Market Loop - Klarna scales back

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25th May 2022

Bite-sized business news from the UK and beyond
Good morning What’s the most unusual job title you’ve ever heard of? Perhaps Chief Happiness Officer or Chief Troublemaker (real roles btw). Well there’s a new one to add to the books. Yesterday Kim Kardashian was unveiled as the first Chief Taste Consultant at plant-based food maker Beyond Meat.

It’s hoped that Kim’s involvement can help turnaround the fortunes of the alternative-meat maker, which has struggled in recent times as it faced stiffer competition and questions about how healthy and appealing the products are. Beyond Meat shares have sunk around 80% in the last 12 months.
Today's stories
  • Klarna scales back
  • Windfall tax rumours send energy shares down
Klarna scales back

What happened?
Yesterday  Klarna, one of the leaders in the “buy now, pay later” space, announced plans to lay off 10% of its 7,000 workers. The company is also reportedly looking to raise a new funding round that will lower its valuation by a third.

As a reminder
Founded in Stockholm in 2005, Klarna pioneered BNPL which allows customers to spread online purchases over multiple interest-free payments instead of using a credit card.

The sector has flourished in recent years as ecommerce has rocketed during the pandemic. A recent survey found that one in five Brits now using BNPL. Last June Klarna became the most valuable private company in Europe, achieving a valuation of $46bn.

The party maybe over
Klarna’s CEO said the war in Ukraine, soaring inflation and the likelihood of a recession were the reasons for the job cuts. 

Last week, reports surfaced that the company was looking to raise money at a valuation of $30bn, a 30% cut from its valuation peak. 

The industry has long drawn criticism from debt charities that warn that the services encourage people to spend beyond their means. Regulators in the UK and US have also launched investigations into the companies’ potentially predatory lending practices.

Klarna is not the only European startup feeling the pinch
Yesterday German rapid grocery delivery firm Gorillas laid off half of its head office staff and announced it was pulling out of several European markets in a bid to lower costs. 

Gorillas became the poster child of the super-fast grocery delivery market last year and has raised $1.3bn in funding to date but is now struggling to raise money for its next round of investment.
Other stories to keep you in the loop
  • UK borrowing falls in April as inflation raises debt costs
  • Chelsea takeover: Premier League approves American-led bid
  • Biggest rail strike in decades a step closer as RMT union workers back industrial action
  • BA owner faces pay revolt over 'excessive' share award plan
  • Accountancy firms ask for exemptions from ban on providing services to Russia
  • Starbucks to quit Russia but pay six months' wages
  • Snap plunges 30% after company warns it will miss targets and slow hiring
  • JPMorgan's UK consumer bank tops half a million customers
  • Zoom stock goes full circle, hovers at pre-pandemic levels
Windfall tax rumours send energy shares down

What happened?
Yesterday the Financial Times reported the chancellor, Rishi Sunak, has ordered officials to draw up plans for a possible windfall tax on power generators, including renewable energy operators, as well as on oil and gas producers.

If true, it would mark a change of tune from the government who had opposed the idea of the tax saying it would deter investment in the renewable sector and that energy companies are already taxed at twice the rate of a typical business.

The news sent shares in energy companies lower with British Gas parent company Centrica and Scottish and Southern Energy falling 7% and 8% respectively.

What is a windfall tax?
A windfall tax is a one-off tax on businesses that have benefitted from something they are not directly responsible for.

In this context, the soaring energy prices since last September driven by post pandemic demand and uncertainty over supply with the war in Ukraine, were outside the control of the sector. 
  • Earlier this month Centrica announced that profits for this year would be at the top end of analyst estimates - which range from £739m to £1.4bn.
  • BP's profits more than doubled in the first quarter of this year, reaching almost £5bn and Shell posted its biggest ever quarterly profit of £7.3bn
All the while the household energy bills rose 54% last month to an average of £1,971, pushing millions of households into fuel poverty where more than 10% of income is spent on energy.

Is there any precedence?
Spain and Italy have already implemented a version of the tax to ease their own cost of living crises.

The biggest UK windfall tax of all time was in 1997, when the Labour government put a tax on more than 30 water, telecom and energy companies formed after previous Conservative governments sold off public assets into private hands. The tax raised more than £5bn.

The justification at the time was that these businesses had been undervalued at the time they were sold by the government.

The energy regulator, Ofgem, said household energy prices will rise by a further £800 or 42% this winter. This means that the energy sector could enjoy even higher profits later this year. A government announcement on a windfall tax could come as early as tomorrow.
Stat of the day

By midday yesterday 130,000 journeys had been made on London’s Elizabeth line's first day
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