital to increase Limits on the amount of debt in relation to deposits General conservative nature of chartered banking in British North America resulted in a branch banking system Different approach from banking in the United States, where a fear of centralized authority and monopoly resulted in a loose system of many banks Evolution of Banking in Canada - Bank Failures Bank failures more common before 1923 The Canadian Bank Act - passed shortly after Confederation - governed how the Canadian Banking System worked - at least every 10 years the Bank Act will be re examined to see if it will need changes Happened before 1923 - everything is going to be fine - suddenly Home Bank failed  1923 - Home Bank Failure led to much strong regulation; important when Depression hit in 1929 ○ The man that built Casa Loma named Henry Pellet was a major investor in the Home Bank ○ He made many poor investments ○ Did not have the resources to cover investments and they locked their doors ○ Shocked the canadian banking system - they were told everything was fine and they listened - now they won't listen anymore Canadian banking system was significantly impacted upon the Great Depression They were never really in danger The United States eventually had to close the banking system temporarily When Franklin Roosevelt took power in 1933, 50% of American banks had already closed their doors - system was unable to sustain the impact of the Depression Canada’s was because: ○ Even though we were a Conservative banking system before that, we become even more conservative as the 1920s went along 1964 - the Royal Commission on banking and finance (Porter Commission) recommended “a more open and competitive banking system,” and its suggestions led to major reforms and changes 1967 Bank Act revision lifted the 6% annual interest-rate ceiling banks could charge on personal loans and allowed banks to enter the mortgage field ○ 1950s - banks for the first time could issue mortgages in very narrow circumstances ○ Now, competition with mortgages Most significant change for me, as the consumer: ○ The Canadian government created the Canadian Deposit Insurance Company in the 1967-1968 time period ○ Not a government institution ○ Banks have to pay premiums to ensure the money ○ Insurance company will compensate us if the bank goes under ○ 1980s - 2 banks in Alberta went bust and deposit insurance covered the deposits up to $100,000 New Tech, same questions New innovations like Bitcoin, and even ApplePay still work only if we have faith in them. If we question whether our “money” is safe, they cannot work From paper money to digital files, trust makes currency work Part 2 - The Euro Shaking Up Global Finance A Short History of the Euro Video Differentiated Integration - not all member states participate in all EU policies to the same degree or at the same time All EU Member States are legally bound to adopt the Euro one day except for: ○ Denmark ○ Has obtained an Opt-out: A member state decides not to take part in a particular field of EU policy Euro has the same name in all EU languages written in three different EU alphabets The Werner Plan and the “Currency Snake” Euro has been used for only the past 20 years 1957 - Treaty of Rome - creation of the European Economic Community (EEC) - ART. 105 - creation of the Monetary Committee ○ Outlined measures to promote coordination in economic and monetary matters Until the mid 1960s - the need for European monetary cooperation is not very pressing because the stability of the international monetary system is ensured by the so-called Bretton Woods arrangement 1944 - Bretton Woods Agreement - establishes the gold exchange standard ○ Arrangement is based on fixed exchange rates between the US dollar and Western currencies ○ The dollar is tied to gold, and the other currencies are tied to the dollar 1969 - The Hague Summit - Relaunch of the European Integration Process - the Member States entrust Luxembourg’s Prime Minister and Minister of Finance Pierre Werner with the task to lay down a plan for the creation of an economic and monetary union as a solution to the growing instability of the Bretton Woods system 1970 - Werner Report The plan elaborated by Werner envisions the gradual replacement of national currencies with a common European currency This rests on a number of conditions: Stronger coordination of economic policies - Member States should strengthen the coordination of their budgetary and fiscal policies  Free movement of capital - all restrictions to the movement of capital should be removed Fixed exchange rates and common system of central banks - exchange rates between the European currencies should be fixed irrevocably Economists - Germany and The Netherlands see economic convergence as a necessary precondition for monetary integration “Economist” Approach - economic convergence before monetary integration “Monetarists” - France, Belgium, Luxembourg believe that monetary integration will naturally push the Member States’ economies towards great