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Economic analysis of cadbury & nestle


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Managerial Eco Project Analysis of Cadbury and Nestle

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Economic analysis of cadbury & nestle

  2. 2. SUBMITTED TO:PROF, SHAFIQ-UL-REHMAN SBSUBMITTED BY: Muhammad Tayyab 111405 Umair ahmad 111402 Waqar Ahmad 111401 Institute of Management Sciences, (Pak-Aims) Lahore 2
  6. 6. Acknowledgment: Firstly we would thank Allah for giving us this opportunity and theresources to be able to do something productive with our life. Without his blessingwe would not be able to come as far as we have. We dedicate our assignment to our Managerial Economics teacher, Prof:Shafiq ul Rehman Sb who imparted the essential and crucial knowledge ofManagerial Economics and assigned us this project to express the knowledge andskills which we have learned in the class. His guidelines and teaching method andtechnique have been very useful for us not only in preparing of this report but alsofor our future life. He helped us to find new ways of being innovative and creative;this report was not possible without his help and continuous direction. 6
  7. 7. Introduction:Cadbury is one of the fastest growing companies among all multinationalsand national companies engaged in milky and dairy products. Cadbury wasone of ten children of Richard Tapper Cadbury, a prominent Quaker who hadmoved to Birmingham, England from the West Country in 1794.In 1824, 22-year-old John Cadbury opened his first shop at 93 Bull Street,next to his fathers drapery and silk business in the then fashionable part ofBirmingham.Apart from selling tea and coffee, John Cadbury sold hops, mustard and anew sideline - cocoa and drinking chocolate, which he prepared using amortar and pestle.Cocoa and drinking chocolate had been introduced into England in the 1650sbut remained a luxury enjoyed by the elite of English society. Customers at John Cadburys shopwere amongst the most prosperous Birmingham families, the only ones who could afford thedelicacy. Cocoa beans were imported from South and Central America and the West Indies.Experimenting with his mortar and pestle, John Cadbury produced a range of cocoa andchocolate drinks, the latter with added sugar. The products were sold in blocks: customersscraped a little off into a cup or saucepan and added hot milk or water.John Cadbury had a considerable flair for advertising and promotion. "John Cadbury is desirousof introducing to particular notice Cocoa Nibs, prepared by him, an article affording a mostnutritious beverage for breakfast," announced his first advertisement in the Birmingham Gazettein March 1824.He soon established himself as one of the leading cocoa and drinking chocolate traders inBirmingham. The popularity and growing sales of John Cadburys cocoa and drinking chocolateof superior quality determined the future direction of the business.In 1831, John Cadbury rented a small factory in Crooked Lane not far from his shop. He becamea manufacturer of drinking chocolate and cocoa, laying the foundation for the Cadbury chocolatebusiness.These early cocoa and drinking chocolates were balanced with potato starch and sago flour tocounter the high cocoa butter content, while other ingredients were added to give healthyproperties.By 1842, John Cadbury was selling sixteen lines of drinking chocolate and cocoa in cake andpowder forms.The Quaker Influence:The Cadbury family were prominent members of the Society of Friends or Quakers, one of themany nonconformist religious groups formed in the 17th century. Their strong beliefs carriedinto campaigns aimed at ending poverty and deprivation and many prominent Quaker-runbusinesses were part of reforms of social and industrial society in Victorian Britain.John Cadburys lifelong involvement with the Temperance Society influenced the direction of hisbusiness enterprise. By providing tea, coffee, cocoa and chocolate as an alternative to alcohol he 7
  8. 8. felt he was helping to alleviate some of the alcolohol-related causes of poverty and deprivationamongst working people. He also incorporated some of these principles in his industrial relationsphilosophy.Cadbury Brothers of BirminghamAs the enterprise prospered, in 1847 John Cadbury rented a larger factory in Bridge Street, offBroad Street, in the centre of Birmingham and went into partnership with his brother Benjamin -trading as Cadbury Brothers of Birmingham.The retail side of the business in Bull Street was passed to a nephew, Richard Cadbury Barrow in1849. Barrow Stores, as it became, traded in Central Birmingham until the 1960s.A major turning point for the cocoa and chocolate industry came in the mid-1850s, when taxeson imported cocoa beans were reduced by Prime Minister William Gladstone. The previouslyprohibitive chocolate products were now within the reach of the wider population.Cadbury Brothers received their first Royal Warrant on February 4, 1854 as manufacturers ofcocoa and chocolate to Queen Victoria. The company continues to hold royal warrants ofappointment.During the 1850s business began to decline. The partnership between the first Cadbury brotherswas dissolved in 1860, a difficult time in the companys history.John Cadburys sons Richard and George, who had joined the company in the 1850s, became thesecond Cadbury brothers to run the business when their father retired due to failing health in1861. John Cadburydevoted the rest of his life to civic and social work in Birmingham until his death in 1889.Although they had worked in their fathers business for some years, the prospects for Richard.25, and George, 21, were daunting. Their first five years were a period of unremitting