Acknowledgment:

Firstly we would thank Allah for giving us this opportunity and the
resources to be able to do something productive with Cadburys life. Without her
blessing we would not be able to come as far as we have.

We dedicate Cadburys assignment to Cadburys Managerial Economics

teacher, Professor Bushra Hameed who imparted the essential and crucial
knowledge of Managerial Economics and assigned us this project to express the
knowledge and skills which we have learned in the class. Her guidelines and
teaching method and technique have been very useful for us not only in preparing
of this report but also for Cadburys future life. She helped us to find new ways of
being innovative and creative; this report was not possible without her help and
continuous direction.
Table of Contents

Introduction of the Topic ................................................................................................................ 5

Market Structure............................................................................................................................. 5
Research Question ........................................................................... Error! Bookmark not defined.
Research Question .......................................................................................................................... 6
OBJECTIVES AND SCOPE OF THE STUDY ......................................................................................... 6
Methodology.................................................................................... Error! Bookmark not defined.
Introduction to Cadbury ................................................................................................................. 6
Products of Cadbury: .................................................................................................................. 7
Global Market Share Confectionary of Cadbury and Nestle: ..................................................... 8
Cadbury Market Share of production: ........................................................................................ 8
Cost Structure: ................................................................................................................................ 9
Pricing Strategy: ............................................................................................................................ 10
Cadburys pricing strategies are as follows .................................................................................. 11
Pricing Technique for Cadbury ...................................................................................................... 11
Skimming pricing ....................................................................................................................... 11
Cost plus pricing ........................................................................................................................ 12
Demand based pricing: ............................................................................................................. 12
Cost cuts should significantly benefit Cadbury: ............................................................................ 12
Risk ............................................................................................................................................ 12
Strategy ..................................................................................................................................... 12
Profile ........................................................................................................................................ 13
Growth ...................................................................................................................................... 13
Profitability................................................................................................................................ 13
Financial Health......................................................................................................................... 13
Independent Variables affecting demand of Cadbury Dairy Milk ................................................ 14
 Price: ......................................................................................................................................... 14
Income: ..................................................................................................................................... 14
Population & Age group:........................................................................................................... 14
Consumers taste and preferences: .......................................................................................... 14
Competition .............................................................................................................................. 14
Price of Complementary Goods ................................................................................................ 15
Advertisement campaign: ......................................................................................................... 15
PRICE ELASTICITY .......................................................................................................................... 16
Arc price elasticity: .................................................................................................................... 16
INCOME ELASTICITY .................................................................................................................. 17
CROSS ELASTICITY OF DEMAND ................................................................................................ 17
Cross Elasticity for Complementary Goods: ............................................................................. 18
Short run and long run impact in the elasticity of the demand ................................................... 18
Assumptions.............................................................................................................................. 18
Revenue Structure: ....................................................................................................................... 19
Market Structure: ......................................................................................................................... 21
Market Share of Cadbury in production ....................................................................................... 22
Supply Curve: ............................................................................................................................ 23
Demand Curve: ......................................................................................................................... 24
Comparison between Marginal Revenue and Marginal Cost: .................................................. 24
CONCLUSION ................................................................................................................................. 26
RECOMMANDATION ..................................................................................................................... 26
References: ................................................................................................................................... 27
ECONOMIC ANLYSIS OF
CADBURYS PRODUCTS

MEHMOOD ULLAH SHAH

MBA 4TH SEMESTER (A.N)
INSTITUTE OF MANAGEMENT STUDIES
Introduction of the Topic

Price determination is one of the most crucial aspects in economics. Business managers are
expected to make perfect decisions based on their knowledge and judgment. Since every
economic activity in the market is measured as per price, it is important to know the concepts
and theories related to pricing. Pricing discusses the rationale and assumptions behind pricing
decisions. It analyzes unique market needs and discusses how business managers reach upon
final pricing decisions.

It explains the equilibrium of a firm and is the interaction of the demand faced by the firm and
its supply curve. The equilibrium condition differs under perfect competition, monopoly,
monopolistic competition, and oligopoly. Time element is of great relevance in the theory of
pricing since one of the two determinants of price, namely supply depends on the time allowed
to it for adjustment.

Market Structure
A market is the area where buyers and sellers contact each other and exchange goods and
services. Market structure is said to be the characteristics of the market. Market structures are
basically the number of firms in the market that produce identical goods and services. Market
structure influences the behavior of firms to a great extent. The market structure affects the
supply of different commodities in the market.

