Introduction
This paper presents a microeconomic and macroeconomic analysis of Nestle Nutrition. The microeconomic analysis will focus on the company and its market.
The macroeconomic analysis, on the other hand, will focus on the macroeconomic factors that are likely to affect the success of the company. Nestle Nutrition is a multinational company that produces and sales nutritional supplements in the form of foodstuffs and drinks (Nestlé, 2013).
Microeconomic Analysis
Demand and Supply Factors
The demand factors that affect the sales and profitability of the company include price, competition, income levels, and consumer tastes and preferences. Due to high competition in the market, an increase in the prices of Nestlé’s products is likely to decrease their demand, thereby reducing the firm’s sales (Mankiw & Taylor, 2011, p. 67).
This happens happen when Nestlé increases its prices above those of its competitors. The large number of firms in the market has caused high competition. This limits the amount of output that Nestle can sale, thereby reducing its profitability.
An increase in income levels among consumers usually leads to a rise in demand for the company’s products and vice versa. Additionally, the match between the quality of the firm’s products and the consumers’ tastes and preferences usually leads to an increase in its sales.
The supply factors that affect the firm’s sales and profits include the cost of production, technological advancements, and the prevailing market price. A high market price encourages the firm to increase its production, thereby increasing its profits (McEachem, 2010, p. 102).
Low costs of production (cost per unit of output) increase the firm’s profits by enabling it to earn a high profit margin. Similarly, technological advancements enable the firm to lower its production costs in order to increase its profits.
Market Structure
Nestle Nutrition operates in a competitive market that is characterized with a large number of producers or sellers and buyers (Nestlé, 2013). Due to high competition, the buyers and sellers are price takers. Concisely, the prices of nutritional supplements are determined by the forces of demand and supply rather than individual producers and buyers.
Moreover, the firms in the market produce homogeneous products. Concisely, their products have low levels of differentiation because they have more or less the same nutritional values and benefits. Nonetheless, the buyers do not have perfect information about products and prices. Thus, the market is not perfectly competitive (McEachem, 2010, p. 112).
Sustaining Profitability
Nestle Nutrition can continue to operate in the profitable market structure by reducing its production costs. For example, it can use cost saving technologies in the production and distribution of its products. A reduction in production costs will enable the firm to increase its profit margin by selling at the prevailing market price.
Moreover, maintaining low production costs will enable the firm to lower its prices below the industry price (McEachem, 2010, p. 134). Thus, the firm’s nutritional supplements will be cheaper than those of its competitors will.
The resulting increase in the demand for Nestlé products will lead to increased sales and profits. Additionally, Nestlé can advertise its products in order to increase their demand. This is because customers are likely to purchase a particular brand if they have adequate information about its qualities and price.
Elasticity of Demand
Nestlé’s pricing strategy and competitiveness is likely to be affected by price elasticity of demand, cross price elasticity of demand, and income elasticity. Price elasticity of demand “measures the responsiveness of a product’s demand to a change in its price” (McEachem, 2010, p. 217).
Nestlé’s nutritional supplements are likely to have an elastic demand because they have a large number of close substitutes. Furthermore, the buyers of the supplements have low switching costs. Thus, they can easily shift from one brand of supplements to another in the event of a price change.
Cross price elasticity of demand “measures the responsiveness of the demand of a product following a change in the price of a related product” (McEachem, 2010, p. 230). In this regard, the demand for Nestlé’s nutritional supplements will increase if the price of their substitutes or competing brands increase and vice versa.
Income elasticity refers to the change in the demand for a product that occurs when the disposable income of its consumers changes. Since nutritional supplements are normal goods, their demand will increase if their consumers’ disposable income increases.
Resource Utilization
The company is utilizing its resources efficiently because it focuses on economy of scale in production. Its production plants, which are located in different counties, enable it to manufacture a large amount of products, thereby reducing the cost per unit produced, as well as, the distribution costs.
The company also uses lean production technologies in order to eliminate wastages (Nestlé, 2013). This enables it to produce the optimal level of output at low cost.
Macroeconomic Analysis
The macroeconomic factors that are likely to affect Nestlé’s success include economic growth, unemployment, inflation, business cycle, the balance of payment, and the exchange rate. A high economic growth leads to high income per capita and vice versa (Boyes & Melvin, 2010, p. 289).
Aggregate consumption usually increases when a country’s per capita income increases. Thus, a high economic growth will increase the demand for Nestlé’s products, whereas a low economic growth will reduce it. Consequently, the firm’s profits will be high during high economic growth and low during economic downturn.
Aggregate demand is usually high in countries with low unemployment rate. This is because consumption rises when a large percentage of the population is engaged in gainful employment (Abel & Bernanke, 2008, p. 378). Thus, Nestlé’s products will have a low demand in countries with high unemployment rate. On the contrary, the demand for its products will be high in countries with low unemployment rate.
Inflation refers to the percentage change in the prices of goods and services over a period such as a month. Ceteris paribus, an increase in inflation erodes consumers’ purchasing power, whereas its reduction improves consumers’ ability to purchase goods and services (Abel & Bernanke, 2008, p. 413).
Consequently, a high inflation will increase Nestlé’s production costs due to the increase in the prices of its inputs. The resulting increase in the price of its products will lower its sales and profits. On the contrary, low inflation will enable the firm to sell its products at a low price, thereby increasing its sales and profits.
The balance of payment (BOP) is a record of the transactions between one country and the rest of the world in terms of imports and exports (Boyes & Melvin, 2010, p. 371). A large BOP deficit is an indication that the country heavily depends on imports. In this case, Nestlé’s products are likely to face a high competition from imports if the country has a large BOP deficit.
An appreciation in the value of the dollar makes USA’s products to be expensive in foreign markets. This will lower the demand for Nestlé’s exports in foreign markets. On the contrary, USA’s imports will be cheaper than locally produced goods. Consequently, Nestlé’s nutritional supplements will lose their competitiveness. Nonetheless, the products will be more competitive than imports if the dollar weakens.
The business cycle has four phases namely, decline, recession, recovery, and boom (Boyes & Melvin, 2010, p. 461). Recessions are characterized by very low aggregate demand. Thus, Nestle is likely to make losses due to low demand for its products during a recession. On the contrary, an economic boom is associated with high aggregate demand (Arnold 2010, p. 213).
Thus, Nestlé’s sales and profits are likely to increase during economic booms. Aggregate demand usually reduces during economic decline and increases during the recovery phase of the business cycle. In these stages of the business cycle, Nestle can remain profitable if it is able to reduce its operating costs.
Conclusion
Nestlé operates in a highly competitive market that has a large number of producers and buyers. It can overcome the competition by reducing its production costs and marketing its products through advertisements.
Macroeconomic variables such as inflation, exchange rate, and unemployment have both positive and negative effects on aggregate demand. Thus, the company should take into account the levels of these variables when formulating its pricing and expansion strategies.
References
Abel, A & Bernanke, B 2008, Macroeconomics, Routledge, New York.
Arnold, R 2010, Macroeconomics, McGraw-Hill, New York.
Boyes, W & Melvin, M 2010, Macroeconomics, Palgrave, London.
Mankiw, G & Taylor, M 2011, Microeconomics, McGraw-Hill, New York.
McEachem, W 2010, Microeconomics, John Wiley and Sons, New York.
Nestlé 2013, About Us. Web.