MANAGERIAL ECONOMICS

TERM PAPER ON CHOCOLATE INDUSTRY ANALYSIS

UNDER THE GUIDANCE OF PROF. R.K. OJHA

SUBMITTED BY: AJAY WADHWA (JL12PGDM011) AKASH YADAV (JL12PGDMO17) AJITESH KUMAR SONI (JL12PGDM012)

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Table of Contents
INTRODUCTION ...................................................................3 MAJOR PLAYERS OF CHOCOLATE INDUSTRY ........................4 DEMAND OF CHOCOLATES ..................................................5 SUPPLY OF CHOCOLATES .....................................................7 MARKET EQUILIBRIUM ...................................................... 10 ELASTICITY OF DEMAND .................................................... 11 PRODUCTION AND COST ANALYSIS ................................... 14 MARKET STRUCTURE (Oligopoly) ....................................... 16 CONCLUSION:-................................................................... 18 BIBLIOGRAPHY .................................................................. 19

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INTRODUCTION

Chocolates may be items of impulse-purchase, competing with other categories like soft drinks, snacks and beverages for a share of the consumer's wallet, but modern trade and other factors like liberalisation of the economy, growing income of middle class and macro-economic conditions have had a positive impact on consumer spending. "The per-capita consumption of chocolates has increased from 40gm in 2005 to 300 gm now and there is a lot of scope to grow even further. The chocolate market in India is pegged at Rs 2,000 crore and is growing at a rate of 18-20 per cent per annum. The global chocolate market is estimated around $83.2 bn. The industry is extremely fragmented in terms of range of products. The two giants Cadbury with 70 per cent and Nestle around 20 per cent have been instrumental in building up the chocolate market in India with huge investments in product development, advertising and brand building. Due to the dominance of large-scale production dynasties, franchises and small businesses tend to focus on unique or specialty items or services. Unique chocolates may be from a region famous for a particular technique, baked onsite or offer a different take on tradition, while specialty services tend to focus on gift-packaging or delivery.The key growth drivers are tradition of gifting sweets in India, shifting in consumer preference from traditional mithai to chocolates, rising income levels and attractive pricing which is suitable for every pocket. The entry into this market requires a large capital investment for branding and production facilities. Also, facing the major international players with established history and success is difficult. The key challenges that the chocolate market is facing in India are inflationary pressures on raw material prices, lack of government initiative, high entry barriers due to duopolistic market and price-sensitive consumer.

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MAJOR PLAYERS OF CHOCOLATE INDUSTRY

There are a few major players in the INDIAN CHOCOLATE INDUSTRY

Cadbury India Limited Nestle India Gujarat Co-operative Milk Marketing Federation Cocoa Manufactures and Processors Co-operative (CAMPCO) Bars Count Lines Wafer Panned Premium Cadburys Dairy Milk & Variants 5-Star, Milk Amul Milk Chocolate Treat Perk Gems, Tiffins Temptation & Celebrations Nestle Milky Bar & Bar One

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DEMAND OF CHOCOLATES
Economists define demand as the quantity of a good or service that buyers are willing and able to buy at all possible prices during a certain time period. Notice that there are two components to demand: willingness to purchase and ability to pay. We might be willing to buy a new Car, but if We do not have the ability to pay for it, it cant really be called demand. Likewise, if we had the ability to pay for a Car, but not the willingness to buy it, it cant be called demand. We are simply not in the market for Car. Understanding demand provides some insight into the behavior of buyers. For example, if the price of a Chocolate was Rs. 20 each, we would buy two chocolates. If the price of chocolate was Rs. 10 each, we would likely buy more than two-perhaps four chocolates. If the price of chocolate was Rs. 40 per chocolate, we would likely buy fewer bars-perhaps only one. The behavior we just described is called the law of demand by economists. Simply stated, the law of demand says that as the price of a good increases, the quantity of that good or service demanded decreases. Likewise, as the price of a good or service decreases, the quantity of that good or service demanded increases. Notice that we include only two variables-price and quantity. Thats all that the law of demand does: It states how a change in the price of a good or service affects the quantity demanded.