When the competition is high there is a high supply of commodity as different companies try to
dominate the markets and it also creates barriers to entry for the companies that intend to join
that market. A monopoly market has the biggest level of barriers to entry while the perfectly
competitive market has zero percent level of barriers to entry. Firms are more efficient in a
competitive market than in a monopoly structure. We have undertaken this study to analyze
different pricing strategies of Cadburys chocolate products and examine it market strategy
compare to its competitors. For the purpose we have collected data through secondary sources
and from retail shops. We calculated different fluctuations of demand of Cadburys chocolates
products, we calculated elasticity of demand in different target markets and analyze how
Cadburys maintain itself in monopolistic competition.

Cadbury operates as the leading competitor in the global confectionery market, with product
lines spanning the chocolate, candy, and gum segments. The firm distributes its well-known
brands (such as Halls, Trident, Green & Black's, and Dentyne) in more than 80 countries around
the world. After completing the sale of its Australian beverage segment in April 2009, Cadbury
is now exclusively focused on its confectionery operations.

Research Question

There are two key research questions which need to be answered in this study:
To determine the market structure under Cadbury is operating in Pakistan
To analyze different pricing strategies that Cadbury has adopted to survive in market in
Pakistan.

OBJECTIVES AND SCOPE OF THE STUDY

This study aims to examine and analyze the market structure and pricing strategy and market
performance of Cadbury subsidiary firm operating in Pakistan.

To know the behavior of consumer when the price of a product increases or decreases.
To analyze the change in demand due to some forces in the market

Introduction to Cadbury

Cadbury, a chocolate brand was founded almost 200 years ago which in year 1800. Cadbury is
one of the faster growing companies among the multinationals and national companies;
Cadbury Dairy Milk is a brand of chocolate which made by the milky and dairy products. In
1847, the first bar of chocolate appear which made by a Bristol company Fry & Son and the first
person who eating the chocolate recipe was developed by Dr. Hans Sloane when he travelled to
South America where he focused on the cocoa and food values. In 1897, the Cadbury milk
chocolate was launched. After 7 years, George Cadbury Jnr was given the challenge made a
chocolate bar with milky and dairy. So the Cadbury Dairy Milk was first introduced in UK and US
in 1905 and also introduced in Pakistan in 1948. In Pakistan, Cadbury Dairy Milk has been a part
of every moment of festival, celebration, happiness and also joy. Its confectionary products has
captured major market share in Asia, especially in Pakistan and India.

Products of Cadbury:
Blocks of Chocolate
Boxed Chocolates
Old Gold
Coco by Cadbury
Be treatwise
Chocolate Bars
Bitesize
Pre-teens Confectionery
Pascall Confectionery
Nut Free Products
Kosher Products
Global Market Share Confectionary of Cadbury and Nestle:

Cadbury Market Share of production:

70% market share

Dairy milk alone accounts for 30% of market

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!

Cost Structure:

The increase in the price of the product over the given three years wiz 2013, 2014 and 2015
reflects the increase in the inputs because of the inflation over the given years. This inflationary
tendency is reflected in the increased cost of material, processing, financial cost, sales team
expenses etc. despite these increases the company enjoys such a demand for its product that
the production and the demand has increased over the given years.

2014

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

2015

Per Pack Per cotton

Material 320 1600
processing 65 325
financial cost 83 415
sales team expenses 132 660
others (FOH,HR) 60 300
Total 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

Pricing Strategy:

Despite the unstable economic factors causing increase in the cost of material, labor and others
the 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 almost monopolistic status, since all other players sin this industry have significantly less
share of market compared to them thus we can say that in future they are likely to see a
significant increased demand and their share of the total market increasing significantly. These
is a healthy attitude for a company to adopt keeping in view their costumers requirement who
belong to a very important sector of the economy there product stands to influence the output
of the agricultural sector which will greatly enhance the overall national economy
Cadburys pricing strategies are as follows

Weight Prices

20gm pack, Rs.10

50 gm. Pack, Rs.30

150 gm. Pack, Rs.90

350 gm. Tin, Rs.175

500 gm. Tin, Rs.350

And it is concluded from the survey that customers by looking this price chart
have accepted the prices and called it as an economical.

Pricing Technique for Cadbury

There are 4 different pricing techniques that are available to Cadbury.

Skimming pricing
First pricing technique is skimming pricing. With skimming pricing, these prices are set very high
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 same as most of
their competitors and at the price their customers are able to pay.
Cost plus pricing
Pricing methods which are based on the cost structure of Cadbury that are favored by
accountants because they are supposedly more accurate and reliable.
Cadbury is trying to maximize it profits. This method works successfully because all costs need
to be accurately accounted. In many firms this is a very difficult process which is why the
simpler mark-up procedure is used. Cost plus pricing tends to ignore the demand for the
product and the competition.

Positioning pricing:
Cadbury uses this method to position prices that are set which reflect the consumers view of
the chocolate bean.

Demand based pricing:

Cadbury set their prices based on what they think the consumer is prepared to pay. If they
dont then they wont sell as good as they thought. If they do sell at the customers price they
will have a good reputation and an output of more customers.

