INTRODUCTION AND HISTORY OF CADBURY
Cadbury, is one of the British fastest
and a rapid growing confectionery company among all multinationals and national
companies engaged in their well-known dairy and milky products. From 2010 to
2012, Cadbury is managed by Kraft Foods then followed by Mondelēz International
who now operates the company from 2012 to present. In 1824, Cadbury was
established in Birmingham by John Cadbury, one of ten children of Richard
Tapper Cadbury, a prominent Quaker who sold tea, coffee and drinking chocolate.
Cadbury then developed the business with his brother Benjamin in 1847, followed
by his sons Richard and George who had joined the company in the 1850s and
became the second Cadbury brothers to run the business. In 21st
century, the expansion of business has widened to more than 70 countries. The
main head office is located in Uxbridge, England which occupies 84,000 square
feet (7800
) of space inside and consists of 71,657
employees (Wikipedia, 2008).
The company manufactured and
marketed mainly different kinds of confectionery products such as chocolates,
snacks, beverages, candy and gums. Dairy milk is one of the renowned
and best-seller chocolate brands among the other Cadbury products.
The
following shows the global market share and research indicates that Cadbury
consists of 70% market share all over the world. The dairy milk chocolate alone
has accounted for 30% of market. Besides, research also found out that an
estimated number for chocolate bars are sold in every year consists of 120
billion and about 60 million of these are manufactured by Cadbury. Cadbury then becomes the second largest
confectionery company in the world.
MARKET STRUCTURE OF
CADBURY
Cadbury operates in a monopolistic competitive market
structure in which they have been able to maintain a control over their
inflated prices. With usage of the Cadbury logo, quality, and various
trademarks, they differentiate their chocolates from their competitors. Cadbury
understands the concepts of brand identity and product differentiation which is
a reason why Cadbury has become the second largest confectionery company all
over the world. The company’s strategy
to focus on their main competencies to differentiate themselves has made Cadbury
into a confectionery powerhouse. Cadbury
understands how to benefit their customer in which they conduct an observation
on consumer feedback; leverage the company widely to many products and markets,
and create innovative ideas that are hard for competitors to imitate.
Monopolistic competitive firms, like Cadbury are
driven by mass advertising and the establishment of brand names and logos. There
are many other brands of confectionery products on the market that also offer
same flavor and same price, but the advertising of Cadbury attracts all major
part of population. Advertisement such as “Real Test of Life” & “Kuch
Meetha Ho Jaye” that Cadbury shifted its focus from kids to the all age people.
Because most of the confectionery products are virtually identical, advertisers
and producers narrow in on what the consumer wants and allow their products to describe
those ideals. To differentiate between those confectionery products, consumers
must sample all types and determine what suits their tastes. Yet, there are too many on the market and
consumers do not have the time or the funds to sample various brands. Advertisers are aware of this and therefore focus
on targeted ad campaigns to attract more consumers. Cadbury attracts their
customers over their competitors by their creative designed advertisement
campaigns. This is the reason why Cadbury is able to create an array of loyal
buyers.
DETERMINANTS OF DEMAND
AND SUPPLY OF CADBURY
Determinants of Demand
Ø Income
Ø Population and Age Group
Ø Brand Image
Ø Consumer Preference and Taste
Ø Expected Future Price
Ø Competition
Ø Price of Complementary Goods
Ø Cooling Weather and Recession
Determinants of Supply
Ø number of supplier
Ø expected price
Ø price of input costs
Factors that Affect The Demand of
Cadbury
Income of the consumer will also affect the demand of goods. For example, if the income of the
consumer increase, they have more money to spend, therefore they will buy more
goods. At that moment, the demand curve for the goods will shift to the right.
However, not demand for the goods will increase only, demand for normal good
will increased. There is a real life instance for this theory. When our salary
increases, we will have extra money to spend, so before increase of salary, we
may only purchase 1 or 2 chocolate bars. However, after increase of salary,
maybe we will buy dozens of chocolate bars. This made us to purchase more of
the goods sold. Therefore the demand of the product will increased due to the
raise of income. So, there is a positive relationship between income and the
product demand.
