Podcast: Two Cents' Worth
Two Cents’ Worth: Tip Top and other economic mysteries
This week Two Cents Worth explores four burning economic issues: Why there are so many barbers shops these days? Why do Uber drivers always drive Priuses? Why does the Reserve Bank always put the official cash rate up in increments of 25? All critical questions for our time. But first, Nikki Mandow looks economic supply and demand 101 - with ice cream.
Why did Tip Tip stop selling cookies and cream ice cream and suddenly start selling it again?
This has been a much talked about mystery in my house. One minute Cookies and Cream was there, the next it wasn't. A year goes by and then, just as suddenly as it disappeared, it returns. The tub has a pretty red sticker announcing "I'm back".
Tip Top makes over 20,000 metric tons of ice cream a year. Tip Top group marketing manager Steph Stuart says that is about 23 litres per person.
"That’s every man, woman and child. There’s probably some people eating quite a lot of ice cream."
My son is definitely one of their better customers.
"It’s [ice cream] a category that’s in growth," said Stuart. "In fact it delivered the highest dollar value growth of all categories in the entire supermarket last year."
So, what's the the real story behind the Big Ice Cream Shortage.
It begins in 2017.
"We had a really early and really hot start to that summer," said Stuart, "From the very beginning of November and people started eating ice cream unusually early, so our season kicked off early. And given the amount of Tip Top ice cream people eat, if we get behind at Tip Top it’s really hard, almost impossible to catch back up."
She said sometimes they Tip Top will run some extra shifts and work weekends to try to catch up. But they're stymied by areas of bottlenecks.
"Lots of our lines run into the same freezer and so our product has to go to the freezer and get out to the packing floor. So there are some constraints on how much we can make," she said.
Tip Tip does also try to stockpile product through winter.
But in 2017, they just weren’t expecting to need so much.
So - at this point, Tip Top knows it won’t have enough ice cream to cover the long hot summer. It has to decide how best to serve consumers and that results in cutting back some of its lines.
Stuart said they start by looking at substitutability - can they take away one flavour in the confidence people will just switch to a similar one.
And after that, it comes down to costs. Some ice creams are more complex and expensive to make.
"We definitely want to balance out being able to make products that people love, because that’s our number one, that’s most important. But also, we need to make money because we’re a commercial business and we don’t want everybody only buying expensive products and not other ones," said Stuart.
Cookies and Cream is harder to make, because it has the cookie inclusion, and it's more expensive to make, but Tip Top doesn't sell it for a higher price, so they make a smaller margin on it.
There was one other consideration they had to take into account.
"In that time as well we were coming close to Christmas and vanilla is by far the most important thing that needs to be in the freezer," said Stuart.
She said it was a hard choice to make.
"Particularly because we never like letting anybody down. We hadn’t planned to have to make that choice. But we just ended up in that situation. And we definitely heard about it from NZ."
Tip Top didn’t just pick on cookies and cream. They also stopped making a couple of other flavours, including Goodie Goodie Gum Drops, which Stuart said has an even more cult following that Cookies and Cream.
Both flavours are back now, but they came online slowly (although Goodie Goodie Gum Drops was re-introduced much faster).
Stuart said that comes down to efficiencies.
"Every time we change to making a different flavour we have to change things in the line, we might have to put filler back into the line or make a whole new mix or ripple. So every time we change to making a different flavour it’s a bit of a process in the factory. And cleaning as well.”
So what was the turning point to bring Cookies and Cream back? It was a bit of a chain of events...
Tip Top put the price of its blue tubs up by one dollar in September last year causing demand to dip a little which freed up some manufacturing capacity in the factory.
It was also winter, so less ice cream being consumed - again a bit more manufacturing capacity.
And customers hadn’t stopped complaining.
So demand over all had reduced, but demand for that flavour was still high.
Cookies and Cream returned to the supermarket in April this year.
And Steph Stuart assures me it's back for good.
And now Question 2: Why have so many barbers popped up in our big cities?
- Gyles Beckford
Recently I took the bold, or is that the bald, decision to have a hair cut.
I looked around the Wellington CBD and realised that within several hundred metres of the RNZ office in Wellington there were at least half a dozen establishments.