toil withfew customers, long hours and very frugal living. Both seriously considered taking up othervocations - Richard as a surveyor in England and George as a tea planter in India.George was focused on manufacturing, and Richard with sales, but in the early days bothbrothers went out and promoted their goods. Due to their dedication, sheer hard work andimprovements in the quality of Cadbury cocoa products, the business survived and prospered.Technological AdvancementsHistoric packagingDissatisfied with the quality of cocoa products, including their own, theCadbury brothers took a momentous step in 1866 that not only had a bearingon their business but revolutionised the whole of the British cocoa business.Until that time English cocoa had been heavily adulterated with starchsubstances like potato flour or sago to mask the excess cocoa butter. Thecocoa drink, as described by George Cadbury himself, was a "comfortinggruel". 8
  9. 9. Following a visit to the Van Houten factory in Holland to see their new cocoa press, the brothersintroduced this new process to their Bridge Street factory. The press removed some of the cocoabutter from the beans, producing a less rich and more palatable cocoa essence - the forerunner ofthe cocoa we know today.There was no need to add flour and Cadburys new cocoa essence was advertised as Absolutelypure...therefore BestAt that time there was much concern in Parliament about the adulteration of food, includingcocoa. The new unadulterated Cadburys cocoa essence was heralded as a major breakthroughand resulted in the passing of the Adulteration of Food Acts in 1872 and 1875. Cadbury receiveda remarkable amount of free publicity during this period and sales increased dramatically.The marketing of this cocoa essence helped turn a small business into a vast worldwidecompany.The introduction of cocoa essence was not the only innovation that improved the CadburyBrothers trade. The plentiful supply of cocoa butter remaining after the cocoa was pressed madeit possible to produce a wide variety of new kinds of eating chocolate, leading to thedevelopment of the smooth creamychocolate produced today.The quality of the chocolates made bythe company following the introductionof the cocoa press was such that in the1870s, Cadbury broke the monopolywhich French producers had previously enjoyed in the British Market.Cadburys Chocolate BoxA chocolate for eating had been produced at the Cadbury factory since 1849 but it was not, bytodays standards, a very palatable product. With the availability of cocoa butter a new chocolaterecipe produced chocolate similar to that which we enjoy today.Refined plain chocolate was made for moulding into blocks or making bars and chocolate creamsthat with chocolate-covered fruit-flavoured centres.Cadburys "fancy chocolates"- or assortments as they are now called - were sold in decoratedboxes, with small pictures that children could cut out to stick into scrapbooks.Richard Cadbury applied his considerable artistic talents to introduce more ambitious andattractive box designs from his own paintings, using his own children as models or depictingflowers and scenes from his travels. They were the first British-made fancy chocolate boxes andwere very popular. Some of his original boxes still exist.Elaborate chocolate boxes were much prized as special gifts by the late Victorians as they couldlater be used as trinket or button boxes. Chocolate box designs ranged from superb velvetcovered caskets with bevelled mirrors and silk lined jewel boxes to pretty boxes with pictures onthe lid.The popularity of these splendid Cadbury boxes continued until their disappearance during theSecond World War. Victorian and Edwardian chocolate boxes are now collectors items. 9
  10. 10. Cadbury Brothers LtdThe business became a private limited company - Cadbury Brothers Limited - in 1899 followingRichard Cadburys sudden death at the age of 63.George Cadbury became chairman of the new board and his fellow directors were Barrow andWilliam A. Cadbury, sons of Richard and two of his own sons, Edward and George CadburyJunior.By 1899, the Bournville factory had trebled in size with more than 2,600 employees. With theformation of the limited company, Bournville entered a new era as the younger members of theBoard introduced new ideas - analytical laboratories, advertising and cost offices, a salesdepartment, works committee, medical department, pension funds, education and training foremployees.The Bournville factory site became a series of factories within a factory, as everything neededfor the business was produced on site, including tin box pressing plants, carton making units, adesign studio and printing plant.This policy continued until well after the Second World War when the rationalisation of thebusiness to mainstream activity - production and marketing of chocolate confectionery- led to theuse of outside specialised suppliers for ancillary items.Manufacturing processCocoa, common name for a powder derived from the fruit seeds of the cacao tree and for thebeverage prepared by mixing the powder with milk. When cocoa is prepared, most of the cocoabutter is removed in the manufacturing process. After the fat is separated and the residue isground, small percentages of various substances may be added, such as starch to prevent caking,or potassium bicarbonate to neutralize the natural acids and astringents and make the cocoa easyto dissolve in liquids. Cocoa has a high food value, containing as much as 20 percent protein, 40percent carbohydrate, and 40 percent fat. It is also mildly stimulating because of the presence ofTheo bromine, an alkaloid that is closely related to caffeine.The processing of the cacao seeds, better known as cocoa beans, is