The determinant that affects the
demand of Cadbury is population and age
group. The product is known for the children, adults and also for the old
people so the age group are not much affected the demand of the product. In this
case, demand remains constant. If by increasing in the population, there will
be more buyers than there must be more of the market demand. Thus, the demand
of the Cadbury products will increase and the demand curve shifts leftward to
rightward.
The brand image also determines the demand of the product as its brand
of Cadbury plays an important role in the demand of the Cadbury. This product
has built such a brand image that it has attracted the mind of the consumers so
they will not like to go for any other product.
The demand of Cadbury product also
depends on consumer’s preference and
taste. If people enjoy eating and develop a preference for the sweet and
classic tasting Cadbury Chocolate, they will want more of it. If consumer do
not prefer by its sweetness tasting, they will want less of it or change to
other brand. Income changes and lower priced substitutions could affect their
taste and a cheaper priced alternative could become a new preference.
Expected
price is also included. If consumer expects that the
price of a certain commodity will rise in future, the demand will increase as
the product is under the current lower price before the price rise. Inversely,
consumers may believe that a price of a good will be reduced in future; they
will delay on purchasing the product until the price reduces to the lower rate.
Many consumers may purchase Cadbury products if they know that the price is
going to be increasing in the near future. On the other hand, consumers may
wait to buy the products if they know the prices are going to drop in the near
future.
Competition
is also other factors that affect the demand of Cadbury products. In this
market, consumers can find a lot variety of different brands of chocolate that
are available such as Nestle Kit-Kat, Ferrero Roche, Hershey,Mars and so on.
All chocolates are sold according to the market price including Cadbury. So it
is a tough competition for all confectionery companies. In order to increase
the demand for Cadbury products, the price of the competitors have to be
increase. In vice versa, if the price of the competitor’s decrease, the demand
of Cadbury products not much affected by it as it is considered as consumer’s
’brand loyal’ but the sales volume is not much as the previous. In the results,
the profits will not that high as before the changes of price of competitors.
Furthermore, price of complementary goods is also another determinant. If the
price of complementary goods increases then there will be no change in the
demand as Cadbury has referred to normal goods. It becomes every people daily
needs. But there is another consideration that the demand will be affected if
the price of complementary goods increases highly. For example, in 2009 a
shortage of cocoa was reported in UK. The cost of cocoa has increased
drastically to £2,055 a ton, the highest since 1985. The sale
revenues dropped drastically as many consumers may be unwilling to buy the
product. They would rather to purchase sweet or candy rather than buy
chocolate.
Other factors for
affect the change in demand could be related to the cooling weather and to the recession.
Cooler weather encourages the increase in sales of chocolate and the recession
could mean that people are staying at home rather than going out to eat. In
2009, Cadbury have that a ‘stay-at-home culture’ that have helped increase
Cadbury’s UK sales by 12% in the first half year (BBC News, 2009). Thus, the
weather affects the demand curve shift from left to right as demand increases.
Factors
that Affect The Supply of Cadbury
The price of related goods will
affect the supply that will shift the supply curve. For example, in 2009, UK
had faced inflation in the price of cocoa that brought a huge impact to all
confectionery companies including Cadbury. (mail online, 2009).The increases in
the price of the related good (cocoa) will affect less supply on the
confectionery products although the price of the product remains constant. This
shifts the supply curve to the left.
Besides, the number of suppliers
also will affect supply. For example, as Cadbury expands their business to more
than 70 countries, there are a lot of supplies for Cadbury product. An increase
in number of suppliers shifts the supply curve rightward. The greater the
number of suppliers in the market, the greater the supply of Cadbury products in
the market. There will be more Cadbury
products to go around for the consumers.
Expected price of the good also
determines the supply of Cadbury products. Producers may delay the production
of Cadbury in the current period if they expect the price of the products to
rise. They will be more willing to sell
the products at a higher price rather than selling and producing at the lower
price. The higher price will increase their net revenue.
PRICE ELASTICITY,
INCOME ELASTICITY & CROSS ELASTICITY OF DEMAND FOR CADBURY
Price
Elasticity of Demand
Price elasticity of demand measures the extent to which
the quantity of demand of good changes when the price of good changes. In order
to determine price elasticity of demand we compared the change in quantity
demanded with change in price.
