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Report on Lipton Ice Tea [pic] Assignment CONTENTS Introduction…………………………………………………………………….. 3 Demand Equation……………………………………………………………. 4 Justification for the Chosen Variables…………………………….. 4 Regression Analysis…………………………………………………………. 9 Explanation of results…………………………………………………….. 9 Comments on Regression Analysis…………………………………. 1 Elasticity…………………………………………………………………………… 12 PED………………………………………………………………………………… 12 YED………………………………………………………………………………… 12 XED………………………………………………………………………………… 13 Competitive Structure of the Market………………………………… 14 Strategic Decisions…………………………………………………………….. 4 Recommendations …………………………………………………………….. 15 References………………………………………………………………………….. 16 Appendix……………………………………………………………………………. 17 INTRODUCTION The company “A&P Enterprises Ltd. ” was established in 1959. Since then it became one of the biggest beverage producing, importing and distributing companies in Cyprus. The company is operating in the importing and retailing sector of the market. “A&P Enterprises Ltd. is operating with a big product range including such worldwide known names as Pepsi and 7up. In June 1996, our company entered into a franchise agreement with Unilever International Market Development Company for the production and marketing of Lipton Ice Tea products in the domestic market. Since then Ice Tea became one of the key products of the company. The product is distributed and sold in almost every supermarket, restaurant, cafe, hotel, etc. , all over Cyprus. “A&P Enterprises Ltd. ” is the only legal representative of Ice Tea Lipton in Cyprus.
Ice Tea Lipton is differentiated in terms of flavor, shape and size of the package. Flavor: The Ice Tea is introduced in the Cypriot market in five flavors: peach, lemon, red, mango and forest fruit Shape, size, packaging: 330 ml cans, plastic bottle 0,5 lt and 1,5 lt. Market Structure: The Company is operating in an oligopoly, having four main competitors: • Kean Ice Tea – cheaper, local • Pokka Ice Tea – cheaper, local • Nestea Ice Tea – biggest competitor • Snapple Ice Tea – big variety, not big market share, but possible future danger DEMAND EQUATION Q = f (P + I + Ad + Pc + Pop + T) Where:
Q = Quantity Demanded of Ice Tea Lipton P = Price of Ice Tea Lipton I = Income of the consumes Ad = Advertisement Pc = Price of competing good Pop = Consuming population size T = Temperature Justification of the chosen variables: P = Price is one of the key factors in determining the demand of such product as Ice Tea. An important reason, which makes Ice Tea Lipton be one of the most consumed soft drinks in Cyprus, is its available price, so major changes in price will have major changes in demand. From the Table 1 (p. 10), we clearly see the tight correlation between changes in price and changes in quantity demanded.
As an example, we can look at the years 2008-2009: |2008 |10085 |2,15 | |Q2 |20552 |1,75 | |Q3 |25025 |1,65 | |Q4 |11508 |2,3 | |2009 |12041 |2,3 | |Q2 |22506 |2,25 | |Q3 |30012 |1,75 | |Q4 |10856 |2,35 | In the first three quarters of 2008, as the price kept falling, the demand was rising significantly; i. e. decrease in price in the second quarter by 18. 6% caused an increase in the demand of 103. 8%. In the fourth quarter when the price rose by almost 40%, the demand fell by as much as 54%. What is also important to look at, when determining the weight of each variable to the overall demand, is the t-statistics. T-statistics is the test of statistical significance of each estimated regression coefficient. It follows a rule of 2, which means if the absolute value of T is greater then 2, then the estimated co-efficient, is significant at the 5% level and has a true impact on demand.
