Microeconomic analysis of a firm and its industry

¶ … microeconomic study the market for beverages in Switzerland

The Dining Industry in Europe

Throughout the twentieth century, Europe was a contiguous landmass that shared physical boundaries. However, the similarities between these contiguous yet independent countries would end right there. Currency values and format would make dining in one European country more favorable than ordering ostensibly the same meal in a bordering country.

The restaurant and soft drink industry in Europe is more competitive than what is to be expected to be found elsewhere in the world because of the relative changes in currency value and the level of interaction of travelers between different countries and the exchange of currency exchange and the velocity of money. The most popular restaurants do remain where tourists are able to frequent such as France, Italy, and the Czech Republic.

The product market is the soft drink industry. As it is Europe, one must think of Cadbury Schweppes as the leading brand of soft drink. According to PR Newswire (2005), "In 2004, on an IFRS basis, Europe beverages; revenue was GBP 653 million and underlying profit from operations was GBP 116 million, representing 10% and 11% of the Group's revenue and underlying profit from operations respectively. Its sales volume of 1.7 billion litres makes it the third largest player in the European carbonated soft drinks market." (PR Newswire, 2005)

Additionally, according to the PR Newswire (2005), "Europe Beverages' principal products are carbonated soft drinks, mineral waters and still drinks. Its main brands are Schweppes, Orangina, TriNa, Oasis and La Casera which account for around 75% of sales. Other brands include Apollinaris, Pampryl, Gina and Vida. Products are sold across Continental Europe, with some sales in the UK, parts of North and West Africa and the Middle East. Sales are concentrated in three countries, France, Spain and Germany, which account for around 85% of total sales." (PR Newswire, 2005)

The Cadbury Schweppes company is known for its brands that include the following: "Cadbury, Schweppes, Halls, Trident, Dr. Pepper, Snapple, Trebor, Dentyne, Bubblicious and Bassett. The Group currently has beverage operations in three regions, the Americas, Continental Europe and Australia, have disposed of its beverage brands in 160 markets in 1999." (PR Newswire, 2005) The Cadbury Schweppes group has since sold off its European beverage unit and is now free from the operations from maintaining the operations of that unit.

The beverage market in Switzerland appears to be somewhat regulated with anti-competitive practices in place to prevent a monopolization of the market. According to The Atlanta Constitution (2000), "The Swiss Competition Commission said it will investigate the agreement between Feldschloesschen-Huerlimann Holding AG and Coca-Cola Co. under which Feldschloesschen produces some Coca-Cola brand drinks. The commission said the agreement may infringe on competition in the distribution of soft drinks to hotels, restaurants, canteens and cafes. According to the agreement between the Atlanta-based Coca-Cola and Feldschloesschen, the largest Swiss beverages, maker will produce some of the Coca-Cola brands and position them as main products." (The Atlanta Constitution, 2000)

Switzerland has a strong and unique following with regard to their restaurant selections. According to Bohannon (2004), "If the growing number of restaurants such as Unsicht-Bar is any indication, feasting on unseen food in an opaque room is an experience that appeals to many diners. Since the first sightless restaurant opened in 1999 in Zurich, Switzerland, dark dining has gradually spread across Europe, with similar restaurants sprouting in Paris and in Cologne, Berlin, and Hamberg, Germany. Another will open in Basel, Switzerland, next year." (Bohannon, 2004)

The market within Sorento, Switzerland is privy to the restaurant and beverage opportunity. However, the relative selection currently in place is of decent quality and therefore the level of investment needed to facilitate market share from the current operations to the new restaurant and beverage opportunities will require a large investment into infrastructure, decor, and marketing, which may yield an inopportune investment when considering the type of limited location that Sorento, Switzerland offers. The population is curtailing in growth and the level of tourism has leveled off in favor of places like Zurich, Switzerland.

The price elasticity of demand in Sorengo, Switzerland for restaurants is a function of the change in price of the substitute good in demand relative to the change in quantity demanded of the good. In the case of a new restaurant and new beverage(s) selection, the substitute is the new introduction of the good, so therefore we must predict how a change in the price of the current service will affect the demand for the substitutable good.

The creation of the perception that the substitute good is at least similar or of value to be considered as a substitute by the population is the mode of success when considering to enter the market. Therefore, a new restaurant in Sorrengo is the substitute good to where the game theory now applies to determine whether the surrounding restaurants will increase or decrease prices relative to the perceived pricing of the substitute restaurant.

