Identify Factors That Influence the Price Elasticity of Demand of Heinz Tomato Ketchup
Jonathan. K. Kush is the lead business writer at 123 Writing. He holds a BA (Hons) degree in Business Administration from the University of Brighton, UK. As a Market Research Analyst by profession, Jonathan has nearly a decades experience in market research and business analysis. His passion includes studying markets and industry trends to understand their impact on company strategy, performance and ways firms can mitigate their environment to outcompete rivals.
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The price elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to changes in its price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. There are several factors that influence the price elasticity of demand, such as availability of substitutes, utility (necessity versus luxury), income, preference/taste etc. In this assignment, we will use the case study of Heinz tomato ketchup to identify the factors that influence its price elasticity of demand and how the product is affected.
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Assignment question
Choose a product or a product range as a first step. For example, Procter and Gamble has gazillions of products, you will not have the time and resources to study its products. Thus, choose, say, baby wipes product range and keep your focus on it.
Your analysis should start with the study of the company’s history, description of its activities, the industry it operates in, types of services and products it produces, the business environment it operates in, main markets, and other aspects of the company’s business profile.
1. Pick a business that you know something about or can find information on. Describe the business and its main product or service. [10 marks]
- What is your chosen product?
- Why did you choose it?
2. Identify Demand and Market Equilibrium. For each of the factors that influence Demand, describe how your main product or service is affected. Does the factor indicate that demand is increasing or decreasing? [20 marks]
- Price of substitutes – What is a substitute for the product or service? Is the substitute's price increasing or decreasing? How does this affect demand for your product or service?
- Price of complements – What is a complement for the product or service? Is the complement's price increasing or decreasing? How does this affect demand for your product or service?
- Consumer Income – Is consumer income increasing or decreasing? How does this affect demand for your product or service?
- Consumer tastes & preferences – How are consumer preferences changing? How does this affect demand for your product or service?
- Consumer expectations of price (of your product or service.) – Looking ahead, do consumers expect the price of your product or service to increase or decrease? How does this affect demand for your product or service?
- Demographics – Number of Consumers (Buyers) – Is the number of buyers increasing or decreasing? How does this affect demand for your product or service?
3. For each of the factors that influence the Price Elasticity of Demand, describe how your main product or service (described in 2 above) is affected. Does the factor indicate demand is more elastic or more inelastic? [20 marks]
- Substitution Effects (Luxury vs. Necessity) – From the consumer's point of view is this a luxury or a necessity? Does this factor indicate demand is more elastic or more inelastic? Income effects (Percentage of income) – Does the purchase of the good or service represent a large or small portion of the consumer's income? Does this factor indicate demand is more elastic or more inelastic?
- Given your analysis, what pricing policy should the business employ? Why?
Factors That Influence the Price Elasticity of Demand: A case study of Heinz Tomato Ketchup
Key Learning Outcomes
By the end of the case, students should be able to:
- Critically evaluate economic data as a guide to policy-making within an international, national, and organizational context.
- Apply a number of different economic concepts (supply and demand, price elasticity, cost analysis) with respect to managerial decision-making in organizations.
- Analyse the impact of government policy on markets and its effect on the managerial decisions
INTRODUCTION
Heinz Company is an American food processing company with its headquarters at Pittsburgh, Pennsylvania. It was founded in 1869 by Henry Heinz as has been a leading food products supplier globally. Its principal products such as tomato ketchup ranked first in the US stock market shares with over 50%.
In 2015, Heinz merged with Kraft to form the world's most abundant food and beverage company. It operates in the food processing industry and offers various food products. It is known worldwide to produce ketchup among other food items such as mustard, steak sauce, and Worcestershire sauce. Additionally, it makes baked beans, delimex taquitos, tamales, lea, and Perrins, processed cheese Jell-O, Kool-Aid, Ore-Ida, Capri Sun and Cracker Barrel. Its Maxwell house branch deals in coffee, Folgers, Keurig, Starbucks, Dunkin' Donuts and other popular coffee brands for market share. The Oscar Meyer deals with meat and cold-cut products including hot dogs, bacon, and lunch meats. The company has also expanded to Lunchables.
Just as any other company, Kraft Heinz operates in a typical business environment with both internal and external environmental factors affecting its operations. It operates under the competitive market forces of demand, supply, and their elasticities to create a market share for its products.
"The major product is Heinz Tomato Ketchup, a product that controls over 80% and 60% of the market in Europe and the United States, respectively" (Baule and Blonski, 2018). The product was first introduced in the market as catsup in 1876 and has been modified over time to be among the best-selling brands of ketchup.
We have chosen Heinz tomato ketchup as it is one of the primary products of the company. Also, it is one of the significant revenues generating products for the company, with all consumers using it as a reference while inferring to Heinz company. The popularity of the product grew due to its unique ingredients such as tomato concentrate from ripe red tomatoes, vinegar, corn syrup, and natural flavouring spices. Heinz tomato ketchup is also a significant product for the fifth-largest food company in the world, making it a key area of interest for management economists in the analysis of market forces and its stability.
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