uniformity “Monetarist” Approach - Monetary integration leads to economic convergence 1971 - U.S. administration announces the end of the Bretton Woods System 1972 - Member States come up with “currency snake” to restore some stability in the international monetary system ○ The currencies of the Member states are allowed to fluctuate against each other within a margin limited to 2.25%: in other words, the Member States’ currencies are now pegged to one another ○ Pegged Currency: A currency whose value is controlled so that it stays at a particular level in relation to another 1973 - Oil Crisis - Failure of the Currency Snake - countries begin to depreciate their currencies because of the oil crisis ○ Severe economic crisis throughout Europe ○ High volatility of exchange rates due to the U.S. refusal to keep the value of the dollar stable 1973 - Denmark, Ireland and The United Kingdom join the EU - because volatility is not good for the functioning of the internal market France - in favour of deepening monetary cooperation Germany - fears inflation, which is rampant in other countries, might spread to its economy ○ Disagreements overcome: gradual convergence between the German Chancellor Helmut Schmidt and the French President Valéry Giscard d’Estaing, who in 1978 propose the creation of a new European Monetary System ○ 1978 - European Council Copenhagen - proposal for a European Monetary System (EMS) ○ 1979 - EMS enters into force European Monetary System is based on 2 keys elements:  ○ A virtual currency called ECU - European Currency Unit, that replaces the dollar as the pivot of the system - virtual because no coins or banknotes are issued ○ Exchange Rate Mechanism - based on “fixed but adjustable” exchange rates: this means that the Member States agree on a central exchange rate and on a fluctuation band around this central rate, within which currencies are allowed to fluctuate ○ Currencies can fluctuate by 2.25% above and below the central rate ○ The central rate can be readjusted periodically upon unanimous agreement 1986 - Single European Act - establish a fully-fledged monetary union Building on the conditions identified by the Wener report, in 1989 a committee led by the President of the European Commission Jacque Delors proposes the implementation of the Economic and Monetary Union in three stages ○ Stage 1 Coordination of economic & monetary policies Free movement of capital ○ Stage 2 Monetary policy gradually transferred to EC European System of Central Banks (ESCB) Narrower Fluctuation Bands ○ Stage 3 Monetary competence transferred to EC Fixed exchange rates European currency 1989 - Delors Report Germany is reluctant to give up control of its currency Situation changes in 1989 - Fall of the Berlin Wall ○ Germany’s consent for the launch of the monetary union becomes a bargaining chip for Germany to win its European partners’ support for the country’s reunification Stage 1 of EMU starts in 1990 - intergovernmental conference going on at the same time to discuss the Treaty revisions that are necessary to move to stage 2 ○ Old dividing lines re-emerge: Germany and the Netherlands believe that member states should fulfill strict criteria on economic convergence before stage 3 can begin ○ France and Belgium are convinced that once the monetary union is completed, then economic convergence will follow swiftly ○ Discussions lead to the signature in 1992 of the Maastricht Treaty that establishes a European Union with a common monetary policy Compromise found between 2 opposing views  Stage 3 - the introduction of the common currency - will begin automatically on January 1, 1999 At the same time, convergence criteria that the Member States have to fulfill in order to participate in stage 3 are also defined UK - does not agree to move into stage 3 - negotiates an Opt-out that allows the country to remain outside the monetary union The Maastricht convergence criteria set out a number of requirements that Member States have to meet in order to participate in the monetary union Requirements: ○ Exchange rate stability (stable currency) ○ Limits to public deficit and debt ○ Durable convergence ○ Price stability 1992 - Massive crisis puts the whole project at risk ○ Referendum in Denmark rejects the Maastricht Treaty putting the monetary union in question ○ Wave of speculations against the weaker currencies - the Italian lira and the British pound - forcing both currencies to leave the European Monetary System, and forcing the remaining countries to widen the fluctuation bands to 15% above and below the central rate, de facto making the system a flexible rate system Plans for the monetary union continue ○ Denmark is granted an opt-out 1994 - Stage 2 begins - Creation of the European Monetary Institute - precursor to today’s European Central Bank 1998 - 11 countries are deemed eligible to join the monetary union on the basis of the convergence criteria ○ Austria ○ Belgium ○ Finland ○ France ○ Germany ○ Ireland ○ Italy ○ Luxembourg ○ The Netherlands ○ Portugal ○ Spain