FACULTY OF BUSINESS AND ENVIRONMENTAL SOCIETY
ANALYSIS OF THE CHOCOLATE INDUSTRY IN UNITED KINGDOM
UK Chocolate industry produces with no doubt a wide variety of chocolate brands manufactured by various manufacturers namely; Mars (bars), Nestle (milky bar), Cadbury (dairy milk), master foods(galaxy), Nestle (kit Kat), Cadbury -milk mint and many more brands. These brands are distributed worldwide to regions where their demand is high which is at different levels due to the varying tastes and preferences and the distribution mechanisms applied.
The Current Demand for Chocolate
The demand for confectionary chocolate in the Middle East and Africa is strongwithin themiddle class consumers and the sales have grown with growths in population. The retail sales volume of chocolate consumption has grown by 2% in Iran while the dark chocolate tablets have increased by 10% in Saudi Arabia. In South Africa the Snack bars consumption have grown by 2%. Americans make use of a round £3billion of chocolate every year but Europeans consume more per capita. Most consumption depends on the seasons where more people consume in winter. Most consumed brand is the kit Kat and the Cadbury brands which have markets all over the world.The chocolate is consumed in the form of chocolate bars, powder form, as beverages and other styles (Sarah, Amy, and Scot 2006)
The past demand for chocolate
The chocolate demand in the past ten years has been growing with time where environmentalists claim it’s due to changes in weather conditions. Europe has been leading in chocolate consumption followed by America especially with the hot chocolate drinks. The demand for chocolate depends on price, income, population and population structure and tastes and preferences. As the price rises up the demand goes down, contrarily, as income rises the demand raises. The population structure that has most youth increases the demand compared to the old and as the tastes and preferences of the population goes up for the chocolate brands so does the demand for the products. There has been a higher demand for chocolate products globally for the last 30 years attributed to the changing tastes and preferences due to environmental changes.
The market structure for chocolate
Chocolate has an international market despite its main usage being in North America and Europe. The Asian market is gradually rising with the main companies; Hershey’s Chocolate and Mars Candy Companies commanding a big share of production and supply of candy chocolate. U.S has majorly Oligopoly production of chocolate. Any company can enter the market though the market is very competitive and therefore the local companies have to compete with foreign companies that do a lot of importation. By the year 2005 the total sales showed that Mars Inc led with U.S $9546 million, followed by Cadbury Schweppes PLC with U.S $8126 million, Nestle SA came third with $7973 million; Ferrero came in Fourth with$5580 million and Hershey foods Corp closed the top five with $4881 million in total sales. Kraft Foods Company had total sales of $ 2250 million while Meiji Seika Kaisha ltd had $1693 million $20million more than Lindt. Barry Callebaut AG and Ezaki Glico Co. Had total sales of $ 1427 and $ 1239 million respectively during that the same year. These are the major companies commanding the chocolate market in the world though the market is highly contestable with more than ninetyplayers in the market. The industry is regulated by food and drug administration because it falls under the category of foods. Therefore they give guidelines on the ingredients used in the manufacture of chocolates and its products.
With the rising prices of cocoa, consumers of chocolate in UK are finding it hard to cope with the escalating prices. Despite escaping the worst of the depression dueto its affordability, price sensitivity is affecting it immensely. The manufactures are responding by reducing their weights and increasing prices due to a rise in cocoa price. The consumers now prefer to buy smaller packs and they may later substitute to snacks like yoghurt and crisps. The chocolate consumption may be a thing of the past as time goes by in regard to the growing concerns about the future of cocoa production.
The Firm Theory
The buyers’ bargaining power is very strong when there is an excess supply of the chocolate products. These in turn lowers the profits level of the firm. These calls for innovation by production of different brands to enhance customer loyalty and producers control of the pricing efforts. On the other side the suppliers may have a competitive force that may weaken the level of profits in a firm. Other factors that affect the pricing mechanism of the chocolate include; availability of substitutes, tastes and preferences, competitors pricing and seasons. For profit maximization, the producer must evaluate keenly these factors to avoid overpricing or under pricing.