complex. The fruit harvestis cured or fermented in a pulpy state for three to nine days, during which the heat kills theseeds and turns them brown. The enzymes activated by fermentation impart the substances thatwill give the beans their characteristic chocolate flavor later during roasting. The beans arethen dried in the sun and cleaned in special machines before they are roasted to bring out thechocolate flavor. They are then shelled in a crushing machine and ground into chocolate.During the grinding, the fat melts, producing a sticky liquid called chocolate liquor, which isused to make chocolate candy or is filtered to remove the fat and then cooled and ground toproduce cocoa powder.The beans are sold in international markets. African countries harvest about two-thirds of thetotal world output; Ghana, Côte dIvoire, Nigeria, and Cameroon are the leading African cocoa 10
  11. 11. producers. Most of the remainder comes from South American countries, chiefly Brazil andEcuador. The crop is traded on international commodity futures markets. Attempts by producingcountries to stabilize prices through international agreements have had little success.Cadbury makes a variety of chocolates for different purposes but the two main types areCadbury Dairy Milk, milk chocolate and Cadbury Bourneville plain chocolate.The taste and texture of Cadbury chocolate are based on long traditions of expertise in recipeand processing unique to Cadbury. Techniques are improving all the time and new technologyenables the whole process to be finely tuned to match evolving tastes and preferences.Production starts at the Chirk cocoa factory, where the highest quality cocoa beans areprocessed to produce cocoa mass containing 55% cocoa butter plus extracted cocoa butter, thebasis for all chocolate products.When plain chocolate is made the mass goes straight to the Bourneville factory inBirmingham while the mass for milk chocolate production is taken to the Cadbury milk factoryat Marl brook, Herefordshire, in the heart of English dairy country.At the milk processing factory fresh liquid full cream milk is cooked with sugar and condensedto a thick liquid. Cocoa mass is added, making a rich creamy chocolate liquid, which is thenevaporated to make milk chocolate crumb. As these ingredients are cooked together the veryspecial rich creamy taste of Cadbury chocolate is produced. 95,000 tonnes of crumb a year areproduced at Marl brook to be made into chocolate at the Cadbury chocolate factories atBourneville, Birmingham and Somerdale, Bristol.On arrival at the chocolate factory the crumb is pulverized by heavy rollers and mixed withadditional cocoa butter and special chocolate flavorings. The amount of cocoa butter addeddepends on the consistency of the chocolate required: thick chocolate is needed for molded bars,while a thinner consistency is used for assortments and covered bars.In the UK up to 5% vegetable fat is added to compensate for variations in cocoa butter,allowing the melting properties of the chocolate to be controlled to a precise standard, andpreserving the full taste and texture of the chocolate. Cadbury use carefully selected vegetableoils similar in nature to cocoa butter: African Shea, Indian Sal and Malaysian Palm oils are allpart of the recipe.Both milk and plain chocolate, which has had sugar and cocoa butter added to the mass beforepulverizing, undergo the same final special production stages, producing the famous smoothness,gloss and snap of Cadbury chocolate.Products of Cadbury:Blocks of Chocolate 11
  12. 12. Boxed ChocolatesOld GoldCoco by CadburyBe treatwiseChocolate BarsBitesizePre-teens ConfectioneryPascall ConfectioneryNut Free ProductsKosher Products 12
  13. 13. Dairy MilkCadbury® Dairy Milk® milk chocolate block is Australias favourite chocolate. Ithas the equivalent of a glass and a half of pure full-cream dairy milk in every 200gof Cadbury Dairy Milk, Milk Chocolate.Cadbury Dairy Milk, milk chocolate is the defining taste of chocolate in Australiaand is perfect for treating yourself and sharing among family and friends.Cadbury Dairy Milk block is available in a variety of formats for all occasions:100g, 200g and a 350g sharepack.Ingredients: Ingredients: Full Cream Milk, Sugar, Cocoa Mass, Cocoa Butter,Milk Solids, Emulsifiers (Soya Lecithin, 476), Flavours. May contain traces of Nuts. MilkChocolate contains Cocoa Solids 26%, Milk Solids 28%Nut Free ProductsCadbury manufactures a wide range of products, some of which contain nuts and nut oils.All our products are packaged and labelled as required by Australian State and Federal foodlaws.We have stringent world-class manufacturing standards and strive to ensure that all our productsare fresh, in an excellent condition, and contain the intended ingredients.All Cadbury Chocolate products are made in an environment where there is the possibility thatnon nut products may inadvertently contain nut traces. We will always include a statement on theproduct label to advise consumers of this. There is a very low probability that the Pascall rangeof sugar confectionery will be contaminated with nut material, as they are manufactured in a nut-free environment.Kosher Products:We do not have any Kosher-certified products, however some of our products are listed in theMizrachi Kosher Food Bulletin from time to time. 13
  14. 14. Globle Market Share Confectionaly of Cadbury and Nestle:Flow Chart of New Product launch Cadbury :Cadbury Market Share of production:  70% market share  Dairy milk alone accounts for 30% of market 14
