The Flat White Economy

“In Silicon Valley we are often too busy bathing in our private sunshine. But the change in London’s technology climate has got us checking our weather apps. The weather alerts show that there will be plenty of opportunities to invest in technology companies based in London in the coming years - some of which will become global powerhouses.”

- Sir Michael Moritz, chairman Sequoia Capital


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In the aftermath of the global financial crisis, London has since emerged as a new hotbed for digital startups in the tech and creative sectors.

Much of this activity has been centred around East London and the Shoreditch area, with the likes of Tech City and Google Campus held up as examples of the new model for digital cities and the knowledge economy.

Economist Douglas McWilliams has witnessed the growth of the East London cluster first hand over the past few years, with his consultancy Cebr being long term residents of the area.

His team coined the phrase “The Flat White Economy” (FWE) to describe the types of people driving East London’s remarkable growth - from advanced techie geeks through to marketers and creatives. What they had in common was a tendency to buy a lot of coffee, usually flat whites, and since McWilliam’s team couldn’t find a single industry grouping to name the sector, the FWE label has stuck, and is now also the title for his new book examining London’s innovation success.

And the numbers behind the FWE are truly mind boggling - according to McWilliams, in the two years to March 2014 nearly 32,000 new businesses were created in the EC1V postcode area alone. This is the fastest rate of new business creation ever for a single postcode in the UK.

Furthermore, London’s GDP growth has been powering along at an annual rate of 4%, while others like Hong Kong are growing at only 2.7%. Overall, the UK has been one of the fastest growing economies in the Western world.


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So what are the factors behind the FWE that have been driving this rocketing growth?

McWilliams calls out three key factors:  technology, demand, and skills.

Technology

The UK has been a pioneer in taking up new technologies, and has been the Western economy that has taken up online retailing fastest, according to the Centre for Retail Research.

Demand

The UK’s growth in online spending has been matched by its growth in online advertising, which has been a critical ingredient in the FWE, where many of the new jobs created have been related to digital marketing and advertising.

Skills

London is one of the world’s most ethnically diverse cities, and a Mecca for young people from all over the globe, especially Europe. Although accommodation isn’t cheap, East London has been the cheapest part of the central areas in London, and especially attractive to migrants, who are often highly educated and creative. Many have come from the EU, with the European economic recession and Euro problems being a major driver for this trend.  

Lifestyle

McWilliams points out that lifestyle is a key attractor for these workers, characterised by mixing. “Work is mixed with play. Living is mixed with working. The coffee bar with the home and office. Some of these lifestyles were pioneered in Silicon Valley but have mutated in the close-knit high property cost environment of East London.”

And the influence of coffee? The stats in this area are telling. The rise of the FWE has been associated with a different lifestyle typified by hipsters riding bicycles rather than driving Porsches, skinny jeans instead of suits, and flat white coffee instead of champagne.

Champagne sales in London are down 25% since their peak in 2007, and 3.2 million cups of coffee are sold in London every day, up more than 50% since 2007.

McWilliams is in no doubt that skills, talent, and a lively labour supply of diverse and creative young people have helped cement East London as the home of the FWE.

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Lessons for New Zealand

New Zealand has some similarities to the UK situation, although on a much smaller scale. In the same way that London contributes an outsize portion to the overall UK economy (approximately 25% of GDP), Auckland truly is the engine room of the Kiwi economy making up 35% of our national GDP.

McWilliams observes that there are two serious challenges which might mean that London could fail to compete and lose its position in the global FWE:

1. Changes to immigration policies which cut off the supply of labour

2. High cost of property. Sound familiar?

Cost of accommodation is the major component of cost of living that in turn sets the cost of labour in London. If this rises too fast, then London labour will become too expensive for the FWE to continue growing. Same applies for us all here in NZ, and especially in Auckland.

Affordability of office accommodation is another issue, and McWilliams predicts that the epicentre of the FWE in London will shift further east out of the city to control this.

Related to all of the above are concerns around ongoing investment in transport infrastructure and congestion problems in the London area, all of which have impacts on commuting and productivity. Again, way too familiar for us here in Auckland, but thankfully this at last appears to be changing with heavy investment in infrastructure and public transport underway.

So what are McWilliams’ conditions for ongoing FWE success in London:

1. Lack of restrictions on immigration

2. Continued housebuilding growth

3. More commercial development

4. Matching supplies of infrastructure

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Challenges and Opportunities

New Zealand has much in its favour when it comes to creating our own version of the FWE:

1. A diverse and creative workforce

2. Wellington and more recently Auckland being increasingly recognised globally as offering great lifestyle opportunities as international cities.

3. A sophisticated population, who are early adopters of new technologies. High adoption rates of mobile and social media technologies are testament to this.

However, we also still face plenty of challenges:

1. Talent shortages. Our small population means we are often short of the skilled workforce needed to support our emerging startups. Immigration policies that support talented, creative people being able to easily work in our country are critical, particularly in the digital and ICT sectors.

2. High property prices. Addressing this issue will be a crucial policy challenge for government in the immediate future, and will likely be a huge barrier to success if not solved in a sustainable and affordable way.

3. Infrastructure. A severe lack of investment in infrastructure, particularly for Auckland, has been a huge drag on performance over the last few decades. This is changing, but the positive impacts of new investment will take time to percolate through the economy.

4. Demand. This one’s a little trickier. McWilliams points to online advertising as being a key industry sector that drove London’s success off the back of the UK’s early uptake of online retail. I’m not sure that we’ve landed on something similar yet here in NZ, or even if we necessarily need to. We certainly have a huge market on our doorsteps, with over 3.1 billion people within a 12hr flight of Aotearoa, and with no shortage of Kiwi SaaS or mobile app startups, perhaps that’s our common theme for demand…

So all in all, plenty of lessons for us here in the home of the flat white, many of which we’re already aware of, but it was refreshing to see it from the perspective of one of the worlds’ greatest cities.

Can hipsters save the world then? Just maybe.


Jonah Merchant co-founded BizDojo, follow him on Twitter @simianaudio.