F.4 Economics: News Analysis (2nd term)
Vanessa Pang F.4A (31)
Viebbe Wu F.4A (38)
Another yoga firm crashes owing customers
thousands
Planet Yoga second such company to fold in two months
Tanna Chong and Amy Nip
May 15, 2010
South China Morning Post
A yoga chain with three outlets and 13,000 members closed suddenly yesterday - the
second such closure in two months - owing customers tens of thousands of dollars in
prepaid fees.
For many customers, Planet Yoga's closure was a double blow after they had
joined it at a discounted rate following the closure of Yoga Yoga International in
March.
Notices posted outside seven-year-old Planet Yoga's branch in Central yesterday
said it had folded because it was short of cash.
It said banks had withheld revenue of more than HK$5 million since September
last year, and there was no timetable for the release of the cash, so it had gone
into liquidation.
An industry leader predicted that at least two other yoga chains, of about eight
remaining, would close this year because of stagnant demand and fierce price
competition.
Yim Yuk-yip, who said she lost more than HK$10,000 when Yoga Yoga closed
and more with the latest closure, said she wouldn't join another yoga school. "If
you suffered a loss twice, would you want it a third time?" she said. Another
woman, who said she had been a member of Yoga Yoga and Planet Yoga, lost
HK$10,000 and HK$12,000 respectively in the two closures.
Other customers complained that they had been lured into renewing contracts
before they were due through what they said were unscrupulous sales methods.
One said she was asked to sign a second contract five months after the first.
"The staff withheld my membership card after I attended a class," she said. "Then
they pestered me from 7pm to almost midnight, until I paid for the second
contract."
But when she looked into the contract details she found it included an extra prepayment which staff had not mentioned.
"I went to the centre the next day and asked to cancel my purchase but they
refused," she said. She paid more than HK$30,000.
Another woman who said she had signed a two-year contract two months ago,
said there had been no warning of the closure.
"I said [to a consultant] that I was worried about sudden closure of the school. But
he assured me that the centre had just renewed its tenancy," she said. She had
paid HK$60,000 but had attended only three classes.
Democrat lawmaker Lee Wing-tat said he had been approached by 60 members
for assistance and had laid fraud complaints with police for a further seven.
A spokeswoman for the provisional liquidator said refund terms would not be
available until the first creditor meeting on May 31. Asked if every member would
get back their deposits, she said: "The situation is special and it depends on
different cases."
The Consumer Council received more than 100 inquiries about Planet Yoga
yesterday, council chief executive Connie Lau Yin-hing said.
The number of complaints about yoga centres had increased from 188 in 2009 to
199 in the first five months this year, including 12 about Planet Yoga, she said.
"When the company closes down, the chance for a student to get a refund is very
slim or none at all," she said. Nevertheless, members could try contacting the
liquidator.
Those who had prepaid using credit cards should file a written request to card
companies to stop the transactions. Copies of credit card bills and contracts
should be included for reference. Consumers should avoid prepayments and opt
for companies that offered monthly payments, she said.
Fong Fai, president of the Yoga Association of Hong Kong, said the market had
been difficult for two years and predicted two more centers would close this year.
"There was a growing demand after Sars but it has decreased since late 2007.
The number of service providers kept going up so malicious price competition
emerged," he said.
Yoga schools relied on one-off payments of new members but new recruitment at
some centers had been halved, he said.
The Trade Description Ordinance, which regulates the sale of products, does not
cover services.
An evaluation of consumer protection laws was near completion, a Commerce
and Economic Development Bureau spokeswoman said. The department was
addressing the issue of unscrupulous sales practices, including companies which
accept prepayment with no ability or intention of offering services.
Thirty-three Planet Yoga employees sought help from the Labour Department
yesterday.
Issue Describing:
Planet Yoga, which is a yoga chain with three outlets and 13,000 members
closed suddenly on 14th May, 2010, which is the second such closure in two
months recently. It was said that the firm owed customers tens of thousands
of dollar in prepaid fees. For many customers, Planet Yoga's closure was a
double blow after they had joined it at a discounted rate following the closure
of Yoga Yoga International in March. Planet Yoga's branch in Central said it
had folded because the shortage of cash. It said banks had withheld revenue
of more than HK$5 million since September last year, and there was no
timetable for the release of the cash, so it had gone into liquidation. Besides,
an industry leader predicted that at least two other yoga chains, of about eight
remaining, would close this year because of stagnant demand and fierce price
competition in the yoga industry. Many customers were suffering deeply as
they were asked to sign a long-term contract with details including an extra
pre- payment that the staff not yet mentioned.
Fong Fai, president of the Yoga Association of Hong Kong, said the market
had been difficult for two years and predicted two more centers would close
this year.
"There was a growing demand after SARS but it has decreased since late
2007.”
The number of service providers kept going up so malicious and price
competition emerged," he said.
Issue Explanation:
The type of market structure for the Yoga-teaching firm is the oligopoly. There
are several dominant sellers in the market. The entry is restricted or difficult
because the existing dominant sellers have large market share. New entrants
are out competed. Also, buyer and seller have imperfect information, that's
why the customers of the Planet Yoga don't know the financial situation of the
firm.
Firstly, customers suffered great losses mainly because of their large amount
of pre- payment of the yoga courses (that is a consumer good, which are for
satisfying human wants directly), as they are more willing to purchase the
future courses due to the discount rate following the closure of Yoga Yoga
International in March. Since there is a discount of the courses, price
decrease, and it attracted customers. According to the Law of Demand, it
states that as price decreases, quantity demanded increases, vice versa,
ceteris paribus.
Secondly, as Planet Yoga and Yoga Yoga International are both yoga firms,
they are substitutes (Substitutes are goods/ services that can be replaced by
each other to satisfy the same want), when Yoga Yoga closed down, some of
the customers tended to go to have yoga course in the Planet yoga as they
are close substitutes, so that it will create business opportunities for the
Planet Yoga. But due to the payment of most of the customers are pre-paid
payments; the firm couldn't obtain the profit in a short time because the banks
had withheld the firm's revenue, making a forward step to the firm's liquidation
and closure. Besides, as the scale of Yoga Planet kept on increasing, it had to
raise capital by borrowing loans from the banks, and the banks will charge
interest on it, interest is the price of earlier consumption, due to the scarcity of
different resources, people are willing to pay a price to get goods (e.g.
teaching venue, yoga tutor) earlier. The interest also creates a heavy burden
for the firm to settle it.
Thirdly, Yoga Planet may suffer from financial diseconomies and managerial
diseconomies. For the financial one, when large firm like Planet Yoga
continue to borrow from banks, banks will charge for a higher interest rate due
to higher risk. Average cost of running the business will rise. Moreover, for
managerial diseconomies, Planet Yoga will have management problems such
as communication or supervision problems. It reduces efficiency. Average
cost will also rise.
Fourthly, the yoga industry continues to expand in the recent years, when it
becomes too large, it may suffer external diseconomies of scale. As
mentioned in the news, the number of service providers kept going up so
malicious and that price competition emerged to attract customers.
Nevertheless, competition over inputs will rise. Hence input costs will raise,
e.g. rentals, wages. Average cost of production will then rise. Also,
competition over customers will rise. The firm has to incur extra costs to
compete for customers. Average cost of production will increase.
Fifthly, when demand of the Yoga courses is elastic, percentage fall in price is
larger than the percentage rise in quantity demanded. Hence, loss in total
revenue is larger than the gain in the total revenue. So, total revenue falls.
The loss brings about a large load to the firm.
From the above, there are totally five factors contributing to the closure of the
Planet Yoga.