Most of the readers who may have read my previous blog entries will know that I recently moved from the UK to the US in order to pursue full-time MBA at the Kellogg School of Management. Today, I want to write about the arbitrage opportunities between the UK and US, based on my experience as a consumer in both markets. I want to highlight my recent experiences in the US, and some interesting questions it raises about market efficiency, specifically relating to pricing and product design.
When I arrived in the US, my immediate realization, like most people, was that overall product prices were much lower that they were in the UK. In addition, in most places, the comparable portion sizes (both packaged and consumables) were much larger than those in the UK. I continued to observe these differences across product categories for the first few weeks while I settled in, as I shopped for furniture, food, groceries, and entertainment.
And at one point I stopped to investigate a specific category. Let’s take a rug selling in the Ikea store in a Chicago suburb. At the largest Ikea store in North America, It was selling for USD 19.99. The same rug in Ikea UK sells for GBP 19.99. At the current exchange rate of 1 GBP=1.6 USD, there is a 60% pricing difference – i.e., the rug in the US costs 60% lesser than an equivalent one in the UK. Given that this Ikea rug is manufactured in Sweden (part of the European Union), I also checked that the customs and excise rate on importation of this product category into the UK is zero. Such pricing differences exist across most product categories.
So what might explain these pricing differences between the two markets? Is Ikea discounting its products in the US in order to match the price expectations of this market, or instead is it charging a premium in the UK because of the higher average price of all products in that market? Even if we consider that the cost of manufacturing the product is the same, the overheads such as transportation, labor, and retail costs simply could not account for the 60% pricing difference. So, I dug in a bit deeper and looked to historical pricing trends in the UK in the hope of finding an explanation for this phenomenon.
I think I may have found an answer. Many decades ago, during the Wars, the UK government promoted the concept of “Be British, Buy British”. The idea was that the citizens of the nation should be manufacturing and purchasing local products, albeit at a premium, in order to show their patriotic support and fund the wars that the UK was engaged in. During that time, the average price of most goods in the UK shot up. By the time the wars ended, and the UK market opened up, the consumers were accustomed to higher prices, and all new entrants tended to operate at higher than average pricing. Similarly, the cost of resources and wage levels also tended to move in tandem along with the product prices. This, in my view, made the UK an “expensive” country. And this may explain the pricing differences across borders.
What I’ve also noticed during the first few weeks is the higher quality of product packaging for foods and groceries in the US compared to the British counterparts. Some of the product packaging, for example re-sealable frozen vegetables packages, is very simple but useful. Not one brand selling frozen vegetables in the UK offers re-sealable packaging. And I’ve noticed such packaging and convenience differences across many product categories.
This brings me to the title of this blog – arbitrage opportunities across borders. I was not implying the standard currency and trade arbitrage, but rather differences and opportunities across consumer product categories. Implementing improved product packaging, or the ability to access products that are considerably cheaper are arbitrage opportunities that could drive revenue for existing brands in the UK, or open up new markets.
My take is that this could be a lucrative business opportunity i.e., to investigate such differences across global markets (not just US and UK) and create niche businesses that allow local producers to gain access to such international practices and innovation.
Readers should feel free to contribute and add some of the observations that you may have made during your global travels…
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