Wednesday, January 4, 2012

GIVE AN ACCOUNT OF THE MAIN FACTORS THAT EXPLAINED THE CHANGING NATURE OF COMPETITION IN THE SNACK FOOD INDUSTRY UNTIL THE LATE 1970’s.DISCUSS THE NATURE AND THE CAUSES OF ANY CHANGES IN THE COMPETITIVE CONDITIONS OF THE INDUSTRY SINCE THEN

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By European standards the British spend higher than average amounts on both savory snacks (principally crisps) and breakfast cereals. Snack foods are a central part of most weekly shopping trips for most consumers, although bagged snacks are a relatively new development. The potato crisps particularly had played a significant role regarding the English eating habits since 150’s they have been a part of their lifestyle and English tradition. Nowadays (potato chips) are the most frequently eaten snacks in the UK.


Crisps began in this country in 10 in London by Barrow of Cricketwood with Smith’s selling fried potatoes according to an American Indian recipe. For many years Smith’s was the leading crisp supplier and its small packet of salt in the bag was a well-known feature of the packs. Benson crisps PLC which is another well established UK supplier entered the market in 141 and followed a few years later by Golden Wonder in 147 and Walkers in 148. By the 150’s Smiths had grown into an incredible empire. At the end of the 150’s it had around fifteen factories. Fifty percent of the business was to the pubs and twenty percent to the grocers. In 161 the Imperial Tobacco Company acquired Golden Wonder and immediately set up changes in the industry. In the following parts it will take place an analysis of the changes in industry over the year till now days.


Smiths’ golden era


The crisps were the glamour product of the sixties, much of this success was a result of the intensified advertising and general marketing campaigns that accompanied new entry competition during the early years of the decade. (Alan Bevan, Journal of Industrial Economics, Volume , Issue 4 (Jun., 174).


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At that time when the crisp potato market was dominated by one single firm (Smiths) there were no special barriers to entry. The main targeted group of people was people at pubs, particularly men. Smiths’ position in the late 150’s was thought by them to be quite secure. They dominated the market. Sales were increasing at about 10% per annum and they were making considerable profits. In the 15 season they recorded a net taxed profit over £1million when the total market were only about £1 millions. (National Statistics)


Bainsian entry barriers existed and certainly seemed to be effective. Smith’s brand was the leader market �their name was virtually synonymous with crisps. They had 4 factories in operation in 160 as well as a large distribution network. They ran their own potato farms that through these supplied only 10 to 15% of their needs were a valuable source of information about the quality and expected yields of the current potato crop. They also had overseas subsidiaries on which they could call for advice on market conditions in several countries (frequently the overseas firms would be making good profits when the UK market was sluggish). (Alan Bevan, Journal of Industrial Economics, Volume , Issue 4 (Jun., 174).


None of Smiths small competitors in Britain could have obtained domestic finance adequate for them to get bigger and become a serious challenger to Smiths in such conditions.


With a small capital outlay anyone could start a business and many people did, entry to the market was both free and easy. Free entry implies that there are no legal or government restrictions. Easy entry refers to a situation where there are no difficulties of entry due to natural causes, technology, uncertainty etc.


Smiths, they appeared to be obsessed with their own performance to the exclusion all that was happening in the market. One of Smith’s favourite slogans was ‘there are no crisps like Smith’s crisps’. This was intended as the company’s watchword but that situation was meant to be changed by Golden Wonder’s market policy.


New entrants and effects on the market


The crucial period in the history of the industry was 160-165. During those years Golden Wonder, a small Scottish producer was acquired by the Imperial Tobacco Company ltd and an ambitious development programme with the target of becoming a national producer began. Golden Wonder strategy concerned both the expansion of product capacity and the overall expansion of the crisp market itself through a colossal advertising promotion. The production process during 150’s in comparison with that after the coming of Golden Wonder had a remarkable difference. Continuous frying cookers were introduced from America and they represented a substantial advance in crisp production technology.


The economies of scale effected by the introduction of these new cookers were thus considerable new packaging materials accompanied the adoption of these new techniques. (Alan Bevan)


During those years until 165 most the cost, estimated around 10m£, was financed by Imperial Tobacco ltd which also was financing the annual loses up to 165. Rationalization and modernization of the same time was a far more difficult task for the already established company, the Smiths.


Another major factor in marketing policy was the attention that was given to massive advertising and promotional support. In particular the growing importance of TV-advertising reveals Golden Wonder’s strategy and its attempt to expand the crisp market. (Table 1) Media expenditure by crisps producers had decreased since 166 this partly because there has been some increase in below the line advertising expenditure. The success of this new entry strategy that is identifying an immature sector of the market (women and children) and concentrating most of the firms marketing effort was the main cause of considerable growth of the market. (Table )


In 166 we have flavours introduced in the market. At later years after 16 when purchase tax payable on crisp sales with the effect of dampening the market while flavour novelty value was declining.