The substitute restaurant is good A, where good B. And good C. are established Sorrengo restaurants with a market share of 50% each. This example is not far from the truth, as the favorite restaurants as indicated by survey response ostensibly show 2 popular restaurants and so a new restaurant would show a third choice to which market share may be distributed.

To say the average price of a meal at good B. And good C. is $10CHF and Quantity Demanded at that price are 1000 meals. Should good A enter the market, Good B. may decide to raise their price to establish their restaurant as a 'premium' brand while Good C. may choose to lower their price to attract more volume to establish a value choice of restaurant. Good B. may see Quantity Demanded rise to 1100 and Good C. may see Quantity Demanded fall to 900. Why? Ostensibly because the market is fraught with tourism and there is a sense of luxury when picking a restaurant to dine at. Switzerland is also more of an established tourist market for those that prefer a specific experience and therefore it is seen that the established restaurant with a premium pricing will attract a greater portion of the market.

For Good B, the new price of 11 CHF is subtracted by the old price of $10 and divided by the old price of $10CHF to get a value of .1. The Quantity demanded for B. increased from the old value of 1000 to the new value of 1100. Therefore, the percentage change in Quantity demanded of good B. is divided by the percent change in price of good C. The old value of Quantity demanded of 1000 is subtracted from the new value of Quantity Demanded, 1100 and is then divided by the old value of quantity demanded, 1000. This yields a value of .1. The percentage change in Quantity demanded is then divided by the percentage change in the price. This value is 1.

The result of the calculation is that we now see there is a cross-price elasticity of demand for Good A when the price of Y increases from $10CHF to $11CHF of 1. This means that between the prices of $10CHF and $11CHF the two goods are substitutable.

We see that for good C, price of the good decreases from $10CHF to $9CHF and the percentage change in Quantity demanded is -.1. The Quantity demanded of the good C. decreased from 1000 to 900, a difference of 100. Therefore the Quantity demanded of good C. is -.1. The price elasticity demand for good C. is -.1/-.1 or 0. Therefore, there is ostensibly no difference in introducing the new restaurant the Swiss market in the specified location.

The industry demand and relative elastic demand curve for the restaurants does indicate that preference is a function of the options available relative to the price. There is not a strong brand identification that will keep patrons from shifting brands nor is there any indication that such a relationship will eventually occur. There appears to be no type of selection that would indicate the population to want to facilitate an inelastic demand function for restaurant services.

A negative cross price elasticity of demand in the market would indicate that there is inelasticity in the market concerning the brand in question. A negative cross price elasticity of demand would indicate an inelastic demand curve for the good. Such an occurrence is a function of increasing prices and increasing Quantity demanded for the good in question.

A positive cross elasticity is similar to the introduction of the new restaurant in question. A positive value, that is a value greater than 1, distinguishes the business as one that faces an elastic demand curve and is therefore subject to market dynamics as a substitutable good.

The income elasticity of demand in our market is that of a normal good. Although currently a part of the luxury restaurant selection, among these selections our good is a normal good. However the restaurants collectively are considered to be a luxury good to those within the market. We feel that our brand is a normal good in this market as our cuisine is specific to the taste of the clientele represented by the demographic. Additionally, our decor and quality distinguish our establishment from what are deemed to be the lower quality establishments in the area that would normally represent the 'competition'.

The additional features of our establishment also yield a luxury restaurant as the market deems the bathroom as an important feature in distinguishing a market friendly and luxurious restaurant experience. In many countries it is that way, the food itself does not distinguish the restaurant, as one can ostensibly obtain a great, world-class meal from many restaurants. Indeed, the restroom experience is what qualifies a restaurant as being luxurious or not luxurious.

The market structure that best characterizes the industry is that of being an oligopoly. There are ostensibly many buyers of restaurant services however the market has relatively few sellers to match the perceived demand for the luxury dining experience. Although there are a number of restaurants in the area, there are not enough of the luxury establishments to offset the demand for these establishments. The result? There can be long wait times and perhaps unfilled reservations for tables during the peak times.

Additionally, such restaurants may hurry their guests along in order to free up tables to accommodate more guests and to fill the reservations for the times they've set. Therefore, a long leisurely 2 or 3-hour dinner may not be in the cards for many restaurant guests. Instead, they may condense their dining experience into perhaps 1 hour so that additional guests may come and be served by the restaurant.

