Report on the Uk Chocolate Industry

Report of the UK chocolate industry CONTENTS Introduction…..

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3 Findings…..

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. 4 •Social Factors….

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… 5 •Technological Factors…

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…. 7 •Political/Legal Factors..

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….. •Economical Factors.

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11 Conclusion……

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……………………………………………… 13 Reference List………………………………………………………………………. 14 Appendix 1…………………………………………………………………………… 17 Appendix 2…………………………………………………………………………… 18 Appendix 3…………………………………………………………………………… 9 Appendix 4…………………………………………………………………………… 20 Appendix 5…………………………………………………………………………… 21 Group Meeting Minutes………………………………………………………… 22 Introduction ‘’As part of their normal production activity, businesses are involved in buying (inputs- like labour and raw materials) and selling (outputs- the finished product). Buying and selling takes place in markets and although there are different types of markets the basic analysis remains the same. ‘ Britton, C (1994) p. 253. This report will identify and explain how Social, Technological, Political/Legal and Economical factors affect one particular sector of the UK confectionary market, namely chocolate. It will focus on the years between 1990 and 2009 and will show how the various factors affect supply and demand in this market. The general rule is that if the price of a product goes up, the demand goes down and when the price goes up, supply will also go up. The chocolate market is the exception to this rule as chocolate is an elastic product.If demand is elastic, the chocolate manufacturers would be unlikely to increase demand as this could lead to a fall in revenue. Instead they try advertising to increase brand loyalty in an attempt make demand more inelastic. An example of this is the recent Cadburys adverts. In order to explain how the chocolate market has been affected by the above factors, it is necessary to compare data covering the period in question and discuss the reasons for their impact on the market. Findings The UK chocolate market is dominated by three large multinational firms.Cadburys, Nestle and Mars. (www. keynote. co. uk) 2008 (see appendix 4) In 1998 the retail sales value of chocolate was ? 3,971. 4bn. Sales steadily increased and currently stand at ? 5,258. 7bn. As seen in the graph in appendix 1, during this period, sales dropped dramatically in 2001 and took until 2004 to recover. (www. euromonitor. com) 2009 The graph in appendix 2 shows that the age of the UK population is changing. ‘’over the last 25 years, the percentage of the population aged 16 and under decreased from 21% to 19%. ” (www. statistics. gov. k) 2009 It is said that the younger majority of the population are the consumers of chocolate. A survey carried out by the National Opinion Poll shows that the consumption of chocolate bars by young people, aged 7-16 years has fallen from 44% to 37% from 1999 to 2003. (www. mintel. co. uk) 2009 The information we will be analysing in each of the factors are as follows: Social FactorsTechnological Factors ?Attitude and behaviour ?Media views ?Demographics ?Consumer buying patterns? Cost of technology ?Efficiency ?Scientific advances ?Research and development Political/Legal FactorsEconomical Factors Regulations ?Laws ?Trading policies ?Affects of the EU? economical situation ?mergers and acquisitions ?market and trade cycles ?exchange rates Social Factors. ‘’organisations exist and function within society and consequently are subject to a variety of social influences. These influences, which include demography, social class and culture, can change over time and affect both the demand and supply side of the economy. Marketing organisations recognise and make use of these factors when segmenting markets for consumer goods and service” Worthington, I (2009) p. 35. The social demand for chocolate varies for several reasons. One of which is a change in the level of the population. The population of the UK is aging, people are living longer and there are a lower percentage of children. This would indicate that although the population is increasing because of people living longer there are fewer children, which is the main consumer for the chocolate industry resulting in less demand for the product. Another factor is the nation becoming more health conscious.There have been recent concerns in the press regarding the increase of type two diabetes and its link to excess sugar in our diets. This as well as the obesity rate showing no sign of declining has increased consumer awareness and is affecting the decisions that are made in respect to the foods they are purchasing. People will not just buy anything that is on offer but will look for healthier alternatives. This means that the manufacturing of potentially high in fat, sugar and calorific chocolate comes under continuous attack and is likely to get further pressure in the long term.Combining this with an increasing interest in health foods, the chocolate industries are urged to supply healthier alternatives. People are better informed and are more particular about what they eat so demand is increasing but at a slower rate. Scientists attribute health benefits to eating dark chocolate as well as it been lower in fat and sugar meaning there has been a growth in demand