  15. 15.  Other power brands include Perk, 5 Star, Gems  Targeting youth and adults through new products  A amazing 120 billion chocolate bars are sold in every year, 60 million of these are made by Cadbury!  Cadbury uses 33,000 liters of milk every day for chocolate production at its one plant!  Cadbury sells over 3.5 million boxes of chocolate every year!  Cadbury Dairy Milk is the oldest chocolate brand!Cost Structure:The increase in the price of the product over the given three years wiz 2010, 2011 and 2012reflects the increase in the inputs because of the inflation over the given years. This inflationarytendency is reflected in the increased cost of material, processing, financial cost, sales teamexpenses etc. despite these increases the company enjoys such a demand for its product that theproduction and the demand has increased over the given years. 2011 Per Pack Per cotton Material 260 1300 processing 40 200 financial cost 64 320 sales team exp 103 515 others (Foh,HR) 45 225 Total 512 2560 15
  16. 16. 2012 Per Pack Per cottonMaterial 320 1600processing 65 325financial cost 83 415sales team exp 132 660others (Foh,HR) 60 300Total 660 3300 Total Costs 1800 1,650 1600 1400 1200 1000 870.4 800 Rs. In Millions 600 429 400 200 0 2010 2011 2012 Years 16
  17. 17. Pricing Strategy:Despite the unstable economic factors causing increase in the cost of material, labor and othersthe company is maintaining a steady gross margin of approx 20% around its years of production.This is despite the fact that they having 35% share of this market which gives them an almostmonopolistic status, since all other players sin this industry have significantly less share ofmarket compared to them thus we can say that in future they are likely to see a significantincreased demand and their share of the total market increasing significantly. These is a healthyattitude for a company to adopt keeping in view their costumers requirement who belong to avery important sector of the economy there product stands to influence the output of theagricultural sector which will greatly enhance the overall national economyOur pricing strategies are as followsWeight Prices20gm pack, Rs.1050 gm Pack, Rs.30150 gm Pack, Rs.90350 gm Tin, Rs.175500 gm Tin, Rs.350And it is concluded from the survey that customers by looking this price chart haveaccepted the prices and called it as an economical.Pricing Technique for CadburyThere are 4 different pricing techniques that are available to Cadbury.1. First pricing technique is skimming pricing. With skimming pricing, these prices are set veryhigh to take advantage of some peoples desire for a new product or design at any price.Skimming is most effective if demand is inelastic. For e.g. Cadbury put their prices at the sameas most of their competitors and at the price their customers are able to pay. 17
  18. 18. Cost plus pricingPricing methods which are based on the cost structure of Cadbury that are favored byaccountants because they are supposedly more accurate and reliable.Cadbury is trying to maximize it profits. This method works successfully because all costs needto be accurately accounted. In many firms this is a very difficult process which is why thesimplermark-up procedure is used. Cost plus pricing tends to ignore the demand for the product and thecompetition.Positioning pricing:Cadbury uses this method to position prices that are set which reflect the consumers view of thechocolate bean.Demand based pricing:Cadbury set their prices based on what they think the consumer is prepared to pay. If they don‟tthen they wont sell as good as they thought. If they do sell at the customer‟s price they will havea good reputation and an output of more customers.Cost cuts should significantly benefit Cadbury:RiskCadburys ongoing restructuring efforts may prove to be disruptive to the firms operations, and itis still highly unclear whether the company will achieve the significant margin improvementmanagement anticipates. Further, Cadburys profitability may be hurt by elevated commoditycosts, particularly cocoa, sugar, and fuel costs. Finally, with nearly 40% of its sales resultingfrom developing and emerging markets, the firm is exposed to volatile political and economicclimates that could pressure sales.StrategyCadburys primary objective is to drive margin gains by improving the efficiency of its business.To achieve this, the firm is reducing stock-keeping units and scrapping 15% of its manufacturingand distribution centers by 2011. In addition, Cadbury is placing increased emphasis on its keybrands, markets, and customers. Finally, the firm is concentrating on enhancing operations inRussia and China, which have been a drag on profits.Management & Stewardship 18
  19. 19. Todd Stitzer is the CEO at Cadbury, while Roger Carr assumed the chairman role in July 2008.In our opinion, the separation of these roles between two individuals is a positive. We alsobelieve that Stitzers experience of more than 20 years at the firm, most recently as chief strategyofficer, is beneficial as Cadbury faces several challenges. Overall, we believe compensation isfair. Two thirds of compensation is variable and performance-based, which is a plus in our eyes.In addition, we believe the metrics by which management is critiqued--underlying earnings pershare and returns on invested capital--appropriately align managements interests withshareholders. We are further encouraged that Cadbury has put share-ownership guidelines inplace for its executive management group. However, we would prefer if directors were electedon an annual basis, rather than the current three-year staggered structure. It is also worth notingthat Ken Hanna stepped down as CFO in April 2009. We liked Hanna, and he will surely bemissed. However, we believe the appointment of Andrew Bonfield (most recently CFOofBristol-Myers Squibb) was a sound decision. Although Bonfield is new to the confectioneryindustry, we contend that