The Pricing Mechanism for chocolate firms
The price of cocoa and chocolate is fairly inelastic in the short run. This implies the there is a small effect of price changes on consumption. A typical chocolate firm may hold income of consumers fixed and prices to fluctuate. Let’s say if they let P1vary and hold P2and income M fixed, a curve referred to as the price offer curve will be formed by the locus of tangencies. This result into a situation where a lower price for product 1 will lead to a higher demand for the product 2 such that the law of demand is attained (Tian 2011). In the other situation a reduction in price of product 2 will cause a reduction in demand for product 1. To maximise profits they will take the highest curve tangent and determine the price to charge the consumer at equilibrium.
Another way of pricing the chocolate products is by use of participative pricing (Kim, Natter, and Spann 2009) where the buyer is allowed to pay for what he wants. This involves analysis of behaviour of the buyer and the effects for the revenue realized. It was discovered that through the behaviour, a buyer could not pay a zero price for the products. This is caused by the interference within the buyer’s willingness
Pricing of products is of essential importance to any manufacturing firm as this may determine whether or not the firm may make profits. However, firms should consider all the factors affecting demand and supply to prevent overpricing of the chocolate products. Besides, innovation of different products of good quality may be a way of diversifying with the change in the world market supply of the raw materials since the cocoa production is gradually deteriorating. Hence future prices might be too much for chocolate lovers.
Causes of the recent recession
Recession is a period of downturn of the economic activities of a country or the world at large. It leads to low consumer confidence, reduction in values of homes, rise in food and fuel prices and generally a financial crisis. The world at large experienced a period of recession in the late 2000 where most affected were the stock markets holders and home owners in the Europe and America and Asian countries. It began in the year 2007 only to end in 2009 though the effect is still being felt till now with the high fuel prices.
The Causes of the recession
Differing debates have been put fourth as to what caused the depression, some economists point out that the origin of the crisis was caused by downfall of the real estate market in 2006 due to huge U.S debts. On the other side some economists claim there was poor regulation structures by Alan Greenspan the U.S Federal Reserve Chairman in relation to financial instruments regulation.
Recession was also caused by the high interest rates which minimized the liquidity increasing the rates by 6.25% in May 2000. The Federal government slugged to increase the interest rates again when the economy boomed in 2004.
The impact on U.K economy
The U.Khad to reform its taxation systems through household’s tax rebates in order to support certain sectors like the housing sector. €200 billion was proposed by EU for all the European countries to adapt in 2008. The British government also called for a rescue package for banks which saw the increase in capital markets and setting a side of a liquidity stack for banks. Besides since the pound fell down in value against the dollar value, this made imports expensive and their exports very cheap. The interest rates for foreign debts went up for the U.K economy making the cost of foreign borrowing by the local investors to rise up. Some of their chocolate products had to be sold at cheaper prices reducing the profit margins. Some chocolate firms were to be sold hence posing a threat to the employment rates e.g. Kraft Foods which took over Cadbury. This caused more of cyclical unemployment for the chocolate workers. The quality of the chocolate brands may in turn be jeopardized since the Kraft foods co. is a firm struggling with debts and hence through its greediness it may try to compromise with the quality of chocolate brands through cost minimization.
Inflation affects all sectors of the economy and in valuation of a firm the board of directors should factor this in its valuation before putting forward their ask price. Cadbury in its initial bid did not factor this but later on changed its bid price to £11.5billion resulting into a renegotiation with Kraft foods company. The Kraft company should not be greedy to make profits by a possible layoff of the employees as this may cause further crisis in the U.K.They should rather find a proper way of minimizing the costs to make genuine profits.