in this product by 96% from 2005. The demand for dark chocolate is set to grow in smaller portions that deliver health benefits with fewer calories will become increasingly popular.Dark chocolate is said to be high in flavonoid antioxidants and scientific evidence that states it can aid with heart health and lower blood pressure is causing consumer demand to grow. (www. mintel. co. uk) 2008 There was a higher demand for chocolate after research linked the consumption of chocolate to the ‘happy’ feeling felt whilst kissing. In April 2007, a report published by Dr David Lewis, formerly of the University of Sussex concluded that ‘’chocolate beats kissing hands down when it comes to providing a long-lasting body and brain buzz” (www. ews. bbc. co. uk) 2007 Demand for chocolate can also be affected by social/religious festivities. Sales of chocolate products increase at Christmas, Valentine’s day and Easter, consequently manufacturers have to segment the products to keep up with the demand during these times and will therefore supply seasonal variety such as Easter eggs, more boxed chocolates and advent calendars. In 1998 the Ivory Coast (which provides 40% of the worlds cocoa beans) office of UNICEF concluded that cocoa farmers enslaved children. 001 saw a drop in demand for chocolate. Upon conducting further research as to the cause, it emerged that at this time a report titled ‘a taste of slavery: how you’re chocolate may be tainted’ was published informing the UK chocolate consumer of these facts. Reports noted 200,000 children were working on cocoa farms; at least 12,000 of these children were not working near their families suggesting trafficking was also taking place. Subsequently this caused outrage in the UK which is what lead to the drop in demand and causing the trough in the market.Following these revelations the ‘Harkin-Engel’ protocol was introduced in an attempt to regain consumer faith in the market and re build up the demand. Labelling systems were put into place to assure customers that slave labour was not used in the production and manufacturing of chocolate. (www. wikipedia. org) 2009 In turn this lead to the demand for fair trade chocolates. The chocolate industry is one of the most developed and sophisticated in the world and as consumer demand increases for these products there is still room for manufacturers to tap into this niche market and increase their supply to meet the increasing demand.Technological Factors Worthington and Britton (1994) p. 133 describe technological change leading ‘’to the introduction of new products, changes in the methods and organisation of production, changes in the quality of resources and products, new ways of distributing the product and new ways of storing and disseminating information. ” As technology improves, so does efficiency. This would result in lower production costs meaning the manufacturers can supply a lot more of the product.Technology has affected the taste and preference in chocolate production. The larger chocolate companies have large factories with many manufacturing processes having been automated. This improves efficiency and in turn increases supply. It also makes it easier for chocolate manufacturers to increase production differentiation and offer a wider variety of products, sizes and shapes in response to customer preference and changes in taste. This would then also create an increase in demand.Current technology such as computerised record keeping systems make it easier for companies to keep up to date stock levels and customer requirements, allow for rising or falling demand and also result in less wastage and increase efficiency again for the chocolate companies. Organic and fair trade are both areas in the industry that have been identified as having a potential for further development Consumers are placing more emphasis on naturalness and quality of products rather than reduced fat and calories, so top quality chocolate has become a permissible indulgence and even more in demand. www. mintel. om (2008) The industry could use this information to develop ways to advance their chocolate making methods to supply the amount of product that the consumer is demanding. ‘’Chocolate manufacturing takes place in large, modern buildings and makes use of scientific developments, which enable the company to save space, time and energy. As part of the modernisation programme, energy efficiency programmes have been introduced, together with waste reduction and better insulation. Water is increasingly being recovered from processes so that it can be reused in boilers, which saves energy and reduces the quantities required. ” (www. estle. co. uk) 2009 These scientific advances aid in helping the manufacturers bring down costs, improve efficiency and supply more, better quality product. Other scientific advances such as the use of pesticides in cocoa production are of benefit to the chocolate industry as a whole. Because cocoa farmers can produce more raw materials due to these new advances, they can supply more to the UK manufacturers. This then leads to the manufacturers then being able to supply more chocolate to the consumers increasing productivity and profits. To give an example of the amounts spent on R & D, in 2008 Cadburys spent ? 