Picture This In fact, if we put the quantity of Chocolates on the x or horizontal axis of a graph and the price of Chocolate on the y or vertical axis and plot the information we just discussed, we would start to see a picture of demand or a visual relationship between the two variables: The line that is created when we connect the points on the graph slopes downward. This downward slope means that there is an inverse (or opposite) relationship between price and quantity demanded. When price increases, quantity demanded decreases, and when price decreases, quantity demanded increases. In fact, we could recreate this same scenario with almost any good or service and get the same result-a downward-sloping line. This downward-sloping line is called a demand curve.
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The demand curve is a helpful tool, but it is not static (or unchanging). It shifts back and forth as conditions in the market change. For example, if you heard of an impending Chocolate shortage, you might expect Chocolate prices to rise in the future. As a result, you might run to your favourite candy store and buy extra Chocolates before chocolate prices increase. In this case, the original demand curve no longer tells the whole story; it must shift to the right to accurately reflect the change in chocolate demand. Or put another way, your chocolate bar demand curve shifted to the right because the quantity of chocolate bars you-and your fellow chocolate lovers-demand would be greater at each of the given prices. What Things Change the Curve? There are several reasons a demand curve might shift to the left or the right. In each of the following examples, imagine that the price of Dairy Milk chocolate remains constant but something else in the market changes. 1. A change in consumer expectations. Your fear of chocolate shortage and rising prices is a good example of a change in consumer expectations. If many other chocolate lovers had similar fears, the demand curve for chocolates would shift to the right as more people bought chocolates. 2. A change in consumer tastes or preferences. Imagine that scientists discovered some new health benefits from eating chocolates. You can bet that more people would buy chocolates, causing the demand curve to shift to the right. 3. A change in the number of consumers in the market. A huge convention of candy lovers has come to town-and they want chocolate bars now! The demand curve shifts to the right. 4. A change in income. During recessions, the demand curve for chocolates usually shifts to the left because many chocolate lovers have smaller incomes due to the bad economy and cant buy as much chocolate. This means that the demand curve for chocolate -and nearly everything elsewould shift to the left as people buy less chocolate. 5. A change in the price of a substitute good. Imagine that the price of Nestle Chocolates has fallen by half while Cadbury chocolate prices have remained the same. You can bet that more than a few chocolate lovers would start eating Nestle Chocolates. As a result, the Cadbury chocolate demand curve would shift to the left as people substitute Nestle Chocolate for Cadbury chocolate because Nestle is cheaper. So a change in the price of a substitute-Nestle-changes the demand for Cadbury chocolate.

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6. A change in the price of a complementary good. In this case, when we say complementary we do not mean free; instead, we mean a good that is used with another good. Imagine that the prices of ice cream-your favourite chocolate complements-have doubled. You and lots of others would buy fewer containers of ice cream-and even though the price of chocolates hasnt changed you and other chocolate lovers would likely cut back on your chocolate purchases, shifting the demand curve of chocolate Industry to the left. So a change in the price of complementsice cream changes the demand for chocolates. Notice that two types of changes are occurring. The first is called a change in the quantity demanded, which is the result of a change in price. A change in quantity demanded is illustrated by moving from point to point on a given demand curve. The second type is called a change in demand. The demand for a good or service changes not when the price of the good changes, but when something else in the market changes-for example, changes in prices of related goods, consumer expectations, consumer preferences, consumer income, and number of consumers in the market. These changes make the original demand curve irrelevant. A change in demand is illustrated by shifting the demand curve left or right. An easy what to remember which way the demand curve shifts is this: When demand is LESS, the demand curve shifts to the LEFT both start with an L and have 4 letters.

