Tuesday, April 14, 2020

More Incentives To Bake Less Bread

Previously I pondered whether my local bakery will choose to make money or bread while there is a Covid-19 wage subsidy. They should be close to four times more profitable if they were to reduce bread production by two thirds. Now we rely even more on bakers altruism to get bread since the incentive to reduce baking has been further increased. Where the previous  rewards were provided from community resources, these new baking reduction incentives oblige landlords to chip in.

So far, I can report my local bakery has remained altruistic, or perhaps ignorant, and I can still get as much bread as I want at previous prices. While acquiring some of their delights yesterday I was able to check the assumption in the previous analysis that Covid-19 would not reduce sales.  They told me "on some days they are selling as much as $500 more than they would have expected and on other days less, but on average sales haven't changed".

The new incentive is an obligation on landlords to provide reduced and deferred rent. The Financial Review explains "In practice, if a qualifying tenant suffered a 30 per cent fall in revenue, then at least 15 per cent of total cash flow relief would be rent-free or waived and the remainder would be deferred." The Grattan Institute's program director of budget policy and institutional reform, who wants larger rent reductions funded by additional community assistance to landlords, says rent is usually 20% of normal costs. Updating the model for this new incentive gives the revenue distribution in figure 1 and profitability as a proportion of original revenue in figure 2.
Figure 1 - Comparison of bakery revenue distributions with Jobkeeper plus rent reduction scenarios. Source: Model

Figure 2 - Comparison of original profitability with Jobkeeper  and rent reductions
Source: Model

That gets absolute bakery profitability up by a factor greater than four so the bakery can generate more profit in the next six months of Jobkeeper  than would normally be achieved in two years. The landlord funded anti baking incentives are much smaller than community funded incentives but they make it a bit less likely the baker can ignore the temptation to increase profit and a bit more likely I'll have to eat less bread and more rice in a few months time.


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