69m (page 100). (www. adburys. co. uk) 2008 Packaging plays an important role with the advancements of the industry because improvements need to be made in response to the customers demands for environmentally friendly products. The industry are always researching and developing new ides to improve demand. For example, the Wispa chocolate bar was launched in the early 1980’s but was later discontinued in 2003 due to a fall in demand. However after an internet campaign by the consumers to bring the bar back it was re-launched in 2007 for a limited time for Cadburys to assess the sales and the bar finally appeared in shops on a permanent basis in 2008. www. which. co. uk) 2007 Technological improvements to UK roads and he Lorries that deliver products have resulted in increased efficiency by improving distribution and reducing carbon emissions. This increases supply because of the money saved during the distribution of the product. Political/Legal Factors ‘’it is important to emphasise from the onset that the law not only constraint business activity (eg. By establishing minimum standards of health and safety at work which are enforceable by aw), but also assists it (eg.By providing a means by which a business unit Can have independent existence from its members), and in doing so helps an enterprise to achieve its commercial and other objectives. ” Worthington and Britton (2009) p194 suppliers of confectionary such as chocolate are subject to a world wide range of government legislation in a number of areas due to the growing concern about child obesity, oral hygiene ie. Tooth decay, additives, preservatives, artificial colourings and food labelling regulations. Most legislation has an impact on supply and demand.A recent Nigerian government imposition of import duties on Jute bags has upset Nigerian cocoa producers. This duty was imposed to discourage growers from using Jute bags because EU countries, the main importers of cocoa, have insisted on the use of Hydrocarbon-free bags. There has been a shortage (supply) of these bags resulting in the price of the bags doubling. (www. guardian. co. uk) 2009 This has lead to a decrease in supply of the raw material meaning a decrease in supply of the finished product from the manufacturers to the consumers. Cadburys have had a number of issues following some of these legislations over the last few years. 006 saw the company fined ? 1m for not informing the Food Standard Agency of a salmonella scare, which was thought to have been caused by a leaking pipe, that had affected 7 of their products. Cadburys had recalled the tainted products at a cost to the company of up to ?30m. 2007 saw further recalls of Cadburys products due to a breach in the food labelling legislation when an error had products going on the shelves for sale without stating that the product may contain nuts, which with the high level of allergies could have resulted in a much more serious matter. 007 also saw another recall of 11 Cadburys products due to the factories been contaminated with Melamine. (www. wikipedia. org) 2009 All of these factors would have resulted in a fall in the supply while these problems were fixed and resolved as well as a large fall in demand as this would have but the company’s reputation under strain. Joining the EU has had an impact on the UK chocolate industry. Because British chocolate contains more milk and less cocoa that its European counterparts, it is not allowed to be labelled milk chocolate when it is sold in EU countries.The product has to be labelled ‘family milk chocolate’. (appendix 5) The re-labelling will have resulted in increased costs to the manufacturer and possible reductions in demand whilst the re-labelling process is sorted out. (www. food. gov. org) 2002 Although this will have led to a temporary drop in demand while the re-labelling is sorted out, in the long run, being able to sell UK produced products in the UK will dramatically increase demand for the product leading to a surge in the amount supplies, therefore making the UK chocolate manufacturers more profit.Another example of this is the 2003 EU directive permitting up to 5% of non-cocoa vegetable fats in place of the cocoa butter used in chocolate. The International Cocoa Organisation estimates that the results of this directive would be an 184,000 tonnes loss in demand for cocoa. (www. internationalcocoaorganisation. net) This would lead in both a loss in supply and demand because the manufacturers can’t supply without the cocoa and the consumer can’t demand a product that is not available. Economical Factors ‘Totality of economic factors, such as employment, income, inflation, interest rates, productivity, and wealth, that influence the buying behaviour of consumers and firms. ” (www. businessdictionary. com) 2009 The chocolate industry contributes ? 2. 9bn into the UK economy. It employs over 300,000 people. Because of the high income and profit guaranteed in this industry there are various other sectors wanting to get into this field. An example of this is the recent bid by Kraft Foods to buy out Cadburys. ‘’ Cadburys shares rose almost 40% after it rejected a ? 