Assignment on Partex Group

Executive Summary:

Partex Group is among the large Bangladesh private sector manufacturing and service based enterprises, owning and operating over twenty units giving value for money to all customers.

The group started modestly in 1959 in tobacco trading and with prudent entrepreneurship of our Founder Chairman Mr. M.A. Hashem today they have a stake in tobacco, food, water, soft drinks, steel container, edible oil, wooden board, furniture, cotton yarn and the IT sector.

They started supplying Mum to the market in 1997 with the motto of serving crystal clear, natural drinking water. The following report is on the analysis of Mum on the basis of microeconomics. We surveyed the industry, the other competitive goods (substitutes), their retail price, Cost of production, Purification process and other features that might be important in an economic perspective. The industry was surveyed in order to find out the costing of each of the steps of purification which aided in the Cost-benefit analysis. The other substitutes and complements are studied to determine the absolute and comparative advantage. The purification process was surveyed to find out the Total quality management which makes the customers buy Mum irrespective of the high price. The local retailers were surveyed to find out the quantity demanded of mineral waters and what amount of that is the quantity demanded of Mum. The supply of Mum was found to be slightly surplus. No shortage of any kind was found in any region. We also got information about the price ceiling and tax imposed on bottled drinking water. The different economic models were used to discuss the market of Bottled drinking water. Lastly with the information of supply and demand the elasticity of Mum was determined and found to be elastic because with the increase of price of Mum people can change to drinking other water from other companies or boil supplied Non-revenue water.

Introduction

Origin of Report

This report is conducted according to the instructions of Dr. A. K. M Saiful Majid, as a part of the Microeconomics course. As instructed, a group of four was formed to carry out the task on November 20, 2011. Mineral Water was chosen as the product to analyze, with a one week deadline to finish.

Objective

The objectives of the report are:

Relating the real world scenario to the basic economic principles
Observing the supply and demand dynamics of the market
Analyzing the equilibrium and elasticity in the market situation

Methodology

Choosing the product

At first, a product was needed to be chosen from a particular field. The primary choice was Coca-cola form the food and beverage sector, due to the huge brand image and being a perfect representative of the products in the sector. The sector was chosen because we felt that this sector would provide us enough information about all the economic phenomena we were trying to capture. But, the company does not wish to disclose their sales and other relative information pertinent to complete the report successfully. So, the product needed to be changed. After consideration, we came into agreement that we should stick to the food and beverage sector and finally, the product chosen was MUM Mineral Water. The reason behind our decision was Mineral Water’s strong position in the market and also, the size of the mineral water section which we feel is just right for the report, given the time afforded and the level of our expertise.

Collecting data

To complete the report, we decided to collect data from three sources:

From the company, about their sales and supply
From the consumers, about how they view the product and its market
From the vendors, about the demand and supply

At first, we collected the necessary information from Partex Bevegages Ltd. Then, we gathered the opinion of the consumers through an online survey. The questionnaire was designed to collect feedback about their preferences, change in demand in various situations, taste and reaction to change in price. Finally, data was collected from retailers by going shop-to-shop about the elasticity in demand and supply with time.

Processing Data

The amount of data collected was such that it was possible to process them manually, without any data processing software. Each person collected the data for their assigned section and processed them for using. To avoid errors, we checked each other’s data several times. Then, with the data, pie charts, bar charts, tables etc were created to project the findings.

Analyzing Data and Reaching Conclusion

We analyzed the findings using some of the basic economic tools covered in the course curriculum so far i.e. Production Possibility Frontier, Circular Flow Diagram model, Demand Curve, Supply Curve . Thus, we related the real world and theoretical economy through the results we found. Once we had all necessary items for the report, we compiled and submitted it.

Limitations

The report only deals with only the scenario of Dhaka city. The entire picture may be different than the one displayed in the report.
Due to relatively small window of submission, some points may not have been portrayed perfectly.
This report was done with minimal background in Economics(half a semester)
Time constraints
Unavailability of information due to company policy
Collected data are inconsistent and approximate

Product Overview:

About the Product

Partex Group is among the large Bangladesh private sector manufacturing and service based enterprises, owning and operating over twenty units giving value for money to all customers.

They started supplying MUM drinking water to the market in the late nineties with the motto of serving crystal clear, natural drinking water. It keeps body hydrated with the tagline, “It comes naturally.”

Study of the Supply Chain

Supply Chain consists of all parties involved, directly or indirectly, in moving a product or service from supplier to customer.

After an analysis of the supply chain of MUM drinking water, we found that it has a supply chain consisting four levels. MUM receives supplies of plastic bottles and caps from external suppliers. Water is collected from a natural resource, which is ground water in this case, and goes under purification processes at the plants. After the purification processes, water is bottled then packaged and ready for distribution.