The T statistics for price is -2,03814, which in its absolute terms passes the test, and ones again proves that the price of Ice Tea has a true impact on its demand. I = Income is a factor in determining the demand curve of the tea, however not an important one, due to the fact that the money spend on it takes only a very small percentage of the total consumers expenditure. Changes in income will not cause significant changes in the quantity demanded. This can be proven by the data collected. Q P 2008 |10085 |20557,8 | |Q2 |20552 |20627,7 | |Q3 |25025 |21714,1 | |Q4 |11508 |21776,9 | |2009 |12041 |21860,1 | |Q2 |22506 |21967,6 | |Q3 |30012 |22025,0 | |Q4 |10856 |22115,5 | By looking at the data, the following conclusion can be made, that the changes in income are not inter-related with the changes in demand. i. e. n the fourth quarter of 2009, there was an increase in the income of 0. 41%, however this did not lead to a corresponding increase in the quantity demanded, but on contrary, the demand fell by 63. 8%. The T-statistics of income, 0,884853, also proves the limited correlation between the variables, as it does not pass the test, and thus it does not have a true impact on demand. Ad = Even though Ice Tea Lipton operates in the oligopolistic structure of the market, and has only a few serious competitors, the company still heavily relies on its advertisement campaign.
The reason for that is the fact the company is constantly introducing new differentiated versions of the product, as well as its competitors do. It needs advertisement to acquaint consumers with those products, but also to distinguish it from the competitors’ goods. And even in the current economic situation, the company has not cut its spending on advertisement. On the contrary, Ice Tea Lipton has used the marketing move in shooting famous people for its advertisement. For its most recent commercial, they have attracted one of the highest paid actors, Hugh Jackman.
This was a very risky move, especially considering the recent economic recession. However, from the data below, it becomes obvious that the correlation between the expenditure on advertisement and quantity demanded is very strong. i. e. when the company increased their spending on promotion during the third quarter of 2008, by 60%, they saw an immediate rise in demand of 21. 8%. When saw the high inter-relation, the company decided to launch its commercial with the famous actor. The launch of the ad happened during the third quarter of 2009, which increased the advertisement spending by 33. %, but has also increased the demand by 50%. Q Y |2008 |10085 |12 | |Q2 |20552 |22 | |Q3 |25025 |55 | |Q4 |11508 |12 | |2009 |12041 |10 | |Q2 |22506 |30 | |Q3 |30012 |60 | |Q4 |10856 |12 | This high responsiveness can be also proven by the T-statistics.
The advertisement co-efficient of 2,099123, passes the test and thus proves that the variable has a true impact on the demand. Pc = Price of the competing product is a factor in determining the demand for Ice Tea; however, it is not a very valuable one, because: • The majority of people buying Ice Tea Lipton are its loyal consumers. The way they are people who only Pepsi, the same way there are people who chose to drink only Ice Tea Lipton, because of its taste, beneficial effects, packaging, etc. So even if the competing good (i. e. Nestea), cuts its price, the majority of Ice Tea Lipton consumers wont change their preferences.
This limited correlation between price of the competing good and demand for Ice Tea can be also proven by T-statistics. The coefficient of 0,911395, doesn’t pass the t-test, and thus proves that the variable doesn’t have a true impact on the demand. Pop = Population is very important in determining the demand, because the starting age of the consumers of Ice Tea Lipton is very young. Since Ice Tea is considered a healthy soft drink, kids of the age 4-5 are already becoming part of the consuming population for the drink. So as every year the population of the country increases by 1. 9% (2009 est. ) (www. cia. gov, 2010), the number of consumers also increases. This relationship can also be confirmed by the t-test, where the coefficient of 3,52122 passes the test and thus proves that the variable has a true impact on the demand. T = temperature can be taken as a variable affecting the demand, especially of such good as a soft drink. However due to the fact that weather in Cyprus doesn’t experience rapid changes, and more or else remains warm during the whole year, temperature changes do not affect the demand for Ice Tea significantly.
This is also proven by the T-test, which with a coefficient of 1,39926, doesn’t pass the test and thus doesn’t have a true impact on demand. REGRESSION ANALYSIS “Regression analysis is techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables. More specifically, regression analysis helps us understand how the typical value of the dependent variable changes when any one of the independent variables is varied, while the other independent variables are held fixed” (Lindley, p. 120,1987).