his financial experience should be a plus as Cadbury seeks to trim theexcess fat from its operating structure and enhance its profitability.ProfileCadbury operates as the leading competitor in the global confectionery market, with productlines spanning the chocolate, candy, and gum segments. The firm distributes its well-knownbrands (such as Halls, Trident, Green & Blacks, and Dentyne) in more than 80 countries aroundthe world. After completing the sale of its Australian beverage segment in April 2009, Cadburyis now exclusively focused on its confectionery operations.GrowthMore than $10 billion of acquisitions have diversified Cadburys business into faster-growing,more-profitable segments of the confectionery market. Going forward, we expect that the firmwill seek to drive growth through small bolt-on acquisitions as well as further penetration of itsexisting brand portfolio.ProfitabilityManagement projects a midteens operating margin by 2011, which we now believe is anattainable goal. In our view, it is likely that Cadbury is now more intently focused on drivingcost savings to ward off Krafts takeover bid or to justify a higher offer price.Financial HealthWere not concerned by Cadburys debt levels, as the firm operates with nearly £1.4 billion oflong-term debt, and adjusted earnings before interest and taxes of more than 4 times through thefirst six months of 2009.Bulls Say 19
  20. 20. 1. In our view, Krafts unsolicited bid for Cadbury has likely motivated management to drivefurther operating margin improvement in order to prove to shareholders that they would be bestserved if the firm remained an independent entity or to garner a higher takeout price.2. We believe the firm has a substantial opportunity to trim excess fat from its operating structureand enhance profitability. Even after its cost-reduction programme, Cadbury remains moreinefficient than its global peers.3. Cadbury is a leading player in the worldwide confectionery industry with 10.5% global share.The firm competes in all three segments of the market: chocolate, sugar, and gum.4. Private-label competition is minimal in the confectionery industry, as these firms only controlabout 5% of the market.5. Nearly 40% of Cadburys confectionery sales result from faster-growing emerging markets.Bears Say1. Given the economic weakness in Cadburys more mature markets, such as the U.S. and U.K.,as well as the impact that slowing growth in the Western world could have on emerging anddeveloping markets, we believe Cadburys growth could come under pressure.2. Escalating commodity costs are a persistent issue for all packaged-food firms. Cadburyexpects its input costs to rise 6%-8% in 2009, particularly because of higher cocoa prices.3. Cadbury failed to deliver on 50-75 basis points of annual margin expansion during its cost-reduction programme.4. The combined Wrigley-Mars has bypassed Cadbury as the global confectionery leader andcould represent a more formidable foe.Independent Variables affecting demand of Cadbury Dairy MilkPrice: This product is a brand loyal product, so if there is a slight increase in the price, the demand of theproduct will remain unaffected. But if there is a decrease in the price, the demand of the product mayslightly increase.Income: If the income of the people increases, the demand of the product also increases and if the income ofthe people decreases, the demand of the product decreases because then people will go for lower 20
  21. 21. price chocolate like éclair or melody of Rs.1 or Rs. 2. So, there is a positive relationship betweenincome and the product demand.Population & Age group:This product is meant for the children, adults and also for the old people so the age groups are notmuch affected the demand of the product so demand remain same and by the increase in thepopulation, the demand of the product also increases.Brand Image:The brand image of the Cadbury plays an important role in the demand of the Cadbury. This producthas built such a brand image that it has much attracted the mind of the consumers so they will notlike to switch over to the other brand.Consumer’s taste and preferences:Cadbury produced milk chocolates by using the high quality of cocoa bean and the taste has stillremained the same which has touched the heart of the consumers. So, they will not like to go for anyother product.CompetitionThere are many competitors like Cadbury 5-star, Nestle Kit-Kat, parle chox, foreign chocolates(Chinese Chocolates), lotee etc. in the market so if the price of the competitors increases, thedemand of the dairy milk also increases. But if the price of the competitor‟s decrease, the demand ofthe dairy milks not much affected by it.Price of Complementary Goods:Cadbury dairy milk is made from the milk, sugar, cocoa bean and cocoa powder. If the price of thesecomplementary goods increases then there will be no change in the demand. Because Cadbury dairymilk is a brand loyal product so there will not be any effect on the demand of the product.Advertisement campaign:Advertisement campaign has played a vital role in attracting the major part of the population towardsthe Cadbury dairy milk. It was through this campaign like “Real Test of Life” & “Kuch Meetha HoJaye” that Cadbury shifted its focus from kids to the all age people and later through “KhanewalonKo Khane Ka Bahana Chahiye” & “Pappu Pass Ho Gaya”, Cadbury has associated dairy milk tocelebrations and every moment of achievement and success. So, it is through advertisement thatCadbury has gained social acceptance which has played a major role in increasing his demand.Celebrations & Occasions: During the festivals and occasions, the consumption of Cadbury increases because it‟s a product forenjoying the taste of each and every moment with harmony. 21