There are 12 distributors of MUM products which participate in the distribution. The distributors collect the products from MUM storage and supply to the retail stores and restaurants.

Relating to the Basic Economic Principles:

The first principle states that people face tradeoffs. For PARTEX this tradeoff includes striking a balance between MUM and its other products. For instance we may consider its main beverage product, the Royal Crown Cola. Now the tradeoff implies that if PARTEX is to produce more of its bottled drinking water it must revert some of its resources from the production of RC cola. Thus an increased production of MUM drinking water means a decreased production of RC cola.

The second principle states that the cost of any good is equivalent to its opportunity cost. When someone buys a half litre bottle of MUM he loses the chance to buy something else for that price, say a bar of chocolate that costs roughly the same. The opportunity cost will be further discussed in a later chapter.

According to the fourth principle, people respond to incentives offered. Suppose the price of MUM bottled water goes down for some reason. The buyers will be more inclined to buy more water due to this reduced price. At the same time, the sellers will look to increase supply and sell more to meet this increased quantity demanded. So incentives can influence people.

The fifth principle implies that trade can work to everyone’s advantage. For example, the producers of MUM, the PARTEX group have specialized in producing bottled drinking water. So they are more efficiently and cost effectively bringing it to the market. This allows producers of other goods at a better price. At the same time this gives them the scope to specialize in something else, subsequently bringing its price down. So the producers of MUM can get those goods at a better price. Thus this tradeoff is good for all parties concerned.

The economy of Bangladesh is a market economy. This enables competition of price and quality among firms and sellers, and ultimately helps keep the economy stable. The huge number of buyers and sellers means that externality and market power is largely reduced.

Analysis with Economic Models

Positive Analysis of the Market

MUM is a product of Partex Beverages Ltd Bangladesh having a brand image of a safe, hygienic and reliable pure drinking water. MUM introduced its products in the market during the late 90’s being one of the first bottled drinking water suppliers in the market. Over the years MUM has constantly developed and controlled its quality which contributed developing its current brand image. The economy that MUM drinking water operates in is a market economy. Although MUM operates in an oligopolistic market, it holds a relatively higher market share despite the slight price difference with other bottled drinking water.

We can differentiate the market of Bottled Drinking water into three different categories, viz.

Segment Dependent on Public water supply:

One part of the Bangladeshi market is almost wholly dependent on the public water supply (WASA). For home use they drink boiled/non-boiled WASA supplied water and when drinking outside of the home they depend on locally filtered drinking water. Usually the low-income families comprise this type of market.

Segment Dependent partially on Public water supply:

The other segment depends partially on the public water supply. They depend on the WASA-supplied water for other purposes except drinking. For drinking at home they either boil and domestically filter the WASA-supplied water or buy from Water-jar suppliers. But when away from home they buy bottled drinking water. Mum basically targets this specific market segment.

Circular Flow Diagram Model

The circular flow diagram demonstrates the business cycle for MUM bottled drinking water. The business firm being PARTEX GROUP produces and supplies goods to retailers and restaurants. The household contains general consumers who buy and consume bottled drinking water from PARTEX and provide factors of production through land and labor.

Production Possibility Frontier

The production possibility frontier shows the different combination of outputs for PARTEX group and subsequently demonstrates the highest possible production of its goods. In this case we can put the production of MUM bottled drinking water against one of their other product, the Royal Crown Cola. For simplification of calculations, let us assume that at any time, PARTEX can produce a maximum of 3000 litres of RC Cola as opposed to a maximum of 6000 litres of bottled drinking water.

If PARTEX decides to reduce production of RC Cola by 500 litres, they can use the spare resources to produce 1000 more litres of MUM drinking water. On the other hand, if they decrease production of bottled water by 2000, they can produce 1000 more litres of RC Cola. Any point outside this frontier is not feasible. Selecting a point on the frontier will maximize output and provide a convenient combination of the different goods.

Gains from Trade:

Absolute Advantage:

The absolute advantage is the comparison among producers in terms of productivity. The comparison here is between the market of MUM and that of the other mineral water suppliers. Since Mum and Fresh are the market leaders of the oligopoly, we will be comparing the cost-revenue analysis of these two. To compare them in turns of productivity we will have to have a deeper view into the purification process of both.