In 2008, Cadbury announced that the
commodity input costs rose by 5-6%. The current original price of the dairy
milk chocolate was $1.20 per bar. Assume we use 6% to determine the price
change, and it increases $0.7, the price would be RM1.27. Assume quantity demanded
is 100 units drop to 95 units.
Although there are increase in price
in input costs, but it is not going to affect much in the demand of Cadbury
products as Cadbury is necessity for consumers. Necessity
tends to have inelastic demand
and it is unresponsive price change. By referring the past
incident based on the article, the price of input costs has increased around 3
times. However, the quantity demanded did not decreased so much. In 2007, the
price of input costs rose up and revenues still grew by 7% that became the best
performance in a decade.
We
can prove that Cadbury has an inelastic demand. This is because the percentage
change in quantity demanded is less than the percentage change in price (-0.4 <1)
However, the annual sales revenues for Cadbury in 2008 decreased by 9% as the
unstable of economic condition.
In
2008, Cadbury announced that its profit before tax was down at £112 million
compared to £134 million. However, its sales revenue rose from £2440 million in
2008 to £2767 in 2009. (BBC NEWS, 2008).
The
profits earned for inelastic demand is higher than elastic demand when the
price increases. Revenue is calculated as Price × Quantity demanded. When p=
$1.27, Qd=95 units, TR= $1.27x 90 = $120.65. Original price, p = $1.20, Qd=100
units, TR = $1.20 x 100 =$120.
Determinants of Price Elasticity for
Cadbury
Price
elasticity is determined by a number of factors. There are number of
substitutes, time and definition of the market. As there is more substitution
in market, then its price elasticity of demand will be more elastic. However,
if there is no substitutes for certain product, although the price of the
product itself increased, people cannot switch to other alternative, then it
will be more inelastic. For example, once the price of Cadbury increases highly
and there is decrease in price of Nestle Kitkat, consumer rather to buy KitKat
although Cadbury is loyal brand. Thus, in this case, Cadbury is elastic demand.
Secondly,
time is significant. Inelastic is occurred when something new is entering the
market and there are no substitutes in the market. However, in long term, more similar product
will enter the market, and then people have other choices and will switch to alternative
once price increased. The product in long term will be more elastic. For
example, the demand for the dairy milk is less inelastic as if
the price of the dairy milk chocolate suddenly increases $1.20 to $1.50, than
the demand of the product decrease but if in the long run the demand may not be
much affected.
There are some criteria that also
affects and they are like: Our product should be in the monopolistic
competitive market product. No change in the taste and quality. In the Long run
period of time, the demand for the dairy milk is more elastic because if the
price of the dairy milk in the 2007 was $1.20 and in the 2010 it costs $1.50
but the quantity and the quality will remain the same and the other products
also like Kit-Kat and Munch, if they don‟t change any of the things like price,
quality and quantity than it will greatly affect the demand of the dairy milk
and it will started decreasing day by day.
Lastly,
market definition is important in determine the price elasticity of demand. For
instance Cadbury chocolates have other substitutes, for example kit-kat. The
price elasticity of demand for Cadbury is inelastic since it has lesser
substitutes as it is sold at low price than the other brands. . If we wider the
definition of the market, we changed the Cadbury to Kitkat market, then it will
have more substitutes. The price elasticity of demand will be more elastic as
the price is higher than the Cadbury products.
Income Elasticity of Demand
Income
elasticity impacts change in demand curve. When income increases, the quantity
of demand increases and when income decrease, quantity of demand decreases. As
income increases, people will tend to purchase more Cadbury products. But some
facts states that Cadbury product might become “inferior” good for some
people as it is sold at low price. Some consumers rather switch into a more
expensive or more-prestigious chocolate brand products such as Ferrero Roche
rather than purchase Cadbury products. When income decreases, the demand for
normal goods will fall. Consumers will switch back to Cadbury as they are
easily to be bought at an affordable price.
Cross-Price
Elasticity of Demand for Substitution Goods
The
concept of cross-price elasticity of demand measures the responsiveness of
consumers of one good or service to the change in price of another. If two
goods are substitutes and increases in price, we expect to see consumers
purchase more of the good. For example, if there is an increase in price of
KitKat (original price = $1.30, new price = $1.40), quantity for Cadbury
increase from 100 units to 150 units then
the demand for Cadbury Dairy Milk will increase as well.