UK and Denmark have obtained opt-outs  Greece and Sweden don’t fulfill the conditions to join 1999 - Stage 3 begins - Euro is formally introduced as virtual single currency, and the exchange rates between national currencies are fixed irrevocably January 1, 2002 - Euro coins and banknotes officially start to circulate Since then new member states have joined: ○ 2001 - Greece ○ 2007 - Slovenia ○ 2008 - Cyprus & Malta ○ 2009 - Slovakia ○ 2011 - Estonia ○ 2014 - Latvia ○ 2015 - Lithuania Today - Euro used in 19 out of 27 countries of the European Union Used by more than 300 million Europeans Part 3 - Currency Exchange Exchange Rate Systems Explained/A Level & IB Economics Video What are the main currency systems? Free floating currency ○ Currency value is set purely by market forces ○ Strength of currency supply and demand drives the external value of a currency in the markets ○ Currency can either appreciate (rise) or depreciate (fall) ○ No intervention by central bank - a central bank allows the currency to find its own market level. There is no target for the exchange rate ○ The external value of currency is not an explicit target of monetary policy (meaning that a country’s interest rates are not set to influence the value of the currency) Managed floating exchange rate (Ex. Brazilian Real, Indian Rupee & Singapore Dollar) ○ Day to day, the currency floats, finds its own market level, but occasionally the central bank will intervene ○ Central bank gives freedom for market exchange rates on a day-today basis, supply and demand factors drive the currency’s value ○ Central bank may intervene occasionally - Buying to support a currency (selling their FX reserves) Selling to weaken a currency (adding to their FX reserves) ○ Currency becomes a key target of domestic monetary policy Higher exchange rate to control inflationary pressures “Managed depreciation” to improve competitiveness & trade balance ○ 2022 - the average exchange rate from U.S. dollars to Singapore dollars amounted to approximately 1.38, meaning that one U.S. dollar would buy 1.38 Singapore dollars ○ 20 years ago - China moved to manage floating exchange rate (July 2005 ended fixed exchange rate and then they moved to semi fix system) ○ The People’s Bank of China (PBOC) allows the Chinese yuan to trade in a 2% range around a midpoint it fixes against the $ each day  ○ How does China control its currency? China maintains a capital controls limiting hot money inflows and outflows There are strict foreign investment quotas (FDI quotas) PBOC can use vast reserves of foreign currency to intervene in the market if needed Fixed Exchange Rate (Hong Kong Dollar - pegged to the US Dollar & Bulgarian Lev - pegged to the Euro) ○ Central banks fixes the currency value - pegged to one or more currencies ○ The central bank must hold enough foreign exchange reserves to intervene in currency markets when needed to maintain the fixed currency peg ○ Pegged rate becomes the official rate - Trade in currencies when buying and selling products takes place day-to-day at this official exchange rate ○ There might be unofficial trades in shadow currency markets ○ Adjustable peg: Occasional realignments may be needed (must be officially sanctioned with the agreement of the IMF) leading to either a devaluation or revaluation Semi-fixed currency (crawling peg) Fully-fixed exchange rate (hard peg) Currency board system (hard peg) ○ A type of exchange rate regime in which a country’s domestic currency is fully backed by a foreign reserve currency or a specific foreign asset, typically held in a fixed exchange rate relationship ○ The central characteristic of a currency board system is that the domestic currency is issued only when there are corresponding foreign currency reserves to back it up, and the currency in circulation is fully convertible into the foreign reserve currency at the established fixed exchange rate ○ For example, if the exchange rate is 1:1 (1 unit of domestic currency = 1 unit of foreign currency), the currency board must hold foreign currency reserves equal to the total amount of domestic currency in circulation) Currency system Official currency Government/central Need for large target (anchor) bank intervention? foreign exchange reserves? Free floating No target No need for central No currency bank intervention Managed floating Possibly Occasional FX reserves can be currency intervention by the used for intervention central bank Semi-Fixed currency Yes - currency can Intervention if FX reserves must be move within set currency moves used for intervention bands outside prescribed limits Fully - fixed currency Yes - explicit Intervention needed FX reserves must be currency target to maintain official used for intervention currency peg Most popular exchange rate system - managed floating currency  Euro Visions; The International Role of the Euro - The Economist The launch of the Euro 2 decades ago aimed to challenge the U.S. dollar, but most global businesses and central banks continued to rely on the dollar