  22. 22. PRICE ELASTICITYOur product is a brand loyal product so if we increase our price by 20% then demand of our productwill decrease by 5% that means elasticity of price is <1. So, our product is less elastic. (If weincrease the price by Rs. 1 then demand will fall by 5 pc per 100 pc) 7 EP = ∆Qd . P 6 P ∆Px Q 5 R 4 I = 5 . 5 3 C 1 100 20 90 95 100 105 110 115 E 120 1 = 0.25 Deman d[Our Product‟s price elasticity is <1 because our product is in monopolistic market]Arc price elasticity: EP = Q2-Q1 . P2+P1 P2-P1 Q2+Q1 = 95-100 . 6+5 6-5 95+100 = -0.28INCOME ELASTICITYIf the income rises by 20% then the demand will rise by 10% the curve is positively sloped meansthat elasticity of Income is >0 and <1.(When the average income was Rs. 10,000 and demand was 100) 22
  23. 23. EI = ∆Qd . I 14 ∆ Ix Q 13 I 12 N = 10 . 10000 C 11 2000 100 O 10 = 0.50 M 9 0 90 95 100 105 110 115 120 Deman E 8CROSS ELASTICITY OF DEMAND dIf there is an increase in the price of Kit-Kat or Munch by 20% to 25% then the demand for the dairymilk will increase by 8%.(When there is an increase of Rs.1 in the substitute‟s price then the demand of the dairy milk willincrease by 8%)EXY = ∆QX . PY ∆ PY QX = 8 . 5 1 100 = 0.4Cross Elasticity for Complementary Goods: If the price of the cocoa bean, milk and other complementary goods like plastic packagingmaterials will increase constantly than the cost of the production will increase and by this the priceof the relevant product will also increase but the demand of the dairy milk will remain constantbecause of it is a normal good.Short run and long run impact in the elasticity of the demand In the Short run period of time, the demand for the dairy milk is less elastic because if theprice of the dairy milk chocolate suddenly increases Rs.5 to Rs.7, than the demand of the productwill also decrease but in the long run the demand may not be much affected. 23
  24. 24. 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 2005 was Rs.5 and in the 2010 it will be Rs.10 and, 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. Assumptions: There are possibilities of change in technology & chances of Product innovation in the long run. There are possibilities of increasing good quality chocolate manufacturing units. Band Wagon Effect: The band wagon effect is totally depended on the mentality of the human beings. The advertisement campaign with Amitabh Bachchan has made an increase in the demand of the dairy milk. It indicates that if the one person is going to buy dairy milk chocolate than the other also want to buy the same chocolate. Snob Effect: This is a kind of totally contra effect of the band wagon effect. If a person bought one particular product then the other person wants superior product than the person had already bought. But in our product the demand does not affect by the snob effect. Revenue Structure: During the three under study the company data shows that because of the increases production in each year their revenue has shown a very significant increase during the period this reflects tow thing a. that the company has been able to control its production cost reasonably, despite the quite uncertain economic factors b. the company‟s product is greatly appreciated and valued and hence 24
  25. 25. the total increase in the demand of the commodity. The company claims that in all these yearsthey never have any inventory left that they have sold everything they produce which is anexception. 5-7% Revenue growth per annum this is the long term planning of the company. Revenue of 2011 Cadbury Total No. of sold in 2011 340,000.00 Per Bag Revenue 3,200.00 Total Revenue 1,088,000,000.00 Revenue of 2012 Total No. of sold in 2012 500,000.00 Per Bag Revenue 4,125.00 Total Revenue 2,062,500,000.00 Total Revenues 2500 2062.5 2000 1500 1088 1000 $ in Billions 572 500 0 2010 2011 2012 Years 25
  26. 26. Market Structure:There are almost ten large firms operating in the industry of confectionary apart from these largeindustries there are several other small firms who are involved in the production of confectionaryand milky products observed market situation suggests that there is a Monopolistic Competitiongoing in the food products. There are large numbers of buyers but relatively limited number ofsellers. It is easy to enter in the market of food production. Each firm sale its product under theirunique brand name. There are no limitations of entering and exiting the market.Cadbury is enjoying the market leadership for the last couple of years due to their high quality ofseed, competitive prices and large marketing network. Cadbury 2010 Percentage 2011 Percentage Market % % Cadbury 1,100,000 35.48 1,700,000 36.17 Nestle 1,100,000 35.48 1,200,000 25.53 Kraft Foods 200,000 6.45 400,000 8.51 Ferrero 100,000 3.23 200,000 4.26 others 400,000 12.90 550,000 11.70 Total demand 3,100,000 100.00 4,700,000 100.00 26
  27. 27. Market Share 2011 40 35 30 25 20 Percentage % 15 10 5 0 Cadbury Nestle Karft foods farrero OtherSupply Curve:Looking at this curve which for three years shows significantly their increase in production forrespective years which has greatly benefited company‟s revenues. Supply Curve 1000 825 800 Price Rs. 640 600 Sales prices per year 520 400 1.1 Million kg 1.7 Million kg 2.5 Million kg (2010) (2011) (2012) Quantity 27