MUM: The source of water plays a key role in the quantity and quality of water one wants to produce, as well as to remain profitable. About a quarter of all bottled water comes from municipal supplies, with the rest coming from natural sources like springs and wells. But, regardless of where the water is flowing from, is privy to all the testing from the agencies. One thing to take into consideration is what and organic and inorganic compounds are present at the source, and if it is practical or not to invest in equipment to remove them. However, the common elements that are found in the water of the country are Mg, Al, Ca, V, Cr, Mn, Co, Ni, Cu, Zn, As, Rb, Sr, Mo, Ag, Cd. These are not that expensive to be removed. Here are the steps that are undergone in the process of purification.

Membrane Filtration: It removes organic impurities, metal and other ions.

Ozonization: It breaks down organic constituents and reduces their odor potential while also sanitizing to minimize further microbial contamination.

It costs around 14 BDT to purify and bottle per liter of water and is sold at 22 BDT. And more than that, the companies are also using water supplies from WASA which is partially subsidized by the government.

FRESH: Fresh has almost the same purification process. The Cost per liter of purification and bottling is around 15 BDT and the water is sold in the market at a rate of 18 BDT per liter.

From the aforementioned study of the cost and revenue per liter of both the companies it can be clearly stated that MUM has absolute advantage over Fresh.

Opportunity Cost and Comparative Advantage

We have already studied the absolute advantage of Mum. Comparative Advantage is the comparison between two goods in terms of opportunity cost and opportunity cost is what we give up to obtain that specific good. Even in this case we would be comparing Mum and Fresh since these are the major two Bottled water seller in the country. For Mum, it costs around 14 BDT to purify and bottle 1 liter of water and they sell it at 22 BDT . On the other hand, for Fresh Drinking water it costs around 15 BDT and they sell the same at 18 BDT per liter. So, the opportunity cost for Mum is greater than that of fresh because to buy Mum one has to give up 22 BDT per liter compared to Fresh’s 18 BDT per liter. Thus it can be inferred that Fresh has comparative advantage over Mum but due to TQM and other specific qualities the market is more inclined towards buying Mum than Fresh.

Demand

The demand for MUM bottled drinking water in Dhaka city is subject to various shifts and changes. First let us consider the overall demand for bottled drinking water.

From researching the market we have come to the conclusion that about 22% of the population directly or indirectly consumes at least 1 litre of bottled drinking water on a daily basis. Another 43% consumes at least 1 litre per week. Considering that the respondents of this survey represent the several economic classes equally, we have used the results of this survey to measure the daily demand for bottled drinking water in the city.

According to the 2011 census the population of Dhaka city stands at 11,875,000.

7% of this population means about 831,250.

The further 43% accounts for about 5,106,250.

Another 11% includes about 1,306,250

So the average quantity demanded for bottle drinking water is roughly around

(831,250/2 + 5,106,250 /7 + 1,306,250 X5 /7) = 2,078,124 or two million

1litre bottles.

Another market survey, presented below, shows the average consumption of different brands in the metropolitan.

According to the survey about 32% of the consumers of bottled drinking water prefer MUM over any other brand. So in reference to our previous findings we can say that the average demand of MUM bottled drinking water in Dhaka city stands somewhere around,

32% of the 2,078,124 = 664,999

So there is a daily demand of about half million litres of MUM in Dhaka metropolitan.

Shift and movement along the demand curve

Shift of the Demand Curve

Income:

The income of the general population plays a key role in the shift of the demand curve. For instance, currently the majority of the population in Dhaka city relies on the water supplied by WASA. Since this water is not hygienic in many places, the reason consumers don’t switch to bottled drinking water is affordability. Since this is a normal good, a raise in income might allow the general population to spend more on bottled drinking water and thus cause a positive shift in the demand curve. Likewise, a decrease in income will make people spend less on this, thereby causing a negative shift in the curve.

Price of substitutes:

The goods that can be considered as valid substitutes for bottled drinking water are soft drinks- carbonated beverages and fruit juices as well as water supplied by WASA. If the price of these rise, then the general population will surely be encouraged to buy bottled water, causing a positive shift in the demand curve. If the prices of these substitutes fall, then they could be a more popular choice over bottled water, which would decrease demand and cause a negative shift.

Price of Complements:

We can consider goods that require the subsequent consumption of water, such as fast food, to be complements of bottled drinking water. So if the price of fast food is reduced, for some reason or another, the consumption of fast food would likely increase. Therefore the consumption of bottled drinking water will also increase, thereby making a positive shift in the curve. On the other hand, the increase of prices and subsequent decreasing of demand for fast food could likely cause a negative shift in the demand curve.

Weather:

In the perspective of Bangladesh, weather is a crucial determinant of demand of bottled water. In summer time the temperature rises and the heat becomes unbearable, which results in significant consumption of bottled water around the country. So during summer time the demand of bottled drinking water rises substantially and thus the demand curve shifts to the right.