SUPPLY OF CHOCOLATES
As we have studied about demand with the context of chocolates now we study the concept of supply in context of the same chocolate industry. Economists define supply as the quantity of a good or service that producers are willing and able to offer for sale at each possible price during a given time period. Understanding the concept of supply provides some insight into the behaviour of sellers. For example, imagine we own a firm that produces and sells Cadbury chocolates. Our objective as a business owner is to make a profit, which is the difference between my cost of producing the
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chocolates and the price that we receive for selling the chocolates to buyers. We will only produce a larger quantity of chocolates if the market price of chocolate increases. This relationship is called the law of supply by economists. Simply stated, the law of supply says that as the price of a good or service rises, the quantity of the good or service supplied also rises. Likewise, as the price of a good or service falls, the quantity of the good or service supplied falls. Notice that we included only two variables, price and quantity. Thats all the law of supply does; it states how a change in the price of a good or service will affect the quantity supplied. Picture This In fact, if we put the quantity of Chocolates on the x- (horizontal) axis of a graph and the price of Chocolate on the y- (vertical) axis and plot the information we just discussed, we would start to see a visual relationship between the two variables: The line that is created when we connect the points on the graph slopes upward. The upward slope means that there is a direct relationship between price and quantity supplied: When price rises, the quantity supplied rises, and when price falls, the quantity supplied falls. In fact, we could recreate this same scenario with almost any good or service and get the same result-an upward-sloping line. This upward-sloping line is called a supply curve. The supply curve is a helpful tool, but it is not static (or unchanging). It shifts back and forth as conditions in the market change. For example, if a raw material supplier sold cocoa at cheaper rate which allowed the chocolate producing companies to produce Chocolate at a substantially lower cost than the current production cost, the increased profit would cause to increase the production of Chocolate. In this case, the original supply curve no longer tells the whole story: It must be shifted to the right to accurately reflect the new Chocolate supply. Or put another way, the Dairy Milk supply curve shifted to the right because the quantity of Chocolate supplied by me-and other chocolate sellers-would be greater at each of the given prices.

What Things Change the Supply Curve?

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There are several reasons a supply curve might shift to the left or the right. In each of the following examples, imagine that the price of Dairy Milk Chocolate remains constant but something else in the market changes. 1. A change in the costs of inputs to the production process. As the Chocolate is made up of Full Cream Milk, Sugar, Cocoa Mass, Cocoa Butter, Milk Solids, and Emulsifiers, traces of nuts, cocoa solids and milk solids. If Cream Milk price rise, cost of producing Chocolate would rise as well. This higher cost of production would mean that profitsthe difference between costs and the pricewould be lower than before, so we would produce and sell less Chocolates. Other chocolate producers would likely do the same. This would shift the Chocolate supply curve to the left. 2. A change in technology. Generally speaking, improvements in technology will lower my production costs. Lower production costs mean profitthe incentivewill increase. As a seller, the chocolate industry would respond by offering more Chocolates to the market. As other firms adopt the new technology, they would behave in a similar fashion, causing the supply curve to shift to the right. 3. A change in the number of producers in the market. If more firms start producing similar chocolate, the market supply of chocolates will rise shifting the supply curve to the right. 4. Government policies. Government policies, such as taxes, subsidies, and regulations, all affect the cost of producing goods and services, which affects profits and-as a result-our production decisions. For example, imagine the government taxed every new Chocolate that producers made; the result would be smaller profits. Smaller profits would cause the Chocolate producing companies to decide to reduce the quantity of Chocolates to be produced. Other chocolate producers would likely do the same. This would shift the Chocolate Industrys supply curve to the left. Notice two types of changes are occurring. The first is called a change in the quantity supplied, which is the result of a change in price. A change in quantity supplied is illustrated by shifting along the different points of the supply curve. The second type is called a change in supply. The supply of a good or service changes not when the price of the good changes, but when something else in the market changes for example, changes in production costs, technology, number of suppliers, or government policies. These market changes make the original supply curve irrelevant. A change in supply is illustrated by shifting the supply curve left or right.