  28. 28. Demand Curve: Chart Title Axis Title 0 0.5 1 1.5 2 2.5 3 3.5 0 100 200 300 Series1 Axis Title 400 500 1.1 Million kg (2010), 520 600 1.7 Million kg (2011), 640 700 800 2.5 Million kg (2012), 825 900Comparison between Marginal Revenue and Marginal Cost:It is evident from the presented data that the company is continuously increasing its productionannually and at the same time all the profit earned by the company is reinvested to facilitate nextyears increase of production we have compared the increase in marginal cost due to the increasein production and increase in marginal revenue due to the increase in sales and from that it hasbeen concluded that the overall Marginal revenue of the firm is Greater than the Marginal costi.e. MR>MC. 2011 2010 Net ChangeIncrease in quantity(Units) 1,700,000 1,100,000 600,000Increase in Revenue ($.) 1,088,000 572,000 516,000 MR = 516,000,000 28
  29. 29. 600,000 MR = Rs.860 2011 2010 Net Change Increase in Quantity (Units) 1,700,000 1,100,000 600,000 Increase in Cost ($) 870,400,000 429,000,000 441,400,000 MC = 441,400,000 600,000 MC = Rs. 736 MR>MCCADBURYS ADVERTISING STRATEGY:Chocolates have usually been viewed as something meant only for children. Perhaps realizingthat children would be attracted to any chocolate, irrespective of the brand, CIL targeted adultswith their advertising since the early 1990s. Most, if not all, of Cadbury‟s advertisements in Indiafeature people over 18 years of age.The message that CIL seems to be attempting to put across is this: “In every adult, there is achild - let that child express itself, give in to temptation, and satisfy his or her desire to sink teethinto a smooth, creamy, delicious chocolate”. This approach appears to be unique to Cadbury‟s.CIL‟s biggest competitor, Nestle, often stresses the energy giving aspects of chocolate (forexample, in advertising for Nestle Charge), or on other attributes of the chocolate - taste in thecase of Nestle Crunch, as a light snack in the case of Nestle Bar One. Nestle specifically targetschildren in the advertising for Milkybar, its white chocolate, again emphasizing its energy givingproperties.To counter Milkybar, CIL has the Dairy Treat - where it targets the mothers of children by tryingto convey the message that its product is full of the goodness of milk, and so equivalent toconsuming milk itself. 29
  30. 30. Message ExecutionCadbury‟s multi-award winning campaign - „The Real Taste of Life‟ - launched in the 90‟sattempts to capture the child like spontaneity in every adult. From the old man offering his wife aDairy Milk chocolate to the dancing girl in a crowded stadium, all reflect the impulsiveness andthe spontaneity of the child in the adult. Cadbury‟s Perk, the light snack, addresses the hungrychild in every adult, as exemplified by the bride who nibbles at a Perk under her „pallu‟.Cadbury‟s Dairy Treat conveys its message through the mother who refuses chocolates and othertreats to her son, till Dairy Treat comes along and quickly changes her opinion about chocolates.Catchy lines such as „The Real Taste of Life‟, „Khane Walo Ko Khane Ka Bahana Chahiye‟, or„Reach for the Stars‟, are also used extensively, and to good effect in Cadbury‟s advertisements.Advertising MediaTelevision, the print media and posters have been the main media of communication forCadbury‟s advertisements. However, with their understanding of the peculiarities of the Indianmarket, CIL has also explored many new ways of getting their message across to the consumers.Sheet Metal Dispensers: This purple salesperson for Cadbury‟s is found in almost every shopstocking their chocolates. Since it is placed on the cash counter, it‟s design offers visibility, easeof vending, and protection from the elements. It is also placed in the most appropriate position tocater to the impulse buyers. This „first‟ from CIL has become so popular that is now the standarddesign for all chocolate manufacturers. Visicoolers: Visibility for chocolates drops in thesummer, as they disappear into the refrigerator. In high throughput outlets, the visicooler servesthe need for cooling while still maintaining the visibility of the product. Jars: These are providedto small outlets, where they are prominently displayed.Nestle:Introduction: 30
  31. 31. Nestlé is a global leader in health, nutrition and wellness. Consumers around the world, fromvillage squares in Nigeria to the skyscrapers of New York and Chicago, are united by the Nestlépromise of quality, taste, nutrition and convenience. Though headquartered in Vevey,Switzerland, we now have factories or operations in almost every country, employing around280,000 people. In 2008, our global sales reached CHF108 billion. Our operations are spread across three global zonescovering Europe, the Americas, Asia, Oceania andAfrica. Recognizing that every region has its specialneeds, the three zones operate locally, but are united bya common vision and priorities. The voices of even thesmallest local markets are heard at our headquarters inVevey, Switzerland.Our immense popularity comes from our efforts to develop products that give quality andnutritional benefits at low prices, even in the most remote regions. We distribute using localmeans; in Madagascar, for instance, backpacker salesmen sold over 12 million MAGGI tabletswithin six months, an approach that was duplicated in Pakistan and Mozambique.Our consumers know that they can rely on us to be there when we are needed.Mission Statement:"Nestlé is the largest food company in the world. But, moreimportant to them is to be the worlds leading food company”.Corporate Social ResponsibilityOur presence in the community is not restricted to making Nestlé products available toconsumers; it brings with it a responsibility to those around us. In China and Pakistan, weprovide animal husbandry assistance to thousands of farmers. InBrazil, our food education programme has trained hundreds ofvolunteers to teach families about nutrition, health and hygiene.And in India, we finance and oversee the provision of clean waterat village schools near our factories, benefiting some 20,000children.Good Food, Good LifeHenri Nestlé chose his own coat of arms to represent thecompanys philosophy: a birds nest, with a mother feeding her 31