10. bn approach from Kraft Foods, sparking talk of a bidding war. Kraft said that the purchase of the market of Dairy Milk would protect jobs in the UK- including saving a factory earmarked for closure. But Cadburys said the approach ‘’fundamentally” undervalued the firm” (www. news. bbc. co. uk) 2009 In this case, as Kraft Foods are not already a chocolate manufacturer it shouldn’t alter either the supply or the demand for chocolate, however if Cadburys merge with another confectionary company, competition would decrease which would make supply increase as it would make the merged companies more efficient.Another area of interest to the confectionary industry is Fair Trade which is Partnership; base on dialogue, transparency and respect that seeks greater equity in international trade. It contributes to substantial development by offering better trading conditions to, and securing their rights of, disadvantaged producers and workers. In addition, labour conditions in these organisations must follow certain standards. The essential characteristics of Fair Trade are that the cocoa producers and organisations receive a higher price for their cocoa beans. (www. andyindustry. com) 2006 This in turn creates a perfect image for the chocolate industry giving them a higher profit and also sees consumers to be socially responsible, resulting in a higher demand for their products. The UK has recently undergone one of the largest economic recessions i has ever experienced. The chocolate manufacturers have responded to this by adjusting products to suit market trends. As people feel the effects of the recession, they are tending to socialise at home more. In response, chocolate manufacturers have concentrated on ‘pouch packs’. www. keynote. co. uk) 2009 ‘’with the economy in recession, there is likely to be a slowdown in spending in many sectors. In previous downturns, the food market has maintained a relatively robust performance as consumers regard confectionary as an easy and cheap luxury. As a result, confectionary may whether the squeeze better than many other sectors. Premium brands are likely to see some slowdown in growth and the confectionary market in general will see a slight decline in sales before a longer-term recovery. ” (www. keynote. co. k) 2009 From this we can establish that the chocolate industry will inevitably see a slight drop in demand but not enough of a drop to affect their supply. ‘’ Chocolate is pretty much recession proof. Even when times are tough, everyone deserves their small pleasures in life” Fiona Dawson. 2008 Conclusion In conclusion we realize that there is interaction between supply and demand relating to Social, Technological, Political/Legal and Economical factors. These factors are constantly changing and evolving. No factor is more important than another.They all contribute to the industry being successful. When supply and demand in the chocolate market remain unaltered a state of equilibrium is achieved. The factors shown in this report can shift the supply and demand to the left or the right depending on the interaction of the factors. This would result in a new equilibrium price. Reference list BBC News. 2007. Chocolate ‘better than kissing’ [online]. http://www. news. bbc. co. uk/1/hi/health/6558775. stm BBC News. 2009. Cadburys spurns ‘low growth’ Kraft [online]. http://news. bbc. co. uk/1/hi/business/8253047. tm Businessdictionary. com (2009) [homepage]. [online]. [cited 6th November 2009]. http://www. businessdictionary. com. Economic environment. [online]. http://www. businessdictionary. com/defenition/economic-environment. html. Cadburys (2009) [homepage]. [online]. Creating brands people love. [cited 11th November 2009]. www. cadburys. com. annual report 2008 [online] http://www. cadburyan2008. production. investis. com/~/media/files/C/cadbury-ar-2008/pdf/cadbury_ra_13mb_compressed. ashx. Candy industry (no date) the global resource, from manufacturing to retailing [online]. 009. [cited 6th November 2009]. http://www. candyindusrty. com. Fair Trade. 2009. [online] http://www. candyindustry. com/archives_davinchi? articles=508. Dawson, F. (2008) the grocer (4th October 2008) quote by the Managing Director, Mars UK. Euromonitor International. 2009. Chocolate Confectionary UK. Statistics [online]. http://www. portal. euromonitor. com/passport/statistics. aspx Food Standards Agency. (2002). Chocolate consultation launched. [online]. http://www. food. gov. uk/news/newsarchive/2002/aug/choc. Guardian (2009) [homepage]. online]. Manchester, Guardian news and media limited, [cited 8th November 2009]. http://www. guardian. co. uk. Bag costs threaten Nigeria cocoa exports –producers. 9th October 2009. [online] http://www. guardian. co. uk/business/feedarticle/8748052/print. International Cocoa Organisation. (2003). The nutritional values of cocoa and chocolate and countering areas of concern such as obesity, cholesterol and tooth decay. [online]. http://www. internationalcocoaorganisation. net/questions/nutrition. htm. http://www. internationalcocoaorganisation. et/questions/buttereu/htm. Katie Hughes (2009) market report plus 2009. IB1002- business context handout. Market trends. Nestle (no date) Nestle Good Food, Good Life [online]. 2009. [cited 6th November 2009]. http://www. nestle. com The Nestle Story. 2009. [online] http://www. nestle. com/aboutnestle/thenestlestory/historyofchocolate/makingandmanufacturingofchocolate Office for National Statistics. 2009. Population, Aging, Fastest increase in the ‘oldest old’. [online] http://www. statistics. gov. uk/cci/nugget. asp? ID=949University of Wolverhampton, Department of Learning Resources (no date) Learning centres [online]. Wolverhampton: University of Wolverhampton [cited 8th November 2009]. http://www. wlv. ac. uk/lib Keynote. 2008. Confectionary-2008 [online] http://www. keynote. co. uk/marketintelligence/view/product/2038/confectionary? highlight=chocolate&utm_source=kn. reports. search University of Wolverhampton, Department of Learning Resources (no date) Learning centres [online]. Wolverhampton: University of Wolverhampton [cited 8th November 2009]. http://www. wlv. ac. uk/lib Keynote. 2009. Market report

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