Recently, the EU issued €20 billion in bonds through the Next Generation EU (NGEU) scheme, which could make the euro a more competitive safe asset alongside American Treasury bonds While currencies mainly facilitate domestic transactions, having international relevance benefits both firms and governments Using a local currency for trade can reduce exchange rate disruptions, and being a reserve currency helps governments borrow at lower costs The euro is widely used beyond the EU, with some countries linking their currencies to it, and about ⅓ to ½ all euro banknotes are held outside the euro area, according to the European Central Bank (ECB) 19 countries formally use the euro 2 dozen countries (24 countries) link their own currencies to it in some way Around ⅕ of all foreign-exchnage reserves owned by central banks, and a similar percentage of cross-border loans and bonds, are denominated in euros - the share for the dollar is about 60% EU - world’s biggest trader of goods and services Oil and cotton are mostly priced in dollars By 2007, the Euro became the most popular currency for foreign-currency-denominated debt issued by multinationals 2007 financial crisis led investors back to the dollar as their safe currency choice Euro-zone crisis - where the euro’s survival was uncertain, validated this shift back to the dollar Since then, the euro’s importance has either remained stagnant or decreased, depending on the measurement 2 Major changes that can help the euro gain international significance: ○ America’s shift in economic policy under Donald Trump ○ Favouring the euro’s role came from the pandemic In March, euro-zone leaders said that boosting the currency’s international use would help them achieve “strategic autonomy”  Critics argued that this extended dollar power represents an unfair weaponization of the currency Total EU debt will reach around $1 trillion, much smaller than America’s $20 trillion debt market 2019 - former Bank of England governor Mark Carney suggested technology could disrupt the dollar’s central role The World Is Seeing How the Dollar Really Works In spring 2022, sanctions on Russia's Central Bank after its invasion of Ukraine showed the extent of U.S. financial power, especially when coordinated with Europe. Countries with large foreign exchange reserves, like Russia’s $500 billion, have few options besides dollars or euros, leaving them vulnerable to U.S. and allied financial controls. Although Russia has managed to withstand these sanctions, it has had to largely isolate its financial system from the world. Russia’s imports have dropped to just over half their pre-crisis levels due to these sanctions. The sanctions raised questions about the sustainability of a system that gives the U.S. so much power, prompting Russia, China, and India to consider creating an alternative currency system. This new system could use China’s renminbi and focus on trading key commodities. An example of this system is an Indian cement company paying for Russian coal in Chinese currency. Funding in this system could come from the dim sum bond market in Hong Kong, where foreign companies can issue renminbi-denominated debt. While this would reduce U.S. influence, it would take years or even decades to scale up significantly. This system’s success would also depend on continued scarcity of essential resources and China’s economic growth. Six months after the war began, this future without the dollar seems less likely, as the global economy is slowing and commodity prices are dropping. Although there’s still high demand for oil, gas, and coal, other resources, like iron ore, have become cheaper. China is losing foreign capital at a rate even faster than during the 2015-2016 crisis, weakening its role as a potential alternative to the dollar system. By mid-2022, the focus is back on U.S. financial power through the Federal Reserve’s actions to combat inflation and the resulting strong dollar. The Fed’s rate hikes are changing global economic conditions through currency values, interest rates, and credit availability rather than direct geopolitical actions. The dollar’s dominance in global finance ultimately supports U.S. financial sanctions.  The dollar system is mainly a commercial and financial network, but political and military power reinforces its global status. The U.S. dollar’s dominance is largely due to its liquidity, low cost, and universal acceptance. Roughly 90% of global currency trades, valued at $6 trillion daily before COVID-19, involve the dollar. Whether or not there’s a new cold war, a sudden rise in U.S. interest rates affects the entire dollar-based network of global transactions. A rising dollar benefits some but hurts others, as it means other currencies lose value. Normally, a stronger dollar would balance out with weaker foreign currencies, but the dollar’s dominance means its rise has broad impacts. A stronger dollar raises the cost for those with dollar debts, creating higher debt servicing costs worldwide. A stronger dollar also i