But during the times of monsoon and winter, the temperature becomes tolerable as the heat soothes down, the consumption of bottled water decreases a bit along with its demand which makes the demand curve shift to the left.

The Quality of the Water Supplied by Dhaka WASA:

Since majority of the population in Dhaka city relies on Dhaka WASA for their water supply, it has great influence over the demand of bottled drinking water. For example, over the years the quality and hygiene factors of the water supplied by Dhaka WASA have declined. So the demand for bottled drinking water has undergone a positive shift. Because people consider WASA to be unreliable they switch to bottled water, thereby increasing overall demand for the good.

Number of Buyers:

The number of buyers may positively or negatively affect the demand of MUM drinking water. If the number of individual buyers increase then the sum, or the market demand will also increase. For instance, if more people switch over from other brands or from Dhaka WASA water supply, then the demand curve will shift to the right. If a lot of buyers stop buying MUM then the demand curve will shift negatively and more to the left.

Movements along the Demand Curve:

A movement refers to a change along the curve. On the demand curve, a movement along the curve occurs due to a change in the two variables denoted in the two axis- price and the quantity demanded. Since the quantity demanded is mostly dependant on the price, we can say that movement is usually the result of movement along the curve.

Suppose the suppliers or sellers decide to increase profit by increasing price. In that case, the quantity demanded will shift according to the demand curve and decrease proportionately.

Market demand vs individual demand:

The demand of the market is the sum of the demands of all individual buyers. In the bottled drinking water industry, for Dhaka city, the buyers consist mainly of consumption at restaurants and individual consumption. The buyers at restaurants buy at a much higher price than individual buyers. The market demand curve represents the sum of all these individual demands.

Supply

The supply of MUM drinking water in Dhaka city is subject to various shifts and changes. The quantity supplied in the market varies from time to time. During the summer times, the demand of bottled drinking water rises substantially so MUM increases the supply of its products in the market. And during the times of monsoon and winter, as the demand for bottled drinking water falls, MUM supplies fewer products in the market. The supply of MUM drinking water also increases in special situations such as- shortage in Dhaka WASA’s supply.

Shift of the Supply Curve

Input Prices:

MUM uses groundwater as their raw material, so a groundwater extraction unit is an input. There are also several inputs such as- machines for water purification, bottling and packaging machines, the labor of workers to operate the machines, power to run the plants, transports, etc. If the price of one or more of these inputs rises, production of bottled water is less profitable and MUM is likely to supply fewer products in the market. If the price of the inputs rises substantially MUM might shut down the supply of one or more products. On the other hand, if the input prices fall, production of bottled water is more profitable and MUM is likely to supply more products in the market. So if the input prices increase then the supply curve will shift to the left and it will shift to the right when the input prices decrease.

Cost of Plastic Bottles:

Plastic bottles are necessary for the manufacture of the bottled waters as every bottled waters come in plastic bottles. So if the price of plastic increases, then the bottle manufacturers will increase the price of bottles which will result in a higher cost of production for MUM.

Expectations:

The expectations of suppliers play an important role in determining the quantity supplied in the market. In Bangladesh, the demand of bottled water has been established quite firmly in the market as it is the only safe source of pure drinking water outside residences and workplaces. Over the years MUM has developed quite a brand image in the market as a safe and reliable drinking water so MUM can easily expect to grow its demand more in the future.

Technology:

Technology used for production of bottled water is another determinant of supply. MUM uses modern technologies in the production which ensures quality as well as reduces the firm’s cost. Over the years, the advanced technology usage raised MUM’s supply in the market and shifted the supply curve to the right.

Number of Sellers:

Besides other factors, the number of sellers in the market is also a determinant of supply. If the number of individual suppliers increases, market supply will also increase. And the supply curve will shift to the right.

More and more convenient stores, shops, food courts, restaurants, etc. are emerging everyday in Dhaka city and also throughout the country. And because of MUM’s image and quality, its demand is also increasing which is very unlikely to fall substantially. So judging from the market scenario, it can be easily determined that the number of sellers will increase in the future.

Movement along the Supply Curve

On the supply curve, a movement denotes a change in both price and quantity supplied from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship.

MUM can increase the price of its products because of increased production cost, transportation cost, taxation, etc. or even for earning greater profits. And due to the increase in the price of its products, suppliers will increase the quantity supplied in the market for earning more profit.

Market Supply vs Individual Supply

By summing up al the sellers’ supply, we can determine the market supply of bottled drinking water of Dhaka city. In Dhaka city, street shops and departmental stores sell MUM drinking water at their retail prices such as- a bottle of 500ml costs 15TK. But restaurants sell the same product in a much higher price costing around 30TK (varies from around 20TK to 40TK).