Determination of exchange rates
Exchange rates refer to the value of a country’sexchange in relation to another country’sexchange for instance U.S $/K.shs. the exchange rate may be a spot rate where there is trading of currencies for immediate delivery in the interbank market or forward rate where the delivery is done at a quoted future date. The market for currencies can not be seen but rather it’s done electronically through use of foreign brokers and dealers who link the participants of the foreign money.
The market operation
Demand of currency
The foreign exchange market demand for pound arises from the American demand for the pound valued financial assets. If the prices are set in pound in the U.K the Americans have to pay for the pound priced goods of which they have to trade their dollars to Pounds, thus they will require the pounds. Higher price for the dollar lowers the U.S need for Pound rated products. Similarly, as the value of the dollar for the pound goes down the American investors require more of the pound hence U.K products will be cheap resulting into a down-sloping demand curve for pounds.
The supply of pounds equivalent to dollar demand is commensurate to pound denominated land demand for U.S products/assets. For the U.K citizens to exchange for U.S goods they should get the dollars. As the value of dollar for the pound rises reducing the price for pound for U.S assets the higher pound claim for U.S assets results into pound demand for the dollars thereby raising the supply for pounds.
Why the Pound fell against the dollar
Following the recent recession and debt crisis the British poundsuccumbed to the U.S dollar. This was as a result of higher prices for domestic energy due to inflation that is still being experienced worlwide. Besides, the sterling pound has continued to fall for the last 12 months due to the increasing borrowing rates. The cost for foreign borrowing for British firms from the U.S companies went up which forced the Cadbury to revise its bid price to £11.5 billion due to its £22billion of foreign debt it poses. The Kraft Foods co. immediately announced 840pence as the share price and 10 pence as dividends. The Kraft co. May shed off over 7000 employees at the Cadbury with the interest of making profits.
Exchange rates determination and regulation should be carefully observed by the relevant authority to protect both foreign investors and local investors from price fluctuation. Proper mechanisms should be put in place by the British government to control the falling value of the British pound against the dollar. In most cases it’s the foreign investors who suffer most due to a fall in the exchange value of the British and Sterling pound. Besides, it calls for a collective responsibility between the foreign exchange dealers and the government for effective stability of the Pound.
THE FUTURE FOR CHOCOLATE INDUSTRY
Chocolate products have no doubt the highest demand across the world with the continued product differentiation to suite the tastes and preferences of different consumers. The industry as discussed earlier has an oligopoly market structure which implies that any firm can enter and leave the market. It faces extreme competition and therefore local firms with little capital input may be phased out of the market if they are not innovative. With the unchecked rates of inflation some of the industry may find it difficult to control its production costs.
The Future of the industry
In future, say 30 years time the world might run short of chocolate since the cocoafarmersmight abandon their crops due to low returns they get from the firm. The prices of the products might continue to escalate as the cost of the cocoa goes up. This is due to the low incentives the farmers get for their crop hence most of them might substitute for other cash crops making the available ones too little for mass production.Besides uncontrolled pests and diseases lowers the quality of the plant requiring the farmers to renew the plant which is tedious and hence possible abandonment of the plant. With the growing upsurge of population the agricultural land is becoming competitive for production of cocoa plant. The weather change is another concern which due to aridity may reduce the production of cocoa for export.We are going to have a serious decline as a result of this phenomenon thereby making cocoa to be a thing of the past.
Despite all the concern about the future of cocoa, there is little hope for chocolate lovers as other continents like South America, Caribbean and Asia who also produce cocoa which may sustain its production for some more time. Though it is not known how long it may last cocoa production still remains a concern among researchers find a way of dealing with this possible extinct of cocoa plant to prolong production of cocoa.
Guoqiang Tian (2011) Microeconomic theory, Texas A &M university college station Texas
Ju-Young Kim, Martin Natter, and Martin Spann (2009), Anew participative Pricing
mechanism, Journal of Marketing, issue No. 74 Pp 56
Sarah, Scot, and Amy (2006), The market for chocolate, Trinity University