However, given these prospects, market share can fluctuate between restaurants as the potential for the guests to sway from one restaurant to the next does increase as a function of availability. Given the relative inelastic supply of given high quality restaurants, the patron may decide to enter a new establishment and try out their beverages and menu, accordingly.

The market structure that best defines the beverage market is that of being perfectly competitive. The anti-regulatory practices of the market prevent the monopoly or the monopolistically competitive from burgeoning and therefore the perfectly competitive market is the result. Ostensibly, this is the reason as to why Cadbury Schweppes sold off its beverage holdings in the European market. The cost of maintaining market was increasing and the inability to monopolize the market made the cost of keeping and growing market share, cost prohibitive.

The beverage market is therefore a function of the regulation that prevents further monopolization and is a requisite barrier to entry to other firms from expecting to obtain a large portion of the market share. Essentially that is what regulation does prevent, the control of the market by one entity such that the market prices are reflective of one pricing structure with the inability for other companies to compete within the same market.

Market penetration in the beverage market in Switzerland is a function of enabling the tourist and the local population. However, the relative inelastic demand of the current demand cycle for beverages in Switzerland may prevent any major market share from being obtained by a new competitor. Beverages including Rivella and Apple Juice still remain very popular in Switzerland, and such beverages are ostensibly relatively easy to obtain as the market readily supplies these beverages for consumption.

According to Micheloud & Cie (2011), "You'll (find) a wide variety of wine, spirits and mineral water in Switzerland. The Swiss are true foreign wine lovers and the best vintages are available. But don't hesitate to taste the Swiss wineries, some of which are excellent. You'll never have trouble finding what you need to quench your thirst in Geneva, be it cocktail hour or dinner time. At the Placette de Cornavin, a large supermarket, a 2-liter bottle of Coca-Cola costs 2.50 CHF, while a liter bottle of San Pelegrino, a popular Italian sparkling mineral water, costs 1.50 CHF. Evian, which is produced on the other side of the lake, was on sale and cost only 1.15 CHF per 1.5 liter bottle. Valser, a good quality Swiss sparkling water, costs only 0.83 CHF per liter, or 1.25 CHF for a 1.5 liter bottle. Lipton Lemon iced tea costs 1 CHF for a liter carton." (Micheloud & Cie, 2011)

Additionally, according to Micheloud & Cie (2011), "Over 70% of Genevans cross-border shop at least once a week in neighboring France, e.g. In Divonne, Ferney-Voltaire, St.-Julien or Annemasse. A number of shopping centers have been set up along the Genevan borders and offer excellent products at low prices. For example, four bottles of Coca-Cola cost 29.95 FF at the Leclerc center in Ferney." (Micheloud, Cie, 2011)

The beverage industry has been performing relatively stable over most recent ten-year history. The market for beverages in Switzerland are notably a function of the simple and the relatively extravagant, when speaking to the wine and spirits, which are often purchased on the market. According to Micheloud & Cie, (2011), "At the Placette de Cornavin, Martini (white or red) costs only 9.95 CHF per liter, while a bottle of ordinary white wine, Fendant Dame de Sion, costs 11.50 CHF (16.43 CHF per liter). If you're looking for the best, head towards the lower streets by the cathedral, to the Arcades de lo Place du Molard. Alongside a few bankers and diplomats, you will find the best wine and spirits at the Arcades du Molard. No soda or mineral water here. The sommelier will help you pick out what you need with professionalism and precision. A bottle of 16-year-old Lagavullin whiskey costs 62 CHF, and its double-distilled big brother (the double distillation takes place in a sherry barrel, we were explained), at 20 years old is yours for only 99 CHF. We suggest a 75-cl bottle of Aigle les Murailles at 20.80 CHF for a wine that reflects the Lake Geneva region, and an Arvine les Ruinettes at 15.80 CHF for the Valais region. For a truly exceptional vintage, you can try a 1995 Chateau Mouton Rotschild for 389 CHF a bottle." (Micheloud, Cie, 2011)

The aforementioned analysis is especially revealing as the understanding of how the experience within the restaurant is with regard to the selection of wines and spirits. Although not considered to be 'normal' beverages, the wine and spirit category are indeed beverages and many Europeans consider the consumption as normal. The daily and frequent ingestion of spirits does enable the market to be considered a beverage and therefore, the competition for spirits within Switzerland is between the homegrown winery and the imported wines from around the world.