Business - Price & Cost Analysis

Company Background

I currently work for a value-oriented grocery store chain. I work in our real estate team where we are constantly evaluating opportunities to open additional stores in new areas within the Seattle market, fill in existing markets and expand existing stores.

My company is also constantly evaluating new products to put into the stores, as well as assessing programs for better promoting and selling the products that we have in the stores. One such program is based on the sale of rotisserie chicken through the service deli counter. The marketing department has introduced many initiatives to remain competitive within this business where the competition comes from other grocery store chains, as well as quick-service restaurants. One program reduced the cost per chicken for the consumer from $6.00 to $5.00, a 20% reduction in price. The company is also implementing a guaranteed availability program where a consumer will receive a voucher for a complimentary rotisserie chicken if one is not available for purchase as their initial visit. As the company reviews these marketing initiatives and additional options, I am interested in reviewing the feasibility of this program.

TCO A -Given a demand function and a supply function, illustrate how the price mechanism, in response to changes in other demand or supply factors, leads to a new market equilibrium price and level of output

On average each of our Midwest stores produce and sell 200 chickens per week at $5.00 per chicken. This quantity is an increase of 25% over the former 160 average when chickens were being sold at $6.00. There are several factors impacting the demand for rotisserie chicken which can directly impact us including 1) consumer's preferences, 2) the number of potential buyers, 3) consumers incomes, 4) price of related goods and 5) consumer's preferences. Changes among any of these factors could cause the demand for our rotisserie chicken to shift. In review of these factors...

* Consumer's incomes - Consumer's incomes in the current economy has actually been a positive factor for my company as we offer value-oriented options for consumers. As the economy has hit many individuals, many individuals have returned to the grocery stores rather than opting for restaurant service. This would show an overall shift in the demand curve to the right showing an increase in demand.

* Consumer's preferences - Luckily chicken is pretty much a staple in most weekly American diets. Where there can be fluctuations is within specific individuals' tastes which can lead them to a competitive source for rotisserie chicken. A market analysis of competitors projected sales would assist with the company understanding our market share amongst the rotisserie chicken sales and how changes in seasoning might improve sales at specific locations.

* Number of Potential Buyers - The areas where we have situated our stores are pretty established neighborhoods where overall population does not change drastically. Where there can be change is within buyers being split between other competitors including other grocery stores and restaurants. An incoming grocery store to the market could show a negative shift of our demand curve as we split the market.

In our current situation, there are currently no impediments to receiving our current supply of chicken and no foreseeable issues in being able to increase our quantity purchased from our supplier.

As a company, we have sought to increase our supply of rotisserie chicken through making the price more accessible to our consumers. This is a competitive feature to increase overall store sales by drawing in consumers who might choose competitive grocery stores. The guaranteed chicken program also will increase supply as we will need to maintain appropriate product levels. This increase in supply has an impact on lowering the equilibrium price for rotisserie chicken while increasing the equilibrium quantity.

TCO B - Given appropriate marketing data, including price elasticity coefficients, demonstrate how to use this information in product pricing in order to maximize profits.

Looking at the purchase reaction to the initial 20% price drop of $6.00 to $5.00, my initial estimate told me that the price sensitivity to the cost of the rotisserie chicken is at least fairly elastic. To further review this, I looked at quantity demanded within the Price-Elasticity equation...

Ed = (% change in quantity demanded of product X)  (% change in price of product X)

= (25%)  ((6-5)6)

= (25%)  (20%)

= 1.25

Since the Ed is greater than one it does confirm that the demand for rotisserie chicken is elastic at the $5.00 - $6.00 price range.

As the company reviews options for increasing our ability to supply more chicken to our consumers and influencing a shift in their quantity demanded, we are reviewing several options.