Thursday, 24 October 2013

...Economics Analysis 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. 

            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
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 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.

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)

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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