The entry of golden wonder in the market as a newcomer regarding economic aspects can be analyzed below


The Gournot duopoly


TR = ðmax =OP1 OQ1


In this situation A is acting as a monopolist. Let us now assume that B enters the market sees that A is supplying OQ1 of the total market. Thus B can try to meet some of the unfulfilled demand Q1Q.B now has to decide how A will react to its entry into the market. Cournot assumed a zero conjectural variation believes that A will continue to sell its existing quantity of OQ1 and will not change this as a result of B’s entry.


The market structure had obviously changed. The number of sellers and buyers has increased as more companies sell their products into a bigger consuming public (women, teenagers, children) there is a quite effective product differentiation regarding flavours. The existing companies have set high standards of quality using more efficient methods of production. At this point we have to mention how advertising acts as a barrier to entry. High advertising implies additional cost to entrants. Due to brand loyalty and/or consumer inertia the new entrant must spend proportionately more on advertising per prospective customer i.e. market penetration costs are high. This is an absolute cost disadvantage type of barrier.


A new entrant on a small scale will not be able to take advantage various economies of scale in advertising. E.g. the increasing effectiveness of the advertising message as well as the decreasing costs of advertising conferred on large scale advertisers.


The capital requirements barrier exists in the following way any demand for ‘risky’ use of funds will incur high rates of interest. Funds necessary to penetrate a market are regarded as a high risk since these funds do not create any tangible assets that can be sold off in the event of failure.


There is an important difference between freedom of entry and ease of entry at this time. Golden Wonder’s entry was expensive and without the external finance provided by the Imperial Tobacco Company (now Imperial Group Limited) it is doubtful whether the new entry would have occurred. The study of oligopolistic markets must surely emphasize oligopolistic interdependence and smiths experience in the early 160’s would seem to support this view.


The Gournot-Nash equilibrium which requires that each firm is doing the best it can given what its rival is doing


A mature market


UK consumption of snacks per capita is high with per capita consumption second only to the Netherlands in Europe. Snacks foods represent a well-established sector in the UK grocery trade and consumption through other outlets such as the catering trade, travel terminal and petrol forecast is also increasing. Crisps the traditional savoury snack of the UK is the largest market sector accounting for around 47% of the total market in 001 reaching sales of over £1.billion. (Euromonitor)


But its maturity and lack of innovation yielded decrease in growth of nearly £,6 billion over the review period.


In mid 170’s potato crisp industry has a serious fall by 10% because of the increase in consumption of savoury snacks, which attracted more and more customers away. A new increased commercial campaign began in 178 with of get back customers back and makes clear the division between savoury snacks and crisps. At the same time a further factor contributing to the decline of the formal meal times has been the growth in the number of single households. Younger people are most likely to have casual attitudes to meal times, additionally there were some other factors that determined the market size. Adults helped to value growth of the savoury snack. Rise of in home entertainment enhanced demand for premium snacks particularly those with dips. Healthier eating habits increased for “better for you” policy. High diversity of product (new flavours, snacks for adults) took place as well.


At a time that consumers were fed up and looking for something new, Procter and Gamble came up with ‘Pringles’ to fill in that gap. The first Pringles were packaged in a tall cylindrical metal can with a red wrapper. National expansion took place in May 175. Many different and varieties came and went in 170’s and 180’s but the most significant breakthrough occurred in September 16 with the launch of fat free Pringles. Gamble’s Pringles brand in the 10’s achieved in a similar fashion to Golden Wonder’s actions in the 160’s


A new oligopolistic market structure featuring price competition.


Obviously the product has now entered a price competitive market in which powerful market supermarket chains as distributors can be seen to play an important role. They hold 0% of the market and the reaction of strong brand leaders to use multi packs reflect this. The industry is highly concentrated with three or four major suppliers dominating the market. (Table 4) Extensive new product development in recent years has declined and many brands and the crisps market is becoming a commodity market experiencing limited growth and price discounting.


Sector forecasts


Crisps are forecast to remain the single most important sector in 006 with a value share of more than 4%, reaching almost 1.£ million. Continued preference for branded and premium priced crisps will increase value sales in the mature crisps sector. However with more consumers trading up to the premium brands and away from economy private label volume sales will decline by just under %. A major area of value growth will be branded organic crisps. The demand for organic products will prompt the launch of several new organic crisps during the forecast period, which will help maintain and build value sales in the sector.


(Source National Statistics/Euromonitor


United kingdom 00 00 004 005 006 007


Chips(tonnes) 181,5 17,41 177,618 175,84 17,04 170,606


Chips(£mm) 1,48,0 1,55.86 1,58.0 1,67.1 1,78.61 1,86.5


“The snack market offers tremendous opportunity for innovation consumers are demanding more opportunity to experiment. And they are eating snacks on occasions they wouldn’t previously have considered such as at work”.


(Dawn Remans, Category Marketing Controller of Golden Wonder, in The Grocer, January 1st 1)





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