I've never been one for style and these days I tend to look for the place able to do a lot with the little I've still got.
But the industry has really taken off lately, in this town at least, and they are no longer the hairdressing equivalent of rugby, racing and beer anymore.
There's one barber in town with a motorbike in the middle of the shop, others have big screen TVs, loud music and almost all of them have shelves of gentlemen's grooming product.
Kay Nelson, Chief Executive of the Hair and Beauty Industry training organisation, told me the sector is booming.
There are more than 5000 owner-operator establishments across the country and it is all about lifestyle and cool.
"You can go all the way from the very top range of spending an hour or so in the barber shop getting a full wet shave and a style," said Nelson, "Right down to just being in the barber’s chair for 10 minutes or so and getting your beard clipped."
She said some barbershops are attached to or have affiliations with tattoo parlours, with clothing chains and certainly the grooming products have taken off - through the roof.
It is not an insignificant part of the economy
The hairdressing grooming beauty industry is the single biggest owner operator sector in the economy
Close to 12,000 people are employed one way or another. The revenue generated is close to $1.5 billion a year, with the average wage at about $19 an hour, with with commissions on top of that.
When I came to Wellington as a callow university student, I visited the Diplomat Hair Salon in the James Cook Arcade.
It's still there. The walls are covered with postcards and business cards and the woman who gave me my first Wellington haircut was Marilyn Southall.
So, I looked at all these trendy new offerings and then went to the Diplomat.
Marilyn Southall said people have been coming back to her salon for years and years.
"Basically because it’s very local. It’s easy to get to. We’re not upstairs or anything like that. We’re very much ground level. So, there was no point in shifting. Everybody knew where we were."
Southall is not just hair dresser.
"I’ve seen a lot [of salons] with TVs, but I think that takes away the conversational side of things. I like to talk to my customers," she said, "We have some lovely conversations in here. It’s like an extended family."
And you never know who you’re going to bump into in the barbers, as we finished our chat a customer popped in that I thought looked familiar.
Ross Meurant, former national MP, head of the infamous red squad from the Springbok tour, and as he put it currently a representative of some Russian oligarchs with interests in new Zealand.
He said his wife cuts his hair normally but today he needed a quick trim for a diplomatic function
"Every time I come to Wellington, which is about once a year now, I come in here because historically Marilyn’s always done a good job and I see no reason to give up an old habit."
Question 3: Would the Reserve Bank ever ditch the traditional 25 basis points moves for the official cash rate, and change the exchange rate by, say, 5 percent?
- Nikki Mandow
At a small business lunch with Adrian Orr, the Governor of the Reserve Bank and other business-types and journalists, we stumbled onto a perplexing question. One not even the policy wonks in the room could answer.
With the Official Cash Rate (OCR) being so low at the moment, any time the governor moves the rate by 0.25 percent - or in official bank speak 25 basis points – that’s a reasonably big move percentage-wise. So, would the Reserve Bank ever consider moving the rate a smaller amount - say 5 or 10 basis points.
Yuong Ha, chief economist at the Reserve Bank of New Zealand, was not at the lunch, but is pretty well placed to answer this question.
Basically, you need a move that's significant and effective enough to be worthwhile, he says.
He uses driving analogy.
"It’s similar to setting your following distance. So, the car we’re driving, the brakes or accelerator are a bit spongey. We don’t have this finely tuned vehicle where we’ve got very responsive accelerator and brake. So we want to achieve a smooth journey. So we will set our following distances accordingly so that we’re not constantly stepping on the brake or the accelerator and creating a very jerky, jerky ride. So for us the equivalent following distance is this 25 basis point marker."
So would the Reserve Bank think about shifting the OCR by 1% or 10% or even 16.5%
"No," said Yuong.
And again with the cars...
"This comes back to the following distance, we just don’t think we can fine tune the economy to that degree that 10 basis point changes are worthwhile. The opposite isn’t true though. 25 basis points is almost the minimum marker. We can actually decrease or increase the OCR by more if conditions warrant. So we are constantly assessing the traffic conditions on the road and at times when we do need to take strong evasive action, we have changed the OCR by much more than 25 basis points. In the global financial crisis for instance, we were reducing the official cash rate by 1.5%, so 150 basis points, at a time. The analogy there is that we were taking evasive action and we needed defensive driving tactics to keep the car on the road," he said.