Cost cuts should significantly benefit Cadbury:

Risk
Cadbury's ongoing restructuring efforts may prove to be disruptive to the firm's operations, and
it is still highly unclear whether the company will achieve the significant margin improvement
management anticipates. Further, Cadbury's profitability may be hurt by elevated commodity
costs, particularly cocoa, sugar, and fuel costs. Finally, with nearly 40% of its sales resulting
from developing and emerging markets, the firm is exposed to volatile political and economic
climates that could pressure sales.

Strategy
Cadbury's 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 manufacturing
and distribution centers by 2011. In addition, Cadbury is placing increased emphasis on its key
brands, markets, and customers. Finally, the firm is concentrating on enhancing operations in
Russia and China, which have been a drag on profits.

Profile
Cadbury operates as the leading competitor in the global confectionery market, with product
lines spanning the chocolate, candy, and gum segments. The firm distributes its well-known
brands (such as Halls, Trident, Green & Black's, and Dentyne) in more than 80 countries around
the world. After completing the sale of its Australian beverage segment in April 2009, Cadbury
is now exclusively focused on its confectionery operations.

Growth
More than $10 billion of acquisitions have diversified Cadbury's business into faster-growing,
more-profitable segments of the confectionery market. Going forward, we expect that the firm
will seek to drive growth through small bolt-on acquisitions as well as further penetration of its
existing brand portfolio.

Profitability
Management projects a midteens operating margin by 2011, which we now believe is an
attainable goal. In Cadburys view, it is likely that Cadbury is now more intently focused on
driving cost savings to ward off Kraft's takeover bid or to justify a higher offer price.

Financial Health
We're not concerned by Cadbury's debt levels, as the firm operates with nearly 1.4 billion of
long-term debt, and adjusted earnings before interest and taxes of more than 4 times through
the first six months of 2009.
Independent Variables affecting demand of Cadbury Dairy Milk

Price:

This product is a brand loyal product, so if there is a slight increase in the price, the demand of the
product will remain unaffected. But if there is a decrease in the price, the demand of the product
may slightly increase.

Income:

If the income of the people increases, the demand of the product also increases and if the income
of the people decreases, the demand of the product decreases because then people will go for
lower price chocolate like clair or melody of Rs.1 or Rs. 2. So, there is a positive relationship
between income 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 not
much affected the demand of the product so demand remain same and by the increase in the
population, the demand of the product also increases.

Consumers taste and preferences:

Cadbury produced milk chocolates by using the high quality of cocoa bean and the taste has still
remained the same which has touched the heart of the consumers. So, they will not like to go for
any other product.

Competition

There 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, the
demand of the dairy milk also increases. But if the price of the competitors decrease, the demand
of the 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
these complementary goods increases then there will be no change in the demand. Because
Cadbury dairy milk 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
towards the Cadbury dairy milk. It was through this campaign like Real Test of Life & Kuch
Meetha Ho Jaye that Cadbury shifted its focus from kids to the all age people and later through
Khanewalon Ko Khane Ka Bahana Chahiye & Pappu Pass Ho Gaya, Cadbury has associated dairy
milk to celebrations and every moment of achievement and success. So, it is through
advertisement that Cadbury has gained social acceptance which has played a major role in
increasing his demand.
PRICE ELASTICITY

Cadburys product is a brand loyal product so if we increase Cadburys price by 20% then demand
of Cadburys product will decrease by 5% that means elasticity of price is <1. So, Cadburys product
is less elastic. (If we increase the price by Rs. 1 then demand will fall by 5 pc per 100 pc)
7

6
P
EP = Qd . P 5
R
4
Px Q I
3

20 90 95 100 105 110 115

120
= 5 . 5

1 100

= 0.25
Demand

[Cadburys Products price elasticity is <1 because Cadburys 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

= -0.28
considering the price elasticity of demand, shown right, then having an elasticity measure of -
0.28 means that as price goes up by some percent change, then quantity goes down by that
percent change multiplied by -0.28. This is a good result, because it is saying that as the price
goes up.

INCOME ELASTICITY
If the income rises by 20% then the demand will rise by 10% the curve is positively sloped means
that elasticity of Income is >0 and <1.

(When the average income was PRs. 10,000 and demand was 100)

EI = Qd . I
14

Ix Q 13
I
12
N

C 11
= 10 . 10000
O 10
2000 100 9 0 90 95 100 105 110 115
120 Deman
= 0.50

CROSS ELASTICITY OF DEMAND

If there is an increase in the price of Kit-Kat or Munch by 20% to 25% then the demand for the dairy
milk will increase by 8%.