We
conclude that the cross-price elasticity of demand for Cadbury when the price
of Kitkat increases from $1.30 to $1.40 is 6.5. As a result, there is a strong
demand towards Cadbury products.
Cross-Price Elasticity
For Complementary Goods
If
they complement each other we should see a price rise in on good cause demand
for both goods to fall. Basically impact of prices changes substitutes and
complements when the price of related good changes. For example, if
there is an increase in the price of the cocoa bean, milk and other
complementary goods like plastic packaging materials, the cost of the
production will increase and by this the price of the related product will also
increase but the demand of the Cadbury will remain constant because it is
referred as normal good.
SHORT RUN & LONG
RUN FOR CADBURY
The
increase in demand for Cadbury products will have different implications in the
short run and the long run at the industry level. For example, In short
run, as there
is has a greatly increase in demand for Cadbury Dairy Milk, each of the firms
will increase their labour supply by getting existing workers to work overtime
or having an extra shift and raw materials to meet the added demand for Cadbury
Dairy Milk. At first only existing firms will be likely to capitalise on the
increased demand as they will be the only ones who will have access to the four
inputs needed to make the chocolate. However, the factor input is variable as
well when it exits in long run. This means that existing firms can change the
size and number of factories they own and new firms can build or buy factories
to produce chocolate. In the long run, we will see new firms enter the confectionery
market, while they will not exist in the short run as firms will not be able to
obtain all of the inputs they need.
Economies
of scale are achieved when more units of a good can be produced on a larger
scale, yet with less input costs. When economies of scale are realised,
economic growth can be achieved. However, diseconomies of scale can happen when
production is less than in proportion to inputs. The costs on average would
rise as there are insufficiency occurring within the firm.
If
Cadbury wants to remain their position in the market, they need to capitalise
in economies of scale. For example, in 1968, Cadbury was merged with the
company Schweppes. Since they had invested in new machinery in one of their
modern confectionery plants (run by Cadbury Schweppes), they were able to
switch part of factory capacity from lines where demand was in decline, to
where demand was on the increase through well organised production management.
Besides, they will be benefited from technical and financial economies of
scale. For example, they will be able to invent better, bigger and faster
machinery. It means that they could cheaply produce a large quantity of units
and yet lowering their costs. Furthermore, since they merged, the company was
already seen as a secured firm. They will be easier to borrow capital at low
interest rates, as banks knew that the company was less of a risk. But in 2007,
the merged company had confirmed to split itself into two, its confectionery
and soft drink business. (BBC News, 2007)
This would cause the increase in input costs.
Diseconomies
of scale will be occurred if Cadbury expands their business too quickly. It could
become a tough task to monitor the productivity and quality of output from
these many thousands of employees. With different managers of these individual
branches having different objectives, it means that Cadbury needs to place more
input costs in business that will results in a low levels of production. Also,
with thousands of employees, the morale levels for individual workers could be
reduced. As a result, the productivity decreases, wasting factor inputs and
increasing costs for the company.
In
2010, Kraft, the world’s second largest food company took over Cadbury. Kraft
said the combination of the two companies could create a ‘global confectionery
giant’ as Kraft are now able to increase their market shares and growth
overseas, while Cadbury could expand its markets and place itself as a competitor
among the US confectionery market. Kraft indicates that the combination of two
companies allowed them to invest in economies of scales, meaning sales and
distribution would increase and deliver £640m in revenue synergies.(BBC News, 2010)
CONCLUSION
In
conclusion, Cadbury has had much market power in the confectionery industry all
over the world. Cadbury realises their success depends significantly on the
value of the Cadbury brand while relying on its excellent reputation for their
product quality and flavour, accessible, and affordable price. In the current
economic state, they are still facing and need to sort out the issue of the
deficit of cocoa and the price increases in cocoa. Besides, they need to
compete with other chocolate brands as many firms have entered freely in the
market. To remain a major player in the confectionery industry, they need to be
effective in the current market by introducing more new products and react to
the alternatives within the market.
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