Why are there so many Priuses on the roads?
- Bernard Hickey
Sticking with cars. Toyota Priuses seem to be everywhere these days, clogging up the roads in our big cities
The boom in ride-sharing services is obviously the root of the problem, but I want to know - why Prius and not other electric cars?
Steve, my Uber driver last Tuesday, helped me answer this question.
It’s cheap to buy. It’s cheap to run and it hardly ever breaks down.
"The reason it’s not very practical, as one might think, to drive say a Nissan Leaf or one of the purely electric cars is that they do have a limited range and Uber drivers can’t be caught short before the end of their shift having run out of charge and have to pull off the road for that reason," said Steve.
Many Uber drivers rent their Priuses, rather than own them.
That’s what Steve does.
“An Uber car has to be less than 10 years old and that can be a little prohibitive for people who haven’t got sufficient savings or sufficient credit rating to get that organised," he said, "So Uber does have recognised, not so much partners, but I guess they are approved rental companies that they have given the tick to, who collaborate and provide rentals at reasonable rates to people.”
Steve rents his Prius for $225 a week. That’s $11,700 a year.
Capital is key.
You can import an eight year old third generation Prius, with 100k on the clock for only $8,000. That would pay for itself in a year.
It’s not a bad economic model for the individual drivers. But our cities are under strain because of it. Priuses jostle for curb space in our cities as they wait for rides.
A study of traffic patterns at ground zero for Uber, San Francisco, blamed ride-sharing for a 60 percent increase in congestion between 2010 and 2016. 60 percent.
All because the Prius is so damn cheap and reliable.
And from a driver's point of view, they are improving all the time.
Steve has pushed the Prius to its limits, especially the second generation one he’s driving.
“I’ve found it surprisingly forgiving even of poor driving. Like late braking into corners, like you shouldn’t. And the car seems to find its way round corners remarkably well.”
Cost-effectiveness is the big motivator for Uber drivers though. The key thing is never having to stop. For anything. Especially not a long electric charge. Or some breakdown.
“They are worthy of the same reputation that Toyota seems to enjoy, generally speaking in that have a great reputation of being largely bulletproof. So, they’re very reliable cars and these are no exception. They tend to go and go and go,” said Steve.
Turns out Steve’s last name is Kennedy and he was the audio engineer and producer on the great Screaming Mee Mees single ‘See me go’.
Back then, they used to call him Crash McThrob.
I’m happy to report he’s a great driver and there were no crashes.
About Two Cents' Worth
Two Cents' Worth has been launched by Newsroom in a co-production with RNZ. It is the country's first weekly business podcast and will be broadcast just after the midday news on Sundays on RNZ National, will be available on both RNZ and Newsroom's websites and can also be found on iTunes and other podcast apps.
Each week we will examine one issue in depth and then convene a panel discussion. Here is this week's version on RNZ as well.
Two Cents' Worth - the business week and the business outlook. Previous episodes are below.
Episode 1: The rise of double cab utes, the TAB's big profit and a threat to small electricity retailers.
Episode 2: Why your first job is crucial, why interest rates are so low and why wholesale power prices are so high
Episode 3: Inside a zombie town as its mill faces a closure decision, how a New Zealand company won big in Singles day and the future of Vector after the departure of chairman Michael Stiassny.
Episode 4: The rule of 8s and Trade Me’s big buyer
Episode 5: Why we don't buy cheap petrol
Episode 6: Inside open banking
Episode 7: A ride sharing revolution
Episode 8: Salmon set to surpass dairy, save the planet
Episode 9: The wedding economy: a love story
Episode 10: Our place in the space race
Episode 11: How NZ changed world economies
Episode 12: The Park Mews effect
Episode 13: Refashioning NZ's rag trade
Episode 14: Recycling plastic won't save the world
Episode 15: The secret battle of the CPTPP
Episode 16: Raw power in the internet era
Episode 17: Hundreds more Bryans