The regression statistics conducted from the data on Table 1 (App. ), is as follows: |Regression Statistics | |R Square |0,873001905 | |Observations |40 | | |Coefficients |t Stat | |Intercept |-11427,2551 |-3,30674 | |Pricel (€) |-5789,5576 |-2,03814 | |Per capita Income (€) |0,31378755 |0,884853 | |Advertising/Promotions €000) |131,9626817 |2,099123 | |Ave Temperature (degrees Celcius) |117,058359 |1,39926 | |Price per can Coke (€) |1093,600958 |0,911395 | | Population (thousands) |32,93093953 |3,52122 | Explanation of results: R Square: “also known as coefficient of determination, shows the percentage of variation in the dependant variable (Y), accounted for by variation in all explanatory variables (Xn)” (Draper, Smith, 1998). • The value of R Square ranges from 0. 0 to 1. 0; The closer the result is to 1. 0, the greater the explanatory power of the regression equation (Everitt, 2002). When R Square = 0. 87, it means that 87% of changes occurring in the quantity demanded for Ice Tea, is explained by changes in the explanatory variables taken all together. Observation: is the time period covered in the regression analysis. Coefficients: are the slopes for each of the independent variables. • Price = -5789. 5576 ? > when price increases by 1 units, the quantity demanded decreases by -5789. 56 units. • Income = 0. 31378755 ? > when income increases by 1 units, the quantity demanded increases by 0. 1 units. • Advertising = 131. 9626817 ? > when advertising increases by 1 units, the quantity demanded increases by 131. 96 units. • Temperature = 117. 058359 ? > when temperature increases by 1 units, the quantity demanded increases by 117. 06 units. • Competitors price = 1093. 600958 ? > when the price of competing good increases by 1 unit, the quantity demanded for Ice Tea increases by 1093. 6 units. • Population = 32. 93093953 ? > when population increases by 1 units, the quantity demanded increases by 32. 93 units. T-statistics: is the test of statistical significance of each estimated regression coefficient.
It follows a rule of 2, which means if the absolute value of T is greater then 2, then the estimated co-efficient, is significant at the 5% level and has a true impact on demand. (O’Mahony, p. 45, 1986). • Price > -2,03814, which in it’s absolute terms passes the test, and has a true impact on demand. • Income > 0,884853, doesn’t pass the test, and thus doesn’t have a true impact on demand. • Advertisement > 2,099123, passes the test, and has a true impact on demand. • Temperature > 1,39926, doesn’t pass the test, and thus doesn’t have a true impact on demand. Competitor’s price > 0,911395 does not pass the test, and thus doesn’t have a true impact on demand. • Population > 3,52122 passes the test, and thus has a true impact on demand. COMMENTS ON REGRESSION ANALYSIS No variables have been omitted and no other problems have been encountered during the recession process. ELASTICITY Note: The data used, is the most recent one, collected for the last two quarters of 2010, and is available at Table 1 (App). PRICE ELASTICITY OF DEMAND The PED is defined as: “a measure used in economics to show the responsiveness of the quantity demanded of a good or service to a change in its price.
More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price (holding constant all the other determinants of demand” (www. wikipedia. org, 2010). PED = % ? in q. demanded % ? in price = 63. 8238 34. 286 = 1. 86 The result shows that: when the price increases by 1%, the demand falls by 1. 86%. It also shows that the product is elastic, and occurs in the upper portion of the demand curve. INCOME ELASTICITY OF DEMAND The YED: “measures the responsiveness of the demand for a good to a change in the income of the people demanding the good.