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MARKET EQUILIBRIUM
After we have studied the concepts of Demand and Supply, now we come to the concept of Market Equilibrium. There are some questions that may arise in our mind like Where do prices come from? Are they the result of government planning? Are they random? Do they happen spontaneously? Or are they set by some invisible hand? Is it supply or demand that determines the market price? The answer is both. Like the two blades of a scissors, supply and demand work together to determine price. When you combine the supply and demand curves, there is a point where they i ntersect; this point is called the market equilibrium. The price at this intersection is the equilibrium price, and the quantity is the equilibrium quantity. At the equilibrium price, there is no shortage or surplus: The quantity of the good that buyers are willing to buy equals the quantity that sellers are willing to sell. Buyers can buy the quantity they want to buy at the market price, and sellers can sell the quantity they want to sell at the market price. So, is equilibrium a constant, unchanging point? No. Markets do have a natural tendency to settle at the equilibrium price, but the price may bounce around a bit in the process. Think of a deep bowl with steep sides. Now, put a marble in the bowl and turn the bowl in circles. The marble in the bowl will roll around the sides of the bowl, but as it rolls, gravity will pull it toward the bottom. As you slow the turning motion, the marble will drop to the bottom. In a similar way, prices also roll around as the forces of supply and demand change, but they tend toward and eventually settle at equilibrium. Imagine the market of Chocolates in transition, where the demand for Chocolates has suddenly decreased, but market price has not yet settled to the new equilibrium. Suppliers will continue to respond to the market price-which is now too high-while consumers have decreased the quantity they demand. This means that suppliers will produce a greater quantity than consumers are willing to purchase, resulting in a surplus. The surplus
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puts downward pressure on the market price, which causes it to drop back toward the equilibrium price. Now imagine the demand for Chocolates has increased, but the market price has not yet risen to the new, higher, equilibrium price. Suppliers will continue to respond to the market price-which is now too low-while consumers have increased the quantity they demand. This means that sellers will supply a smaller quantity of goods than buyers are willing to purchase, resulting in a shortage. Buyers will respond by bidding up the price, and before you know it, the price is rising toward the equilibrium point. To recap, buyers make up the demand side of the market. Sellers make up the supply side of the market. As buyers and sellers interact, the market will tend toward an equilibrium price. Its as if an invisible hand pushes and pulls markets toward their equilibrium level.

ELASTICITY OF DEMAND
After a detailed study of demand, supply and market equilibrium in the context of Chocolate Industry we move on to Elasticity of Demand. Elasticity of demand is the responsiveness or sensitivity of consumer to the change in price, income and price of related goods. Talking about the Indian Chocolate Industry the three types of elasticity of Demand: PRICE ELASTICITY OF DEMAND As the chocolates cost small percentage of income or are bought infrequently they have inelastic demand. In the short term demand is usually more inelastic because it takes time to find alternatives. If the price of chocolate increased demand would be inelastic because there are no alternatives, however if the price of chocolate increased there are

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close substitutes in the form of other chocolate therefore demand will be more elastic. CROSS ELASTICITY OF DEMAND SUBSTITUTE GOODS:As if the person wants to have chocolate he will only be demanding for it. In the earlier times, people used to eat sweets more and the demand for the chocolates was very low. But today even on festivals people gifts the packings of Chocolates. The Chocolate Industry has very weak substitutes like chocolate and sweets which shows that the consumers will not be changing their demand if there is introduction of more varieties of sweets which furthers conclude that the cross elasticity of demand of chocolate industry is low. There is possibility of substitute within the chocolate industry. A consumer can choose to buy either chocolate of Cadbury or nestle or any other chocolate of any company. COMPLEMENTARY GOODS:Chocolate is a single consumable product and Chocolates doesnot have a strong complement but it is complemented with the choice of variant of the consumer like milk and chocolate, chocolate and bread( cake), chocolate and ice cream, etc. So any strong complement cannot be found. Income Elasticity of Demand This measures the responsiveness of demand to a change in income. INFERIOR GOOD:This occurs when an increase in income leads to a fall in demand. Therefore, Income Elasticity of Demand is less than o. When the income of consumer will decrease the consumer will not buy chocolates and he will concentrate on fulfilling his basic necessities.

NORMAL GOOD:-

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This occurs when an increase in income leads to an increase in demand for the good. Therefore Income elasticity of demand is more than 0. The people with continue to buy the products of reasonable price chocolates like Kitkat, bar one and they will also purchase other chocolate industrys products of reasonable price in this case.