The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, “The Market Supply Curve” is found by adding horizontally the individual supply curves.

Market Equilibrium:

The market achieves an equilibrium state when the market demand and market supply exist in a balanced state. At the equilibrium price, quantity supplied equals the quantity demanded. The equilibrium is found where the supply and demand curves intersect.

In case of MUM, the price elasticity of Demand has calculated as 2.90. Alongside, the change in supply was not apparent in the market for MUM. This scenario suggests that even though the demand for MUM is elastic, the supply has not been elastic. So, we get three different demand-supply state. The three cases of Supply-Demand curve is being described below.

The first case is that the demand in market is highly covered by MUM and the supply is more than the quantity demanded. These provides with a slight surplus of MUM in the market as opposite to the shortage.
The second case would be where the demand of MUM would get down due to winter or some other reasons and as being found out in the survey the supply is as it was before, then the amount of surplus will increase.
He third case is where the demand will increase than it was before which results in the demand and supply move more towards the equilibrium state.

Elasticity

Talking to 12 retailers, we have collected data about the consumption of Drinking Water. Their response is in the tables below:

December ‘10

No. of Cases	No. of Retailers
1.1-1.5	9
1.6-2	3
2-2.5	0

Average Demand=1.43 cases

March’11

No. of Cases	No. of Retailers
1.1-1.5	3
1.6-2	9
2.1-2.5	0

Average Demand=1.68 cases

June’11

No. of cases	No. of Retailers
1.1-1.5	0
1.6-2	2
2.1-2.5	10

Average Demand=2.13 cases

November’11

No. of cases	No. of Retailers
1.1-1.5	11
1.6-2	1
2.1-2.5	0

Price Elasticity of Demand

Between the one year from November’10 to November’11 price has risen from tk. 12 per bottle to tk. 15 per bottle (from tk.240 per case to tk. 300). In the meantime, the demand has fallen from 1.43 cases per month to 1.34 cases per month.

Midpoint:

Price= 270
Quantity= 1.395

Price elasticity of demand===2.90

The negative price elasticity relates to an elastic demand, because the price increase (25%) is more than the decrease in quantity demanded (6.29%). This displays that Mum Drinking Water is a product that has a fairly loyal customer bunch. They are prepared to pay the higher price for the superior quality that Mum Drinking Water offers.

Total Revenue

On November’10, the total revenue received by an average retailer was= (1.43X240) = tk. 343.20

After one year, the total revenue received by an average retailer is= (1.34X300) = tk. 402.00

The revenue earned has increased despite the slight fall in quantity demanded. Because of the fact that Mum Drinking Water is an elastic product, the producers have utilized their brand loyalty and brand value. They knew most of their customers will stick to the brand despite the price increase and the increase in revenue will outweigh portion of customers they lose. A point to be noted here is that the revenue received by the retailers is directly proportionate to the revenue received by the Producers, Partex Beverage Ltd. So, similar rise in revenues for them can also be expected.

Price Elasticity of Supply

As stated above, the demand has decreased because of the increase in price. But, the degree of increase is more than the degree of decrease in demand. To ensure that maximum benefit would be derived from the rise in price, the supply would be increased. The degree would have to be more than the level of price increase because otherwise all the demands will not be met. So, percentage change in quantity supplied would be more than the percentage change in price. Hence, the elasticity would be less than one. And the nature of the supply will be inelastic supply.

Income Elasticity of Demand

When the income increases, the demand of MUM Drinking Water will increase because MUM is positioned in the higher price section of the mineral water market. So, with the increase of income, people would prefer the higher quality MUM. When income decreases, the demand would fall at a high pace for the similar reasons. So the nature of the income elasticity of demand is of the elastic nature.

Government Policy:

All the products sold in Bangladesh has to be authorized under BSTI. MUM has been authorized by BSTI before being introduced in the market. BSTI sends quality surveying team every year or so and could never bring any complaints against MUM. The Patron of MUM drinking water Partex has also been paying the organizational income tax since its inception.

Conclusion

Finally it can be said that Bottled Drinking Water has a major demand in the market of Bangladesh and a major portion of the demand is being met by Mum. Mum being a product of one of the biggest group Partex has a good scope of spreading its business around border of Bangladesh and since yet no news of any shortage have been noticed, the Supply and Demand are well in equilibrium. The only lagging of Mum may be its backwardness in the comparative advantage. Since they already have the major portion of the market they can well take over the advantage by reducing the selling price per liter.

References