The monetary consideration
involved in gifting gives rise to a whole industry that thrives on people
gifting each other gifts that have materialistic touch about it. However, hard
we may decry the economics and materialism involved in gifting it would be
difficult for us not to be happy when we get gifts. We are in the middle of the
peak season of gifting. Diwali is around the corner and this is the time when
we exchange the maximum gifts in India. India is an important market for the multinational
companies as along with Brazil, Russia and China they have captured
approximately 45% of the market. So let us
now understand what the big pain point is for these chocolate companies using
Cadbury India example
What are the factors we need to look at to estimate the profitability
of these companies through sales of chocolates?
·
Total
Sales - (Product of Selling Price and Units sold)
o
Ability to increase the selling price of
chocolate depends on the responsiveness of change in quantity demand. It is
expected that the price of certain high end chocolates such as Cadbury Dairy
Milk Silk and Bournville should increase as the demand for these chocolates are
inelastic, hence increase in price does not lead to decrease in quantity
demanded..
o
The demand (units sold) for chocolates peaks in
the seasons when there is festivity. Hence, October to December is the best
quarter for the company. The increase in demand might also be attributed to
increase in total online gifting.
Cost of Raw Material: As can be seen from the table below raw
material as % of sales has increased over the years.
Table 1 - Cadbury India – Raw Material to Sales
Particular (INR Cr.)
|
Dec 2012
|
Dec 2011
|
Dec 2010
|
Dec 2009
|
Dec 2008
|
Dec 2007
|
Dec 2006
|
Net Sales
|
4,065.98
|
3,364.65
|
2,503.24
|
1,934.38
|
1,588.59
|
1,293.47
|
1,058.24
|
Raw Materials
|
1,576.33
|
1,247.80
|
903.81
|
617.29
|
522.06
|
394.55
|
295.95
|
Raw Materials as %
of sales
|
39%
|
37%
|
36%
|
32%
|
33%
|
31%
|
28%
|
Source: Capitaline
The table above finds the ratio
between cost of raw materials and sales for the FY 2006 to 2012. As the cost of
raw material to sales has been more than 25% it can be deduced that that cost
of raw material is an important cost for the company. The other conclusion that
we can arrive at is cost of raw material has been eating into the potential
profits as it has increased in proportion from 28% to approximately 40% .
Now the important question is why is cost of raw materials increasing?
The cost of raw materials is increasing
primarily because
the cost of cocoa which is an important ingredient is going up. The reason
why the price of cocoa is going up is that there is a mismatch between demand
and supply with demand outstripping supply. Hence, one
alternative for manufacturers of chocolate is to reduce cocoa content and
increase artificial ingredients. The other alternative is to decrease the
size of the chocolate bars and keep the price same. I believe most companies
would prefer decreasing the size of the bar rather than impacting the taste of
the chocolate.
Author: Abhishek Sinha
Abhishek Sinha has approximately 8 year of experience in equity research, business research and consultancy. He has also had the privilege of managing a small portfolio of INR 3 million. However, his interest lies in teaching and "demystifying concepts." He has taught students right from the age of 3 years at PP1, to 40 years at executive courses and believes teaching is not about knowing the concepts; it is about relating the concepts to the audience. At present he is "gainfully employed" at Vignana Jyothi Institute of Management, Hyderabad; where he loves to teach finance to an enthusiastic bunch of management students. His hobbies include analyzing income statement, balance sheet and cash flow.> Google +