Definition of LUXURY GOOD:This occurs when an increase in income causes a bigger percentage increase in demand, therefore YED>1. In this case the demand of product of high price of will increase. The people who used to buy chocolates like Dairy Milk, Kitkat, Barone which costs Rs. 10 per chocolate will buy the chocolates like Bourneville that costs Rs. 80 or 100 or above.

CONSUMER BEHAVIOUR TOWARDS CHOCOLATE INDUSTRY

Consumer behaviour means to find out answers of what, where, how, how much, when and why - the consumers buy. It is not an easy task because in this requires reading consumers minds. Buyer characteristics:As the chocolate is not included in the necessary product and it provides delight only, so it depends upon person to person that how much they want to spend on their delightment. Buyer decision process:As the children and Youth is the main Target Market (user) - so the chocolate manufacturing companies try to attract them through advertisements but ultimately the buyer decides (buyers decision depends upon the income, quality and necessity of buying the product).

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Buyer responses:Product choice:Chocolate is the matter of taste and enjoyment, so consumers are willing to choose from a wide range of variety available. Brand choice:Children and Youth is the major consumer of this product so parents are more and more concern with the brand because brand will provide the quality satisfaction. Dealer choice:Generally consumers go to such dealers which are reliable and consumers can be sure that they will get the right product on the right price. Purchase timing:(As one of the product says- kuch mittha ho jae) it can be any time when a user wants to enjoy. Mainly festivals and other occasions like birthday, Diwali,etc. Purchase amount:Again it depends upon users capacity and willingness that how much they want to spend on enjoyment through such products.

PRODUCTION AND COST ANALYSIS

PRODUCTION

Production is the creation of goods and services from inputs or resources, such as labour, machinery and other capital equipment, land, raw materials, and so on. The various ingredients used to produce chocolates as raw materials are Full Cream Milk, Sugar, Cocoa Mass, Cocoa Butter, Milk Solids, and Emulsifiers, traces of nuts, cocoa solids and milk solids. As there are four factors of production i.e. land, labour, capital and entrepreneurship. According to Chocolate Industry, only labour will be a variable factor where as all others will be fixed factors during short run. If a particular Chocolate company such as Cadbury wants to increase its sales to meet the demand of the consumers it
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will increase its labour to produce more chocolates during that particular period of time. Such situations generally occur during festive seasons like Diwali in which the chocolates become most demanding product. In the long Run, all the factors of production are variable. According to Chocolate Industry, the production of the products is executed keeping in mind the demand of the customers during different times. For this, the chocolate companies may increase or decrease their capacity by increasing their capital through funds or any other means or can introduce new technologies according to the needs of changing trends. LAW OF DIMINISHING MARGINAL PRODUCT The principle states that as the number of units of the variable input increases, other inputs held constant, a point will be reached beyond which the marginal product decreases. In case of Chocolate Industry also the law of diminishing marginal product will apply. As more number of labours will be employed other inputs remaining constant, a time will come when the numbers of products produced could be produced by employing less labour which would reduces the cost and increase the marginal product. COST In the Short Run the cost is partly fixed and partly variable. The total of fixed cost and variable cost will make Short Run Total Cost. According to Chocolate Industry, the fixed cost can be the cost of rent paid for the factory, machinery where as variable cost will be the cost of employing labour, raw material for producing output. In the long Run since all the factors of production are variable the cost will vary according to the plans of the chocolate companies keeping in mind the cost charged by various suppliers, or the cost of attaining factors of production throughout the long run.

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MARKET STRUCTURE (Oligopoly)

Let us first understand what market structure means. A market structure is a setting or an environment in which different type of buyers and sellers exist. The behaviour of a certain firm is influenced by the type of market structure in which it exists. In oligopoly market structure there is competition among two or more firms. Therefore, there is scope for strategic interdependence between the firms. Every oligopolistic firm is large enough to influence the market conditions; therefore it has market power, which affects the market conditions faced by all the rival firms. In Duopoly competition is considered to be a type of Oligopoly, in which there are only two sellers or firms. In Duopoly, the firms are either output- oriented or price oriented. The firms choice of output level or price level is determined by the choices made by its rival companies. Deciding what output leveller price level a firm should choose depends on the level its rival chooses. Examples of some oligopolistic industries are manufacturing industries like automobiles, steel, pharmaceuticals, cereals, soft drinks, beer, etc.