It is calculated as the ratio of the percentage change in demand to the percentage change in income” (Anderton, 2006, p. 62). YED = % ? in q. demanded % ? in income YED = 63. 8278 0. 4109 = 155. 34 The result seems incorrect for two reasons: • Firstly, the result should not be more than 1, as Ice Tea is a mass market good; • Secondly, the result is impossible even for a luxury good. Note: The YED has been calculated using three different formulas and different years’ data. In most of the cases, the final result is incorrect. In reality, the YED for Ice Tea should be ranging from 0. 0 to 1. , as it is a normal mass market good. It would also show that when the income of the consumers would rise, the demand would rise too. CROSS PRICE ELASTICITY The XED: “is an economic concept that measures the responsiveness in the quantity demanded of one good when a change in price takes place in another good. The measure is calculated by taking the percentage change in the quantity demanded of one good, divided by the percentage change in price of the substitute good” (www. investopedia. com, 2010) XED = % ? in q. demanded of product A % ? in price of product B XED = 63. 828 6. 977 = 9. 5% The result shows that: the two products, Coke and Ice Tea, are substitute goods. And when the price of the competing good (i. e. Coke) rises by 1%, the demand of Ice Tea rises by 9. 15%. COMPETITIVE STRUCTURE OF THE MARKET Ice Tea Lipton is operating in the oligopolistic structure of the market. Even though Ice Tea Lipton is the biggest seller, of ready-to-drink (RTD) teas sold in single-serve containers and has the largest market share in the Cypriot market; it has four big competitors. Each of the products has its own features that make them be dangerous competitors to Ice Tea Lipton. Kean Ice Tea – is cheaper then the rest of the teas and is a local product, which might make it more appealing to the Cypriot consumer. • Pokka Ice Tea – has an advantage in terms that it has a related product, Pokka Ice Coffee, which is very popular among the Cypriots. • Nestea – is the biggest competitor to Lipton Ice Tea due to similar packaging and price. • Snapple Ice Tea –doesn’t have a big market share in Cyprus yet, but it a possible future danger to Ice Tea Lipton, as it has a big variety of flavors not yet introduced in Cyprus. STRATEGIC DECISIONS
Many tea drinkers choose Lipton because it is inexpensive and you can get it just about anywhere. The company has recognized that there are two major target markets for ready-to-drink ice tea. One group is the consumers on the go. These are the employees, students, and other consumers who lead a busy lifestyle. Thus, there is a need for products that are accessible and readily available. The other group is made up of health conscious consumers, who patronize anything healthy. When understanding these, the “A&P Enterprises Ltd. “, decided to take the following strategic decisions: 1. Keep the prices as low as possible; . Make the product as accessible and readily available to the consumer as possible; 3. Advertise and market Ice Tea Lipton as “the perfect drink for active, healthy lifestyle” (Unilever 2007). RECOMMENDATIONS Taking into consideration the current market conditions and the increasing competitions, the “A&P Enterprises Ltd. ” Might consider taking the following actions, in order not to just maintain its existing market share, but also increase its market presence. 1) Marketing Strategy – The company can take advantage of the positive press on the health benefits of tea to boost the sales of its ice tea product line.
The company can use recent studies on the health benefits of tea as the basis of its advertising campaigns. 2) New Packaging –The company can introduce other packaging sizes to ensure that consumers will have other choices and that Lipton Ice Tea will be easily and readily available to consumers. 3) Improve Shelf Presence –”A&P Enterprises Ltd. ” can make a deal with stores and supermarkets to ensure good shelf space and prominent positioning for Lipton Ice Tea. 4) Product Differentiation – The company can introduce new flavors of ice tea, that are already available at the global market.
With aggressive marketing strategy and product positioning, Lipton Ice Tea is poised to take the local lead in ready-to-drink ice tea industry. References Anderton, A. (2006). Economics. 4th edition, Causeway Press, p. 62 Case, K; Fair, R. (1999). Principles of Economics. 5th edition, p. 16 Draper, N. R. and Smith, H. (1998). Applied Regression Analysis. Wiley-Interscience Everitt, B. S. (2002). Cambridge Dictionary of Statistics. 2nd edition Lindley, D. V. (1987). Regression and correlation analysis. Volume 4, p. 120 O’Mahony, Michael (1986). Sensory Evaluation of Food: Statistical Methods and