(When there is an increase of Rs.1 in the substitutes price then the demand of the dairy milk will
increase by 8%)

EXY = QX. PY

PY QX = 8 . 5

1 100 = 0.4
Cross Elasticity for Complementary Goods:
If the price of the cocoa bean, milk and other complementary goods like plastic packaging
materials will increase constantly than the cost of the production will increase and by this the price
of the relevant product will also increase but the demand of the dairy milk will remain constant
because of it is a normal good.

Short run and long run impact in the elasticity of the demand

Short run period of time,

the demand for the dairy milk is less elastic because if the price of the dairy milk chocolate
suddenly increases Rs.5 to Rs.7, than the demand of the product will also decrease but in the
long run the demand may not be much affected.

There are some criteria that also affects and they are like:

Cadburys 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 dont
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.
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 companys product is greatly
appreciated and valued and hence the total increase in the demand of the commodity. The
company claims that in all these years they never have any inventory left that they have sold
everything they produce which is an exception. 5-7% Revenue growth per annum this is the
long term planning of the company.
Revenue of 2014 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 2015

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

2010 2011 2012

Years
Market Structure:

Cadbury adapts a monopolistic competition market structure. Monopolistic competition

defined as, they can sell a slightly different product in many or several firms but not the same
product. For instance Cadbury had operated almost 10 large firms in the market but there are
several small firms who also produced the milk and dairy products in the market. Effectively,
the market share of each firm had large number of sellers but it is a small market shares, no
collusion which firms do not cooperated with others firms and they are independent. Cadbury
is considered as a monopolistic competition because it is easy to enter the market of food
production because there are many buyers and limited number of sellers. There are no change
in the taste and the quality of their chocolate because they have their own secret recipe for
making their chocolates. Besides that, there is no restrictions to entry and exit into the market
(easy come, easy go) and they also a price maker which means that they do the influence of the
price.

Cadbury had used a lot of advertising strategies to promote their chocolate, increase the
demand and advertise the production of quality. Basically, their chocolate had usually targeted
on the children and also adults with their advertising and packaging design because they know
that their customers target would be attracted to any chocolate of the brand. Cadbury used
television, posters, magazines, newspapers as the advertising media for them to advertise their
product. Besides that, sometimes Cadbury promote their chocolate with buy 2 free 1
promotion when during a festival, joy, happiness, celebrations and others. During the
promotions, their Cadbury chocolates demand should be increase because if when the price is
low, customers will purchase more so the demand of Cadbury chocolate should be increase.
Market Share of Cadbury in production

Cadbury Dairy Milk has a high market share and its getting higher and higher because Cadbury
gives their consumers more valuable products. Nowadays, Cadbury has hold 70% of market
share in a country, and dairy milk is alone holds the 30% of market share in several firms in
others countries.

Cadbury 2014 2015

Market Percentage % Percentage %

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

 Market Share 2015
40
35
30
25
20
Percentage %
15
10
5
0
Cadbury Nestle Karft foods farrero Other

From the graphs above, we can see that as a market leadership, Cadbury is enjoying for the
past few years due to its high quality seeds, competitive prices and a large marketing network.

Supply Curve:
Looking at this curve which for three years shows significantly their increase in production for
respective years which has greatly benefited companys revenues.

Supply Curve
1000
Axis Title

800

600 Sales prices per year

400
1.1 Million kg 1.7 Million kg 2.5 Million kg
(2010) (2011) (2012)
 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
900

Comparison between Marginal Revenue and Marginal Cost:

It is evident from the presented data that the company is continuously increasing its production
annually and at the same time all the profit earned by the company is reinvested to facilitate
next years increase of production we have compared the increase in marginal cost due to the
increase in production and increase in marginal revenue due to the increase in sales and from
that it has been concluded that the overall Marginal revenue of the firm is Greater than the
Marginal cost i.e. MR>MC.
 2014 2015 Net Change
Increase in quantity (Units) 1,700,000 1,100,000 600,000
Increase in Revenue ($.) 1,088,000 572,000 516,000

MR = 516,000,000
600,000

MR = Rs.860

2014 2015 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 = PRs. 736
MR>MC
It means that the firm is under-production it can reap more profit by producing more
products because it marginal cost (additional unit cost) is less than marginal revenue
(additional revenue from one more unit is employed to production).
CONCLUSION

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 its necessary to pay attention to the brand image. In
todays world most of the people see the image of the product and then purchase it. So
its necessary to make an image in market.
Consumer prefers those goods whose advertisements are shown on television.
Price should be according to the competitors 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.
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:

http://news.bbc.co.uk/local/birmingham/hi/people_and_places/newsid_8467000
/8467606.stm

www.Cadbury.com

www.nestle.com

Group study discussion, research and book study of Managerial Economic by

www.down.com/articals

www.cadbury.co.uk

Wikipedia
https://www.researchgate.net/topic/Managerial-Economics\

https://www.tutorialspoint.com/managerial_economics/