  32. 32. young. The image represents our core values: care, family values, nutrition, healthy growth,safety and comfort. It is a guarantee of quality and a commitment to our responsibilities as a foodcompany and experts in nutrition.Over the years we have reaffirmed our commitment to wellness, helping our consumers to livelonger, healthier, and more productive lives, no matter their age, gender or socioeconomic status.Good IngredientsThree vital ingredients lie at the heart of Nestlé and come together in our brands: our people, ourresearch and development, and our commitment to quality. The dedicated people who make upthe Nestlé family are our source of strength and energy. Realising this, we offer them constantprofessional development, and feel our cultural diversity is one of our greatest assets. Today, weare one of the largest investors in food technology. R&D is the cornerstone of the Nestléguarantee of quality. We consider quality in three keydimensions: health, sensory pleasure, and socialapplicability. Thus we try to provide nutritious, tasty mealsthat offer value and are culturally relevant.Good PracticesAs the world changes, we at Nestlé evolve and adapt tonew circumstances and environments. Nevertheless our business practices are founded on certaintenets that reflect the basic ideas of fairness, honesty, and concern for people. We are committedto the following business principles in all countries, taking into account local legislation, culturaland religious practices:Nestlés business objective is to manufacture and market the Companys products in such a wayas to create value that can be sustained over the long term for shareholders, employees,consumers, and business partners.Nestlé does not favour short-term profit at the expense of successful long-term businessdevelopment.Nestlé recognises that its consumers have a sincere and legitimate interest in the behaviour,beliefs and actions of the Company behind brands in which they place their trust, and that,without its consumers, the Company would not exist.Nestlé believes that, as a general rule, legislation is the most effective safeguard of responsibleconduct, although in certain areas, additional guidance to staff in the form of voluntary businessprinciples is beneficial in order to ensure that the highest standards are met throughout theorganisation. 32
  33. 33. Nestlé is conscious of the fact that the success of a corporation is a reflection of theprofessionalism, conduct and the responsible attitude of its management and employees.Therefore, recruitment of the right people and ongoing training and development are crucial.Nestlé‟s global vision is to be the recognized leading Nutrition, Health and Wellness Company.Nestlé Pakistan subscribes fully to this vision of beingthe number one Nutrition, Health, andWellness Company in Pakistan.In particular, we envision to; Lead a dynamic, motivatedand professional workforce proud of our heritage andpositive about the future. Meet the nutrition needs ofconsumers of all ages – from infancy to old age, fromnutrition to pleasure, through an innovative portfolio ofbranded food and beverage products of the highestquality. Deliver shareholder value through profitablelongterm growth, while continuing to play a significantand responsible role in the social, economic, and environmental sectors of Pakistan.Total sales for the year grew by 25% exceeding PKR 51 billion. This growth was split betweenReal Internal Growth (RIG) and pricing movements which contributed 15% & 10% respectively.Export sales went up by +24.5% to PKR 4.0 billion (2011: 3.3 billion) as we continue toleverage our brand strength in Afghanistan. “Nestlé” is a Swiss-German word which means “Little Nest” which is its trademark Nestlé is the worlds‟ number one food company 5th largest company of the world according to its turn over 2 million 31 thousand people employed from all over the world Present in 81 countries of the globe having 522 factories Over 700 products renovated or innovated in the past five years, with wellness in mindBrands 33
  34. 34. Nestle Market:  24% market share  Chocolates 13-15% of total revenue  Product range includes Classic, kit Kat, Munch, Choco stik, Bar oneCONCLUSION Price plays an important role in the purchase of a product like dairy milk they have introduced dairy milk the most popular chocolate in Rs.5 also which is within the reach of every customer. Consumer prefers quality goods at lower price like Cadbury people just introduced bytes, which is a snack, which is sweet. Consumer is loyal to brand so it‟s necessary to pay attention to the brand image. In today‟s world most of the people see the image of the product and then purchase it. So it‟s necessary to make an image in market. Consumer prefers those goods whose advertisements are shown on television. Price should be according to the competitor‟s price .i.e the price of Cadbury should be less or same as the competitors price. .RECOMMANDATION There should be difference in pricing strategy of Cadbury i.e. in term of rural and urban areas. 34
  35. 35. It should show more and more ad of the chocolates that it is offering. For Example, Cadbury only emphasis on Dairy milk chocolate the most and not the other products. It should introduce different schemes like giving mask to the children with their product to attract children the most. The packaging of the Cadbury product should be made more attractive so that more and more people attractive towards it. Every customer likes changes if not they get used to it but they should take risk.References: study discussion, research and book study of Managerial Economic 35