Here we are going to observe the nature of firms in an oligopolistic industry and analyze its strategic interdependence on it rival firms. We will take into consideration analysis of Chocolate Industry.

Analysis of Nestle and Cadbury

We can analyze the market structure of both the Chocolate companies with respect to branding strategies, pricing strategies, advertising strategies etc. We see that, the Cadbury Company was founded in the year 1820 whereas Nestle was started in the year 1866.Here we can analyze that since Cadbury came into the market 46 years before, it has a greater market due to the first mover advantage.
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We can say that Cadbury is the leader in this situation. Both the companies expanded their business overseas to tap international profit and resources. This situation can be interpreted as being a situation of prisoners dilemma game theory. Wherein, one player follows the lead of the other. As Cadbury has the highest share in the chocolate market, i.e. 70% while Nestle has the second largest share, i.e. 20%. But depending on the region or country the market share of brands keep on changing. Cadbury has maintained its undoubted leadership in the chocolate industry worldwide. This makes it the leader in this situation. There exists heavy competition among both the brand. Both the firms compete with the advertising strategies. The strategies adopted by Cadbury attract the consumers by adopting various innovative and new means of advertising. But a big company like Cadbury after surviving in the market for so many years becomes a big brand name itself. Then all the other brands compete with it for gaining customers attention. Pricing strategies are usually determined by the market share of the firm and demand for the product of the firm. Nestle adopts integrated pricing strategy, leadership and deals in broad range of products. It charges low prices in order to attract the local as well as customers who prefer imported brands. Cadbury brand is highly quality indulgent, there for customers who are loyal to the brand always buy it irrespective of the price. The price of the product is dependent on other external factors too. For example, same products might differ in price in different locations. Furthermore, the success for a brand also depends upon the type of customer at which is targeted. For example, nestle is preferred by the young and urban people whereas Cadbury is preferred by both kids and adults. The market of a company is at some level can be interpreted by the products manufactured by the company. Thus we can observe that the above study gives a detailed explanation of the various market strategies adopted by firms in chocolate industry. The market structure of chocolate confectionary industry is similar to that of an oligopolistic market structure. There are only few top players in this industry who have maintained its position in the market for many years. In this study
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we compared the various market aspects of the Cadbury Company and Nestle and analyzed them with theories of oligopoly market structure. We observed that clearly Cadbury Company is the top player in the industry, since it has the first mover advantage. Being a leader Cadbury company has been successful in creating a brand name for itself in the market. But Nestle Company had foresighted profit opportunities by merging with companies dealing with products other than chocolates. It expanded its horizon in different fields of products. Nestle and Cadbury have been competing with each other to secure consumer loyalty.

CONCLUSION:Potential exporters should carefully select trading partners from among the Indian Importers and distributors, as they will be critical to ensuring presence of their products on retail shelves. India remains a very price sensitive market and appropriate pricing is key to the success of new products. Over 30% of Indian Population is in the 0-20 age group, which the primary target segment for chocolate manufacturers. These will be the prime movers for growth in the chocolate Industry. Attractive packing is very important for brand image. India associates quality with good packaging. The Indian food distribution is characterized by a large number of intermediaries and relatively poor infrastructure, such as transportation, storage, and refrigeration facilities. It has low levels of efficiency, with the costs of distribution being rather high. Manufacturers and importers will have to carefully look at this issue and devise solutions.

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BIBLIOGRAPHY
WEBSITES
http://www.stlouisfed.org www.wikipedia.com www.slideshare.net www.indianmirrorimage.com articles.timesofindia.indiatimes.com Collections

BOOK
Managerial Economics
By Christopher R Thomas S Charles Maurice Sumit Sarkar

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