Major Chocolate Manufacturers in UK
The UK has a long history of being a leading manufacturer as well as consumer of chocolate products. the UK’s chocolate industry has been around for more than 150 years but three major manufacturers dominate the market presently. These are Cadbury, Mars and Nestle (Beckett, 2011, p.2). The chocolate industry has a characteristic medium degree of concentration as the leading three manufacturers claim a massive 83 percent of the entire industry revenue. However, there is a host of small and medium-sized chocolate manufacturers, with majority having as less as four employees. In the recent past the UK chocolate industry has experienced significant rise of acquisitions together with increasing market share of current top manufacturers as a result of successful marketing, strong customer loyalty, and product development. The net effect of this has been an intensified concentration in the industry. In the 2007-08 period, concentration rose from 50.4 percent. The major chocolate manufacturers have adopted a trend towards outsourcing some of their production requirements to selected supplies as a means of expanding their respective market share. Nestle, Mars, Cadbury, Kraft Jacobs Suchard, and Schweppes account for more than half the European market share for consumer chocolate through strategic mergers and acquisitions (Beckett, 2011, p.62). The chart below shows the market share of the leading UK chocolate manufacturers:
The leading chocolate manufacturing companies in the UK are BCCCA (the Biscuit, Cake, Chocolate and Confectionery Association) members. The BCCCA is based in London and serves as the trade union of the UK chocolate manufacturers. In addition, it facilitates co-operation among the companies on matters that are non-competitive.
The leading chocolate manufacturers use chocolate to make a variety of chocolate-based products such as cakes, biscuit snacks, hot drinks, as well as confectionary. In making these products, the chocolate manufacturers use recipes consisted mainly of cocoa beans from which cocoa butter and cocoa liquor are drawn from.
Barriers to Entry and Contestability
There are a number of barriers to entry that new chocolate manufacturers are faced with. Success in the consumer market heavily relies a strong brand name especially for products such as chocolate snacks. This means that well-known brands like Cadbury have a significant competitive advantage over new entrants who require to undertake aggressive marketing campaigns in order to popularize their new brands. As such, high advertising budgetary requirements to facilitate brand recognition becomes a key barrier to entry. Furthermore, new entrants would need to commit high investment in brand marketing and product developments so as to sustain a strong position in the overly competitive UK chocolate market (Beckett, 2011, p.90).
However, it is worth noting that the manufacturing of consumer chocolate is not primarily a capital intensive venture. This implies that structural barriers associated with large economies of scale do not necessarily impact heavily, notwithstanding some considerations that may surface in relation to R&D linked with product development along with distribution logistics. On the other hand, this often turns into a barrier, in practice, when large supermarket chains impose rather stringent logistics requirements for certain suppliers. In fact, it is usually difficult for a new entrant to get approval from a large supermarket chain or even big wholesaling firm in the UK (Beckett, 2011, p.102). This translates into a key barrier to entry considering that supermarkets and wholesalers account for a significant share of chocolate distribution in the UK, where in excess of three-quarters of all consumer chocolate is distributed by supermarkets.
Price and Output Determination
Decisions relating to price and output for a firm keen on maximizing profits are based on costs. A firm maximizes profit when its marginal revenue is equivalent to the marginal cost, in which the marginal cost is an element of variable cost. In imperfect competition, such the UK chocolate industry, a major firm like Cadbury is able to maximize profits by setting a price that is relatively higher than its marginal cost. This enables Cadbury to benefit from potential economic profits. When Cadbury equates its marginal revenue to marginal cost, the price of its chocolate products would be higher. The diagram below shows the equilibrium price and output of manufacturer in the long run when there are increased production costs:
(Beckett, 2011, p. 65)
In the diagram above, there is a higher shifted long run marginal cost that intersects wit the higher shifted marginal revenue at the point M. At this higher equilibrium point, Cadbury’s level of output is at OK. The firm sells its output at price TK as at level T, LAC signifies a tangent to the demand or its average revenue curve denoted at its minimum point. Thus, the total revenue of the chocolate manufacturer is equal to the area indicated OETK. Similarly, the firm’s total costs at this point are equivalent to the area OETK. This translates the company is earning just zero if not normal economic profits. The reduced production at higher price leads to significant waste of resources as well as apparent exploitation of the company’s consumers.
The main advantage of the imperfect competition is that it encourages fewer firms to the advantage of the established manufactures in the industry. In addition, imperfect competition has the advantage of improving the living standard of the consumers in that the major firms compete in other aspects other than price such as research and development. In this respect, Cadbury has been a leader in technological advances and diversified its product offerings to increase consumer choices.
Reference:
Beckett, T. S., 2011, Industrial Chocolate Manufacture and Use. New York: John Wiley & Sons.
