The focus of the 20 mark question in the 2022 Edexcel AS business paper was a discussion of whether a chocolate manufacturer should expand their distribution channels or implement a competitive pricing strategy. Here is an exemplar response.
One reason Tony’s Chocoloney should increase distribution channels is that this may enable them to reach a larger number of customers. Their chocolate can currently only be purchased in Waitrose, Sainsbury’s and some small independent shops. Tony’s could increase customer numbers by also distributing through discount retailers who are growing in market share such as Aldi and Lidl. This would increase their quantity of chocolate sold, therefore increasing sales revenue. All other things being equal with their costs, this should increase their operating profit, which is calculated by subtracting cost of sales and expenses from revenue. However, Tony’s is a premium brand who sell their chocolate at the high price of £3.50 per bar. They would therefore need to be careful about the impact of selling through discounters on their brand reputation.
On the other hand, one reason Tony’s should try to increase operating profit by moving to a competitive pricing strategy is that lower prices can help to bring more demand for their chocolates. Tony’s currently price their bars 75% higher than the equivalent Cadbury’s bar. This is likely to put off more price sensitive customers who may prefer the cheaper option. Therefore by bringing their price closer to that of rivals such as Cadbury’s, Tony’s are likely to gain more demand and increase quantity of sales. The higher revenue this would bring should also help to increase their operating profit. However, the impact of this strategy would depend on the price elasticity of demand. It is possible that their premium brand, based on ethical sourcing, will make consumers more willing to pay a higher price and their demand more price inelastic. If this is the case, then competitive pricing would not bring as many more customers as first thought.
Overall, I think the best option for Tony’s Chocoloney is to increase distribution channels. This is because the most important factor for them is to protect the reputation of their brand and lower prices would act as a signal to customers that they may no longer be sourcing the best and most ethically produced coco beans. However, this would depend on the choice of distribution channels used. I would not recommend that Tony’s use discounters such as Aldi, and they may even prefer to set up their own direct to customer distribution. This would not only protect their brand reputation, but may also allow them to increase their operating profit margin, because it would mean that the retailers would not be taking their cut of Tony’s profits.
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