Waterford Wedgwood potters towards the brink

Another day and yet another venerable institution falls. The Waterford Wedgwood (WW) group had been in talks with US private equity groups for some time before those talks collapsed last Friday, and the Bank of America decided it could not extend its credit deadlines to the company any longer. In October WW reported losses of 63 million Euros, with debts of 450 million Euros, and it had been struggling since May 2005 to restructure the company, cut costs and shift to more capital intensive production, in order to survive a growing lack of demand for these high prestige crystal and china products.

The attempts to find a private equity buyer in the US, which was the market for a large proportion of the company’s exports, were reported in Canada by CBC on 31st December in a report which suggested the buyers may continue the process of switching production from the UK to Indonesia to save money:

“With an average monthly salary of about 1.8 million rupiah ($183), compared with $2,380 in Britain, their work is vastly cheaper. The reduced costs will enable Waterford Wedgwood to boost spending on marketing and create new products, some with a hint of the Indonesian culture of batik and shadow puppets. Though the packaging will say “Made in Indonesia,” all pieces will still be stamped “Wedgwood. England 1759” — labelling the company says is permitted under international trade law.”

As this report suggested, it may well be that the root of the company’s demise lay not so much in trying to sell an expensive product during the rapid shock of a global recession (selling goods which are ‘nice-to-have’s rather than must-have’s, as Robert Peston describes it here, but more in failure to recognise an underlying change in formal dining habits and trends, and being too slow to react to the need to divert resources to research into new products and markets. There may also have been over-reliance on the prestige of a ‘Made in Britain’ label – perhaps they should have been quicker to move production to lower-cost economies as many of their rivals did.

There is another aspect reported here by BBC News reporter Jorn Madslien – the fact that, as a company based in Eire, WW’s accounts are denominated in Euros. A company operating in sterling might have managed to maintain some of its exports to the vital US market, in spite of the recession, as sterling has weakened against the dollar over recent months. However, the Euro has remained strong against the dollar, so this potential boost to the export value of the products has not been possible for the company.

Finally we can consider the effects on structural unemployment in the Staffordshire potteries industry, which used to employ tens of thousands of people. This will affect not only the 600 employed there by WW (+ another 1300 in UK and 800 in Ireland) but also in department stores that sell fine china and crystal so dedicate floor space to WW products and employ staff to sell them – such as Debenhams – their margins will have been affected by lack of WW sales, as we have seen reflected in Debenhams results reported yesterday.

Some questions to consider

What elasticity of demand can you identify here?

What type(s) of integration did Wedgewood use when they merged with Waterford (1987) and acquired Royal Doulton (2005), and what advantages would they have hoped to gain?

Identify three of the main reasons for WW’s demise from the above. Which, in your opinion, was the most significant and why?