Main Products and General Characteristics of Al Ain Mineral Water Company - Case Study Example

TEAM MEMBERS Higher Colleges of Technology BAS Business Administration BUS 1103 – Economics for Managers BUS 1203 – Software Applications for Business 16 December 2013 Analysis of Al Ain Mineral Water Company A. Main Products and General Characteristics According to the company, Al Ain Mineral Water Company was established on August 5 1990 as an initiative of the late Sheikh Zayed Bin Sultan Al Nahyan. The first manufacturing facility was built on Khattam Al Shiklah Road in Al Ain, also known as the garden city of the United Arab Emirates (UAE). Al Ain produces one of the leading bottled water brands in UAE, particularly in the Emirate of Abu Dhabi where they are known as the number one choice among consumers. Aside from their strong domestic presence, the firm also exports their bottled water products to Bahrain, Kuwait, Qatar and Oman. In addition, Al Ain are exclusive bottled water suppliers to UAEs major international airlines, such as Emirates and Etihad. The company also has exclusive contracts with world-renowned hotels such as The Hilton, Emirates Palace and Raffles Dubai. The company brands its products Al Ain Pure Natural Bottled Water. The packaging range – from 100 ml. to 5 gallons – betrays a preference for the consumer, bulk-consumer and bulk-retail market segments . Al Ain also produces flavoured water. In recently integrating the Capri-Sun brand into their line-up of products; Al Ain achieved the company successfully achieved the top-selling juice brand position in the UAE within 12-months of its release. The company boasts of ultra-modern manufacturing facilities that are fully-automated and utilizes innovative processing techniques to ensure that customers receive top-quality bottled brands every time. The firm’s quality control is in strict accordance with the water manufacturing guidelines of the USDA and the Abu Dhabi Food Control Authority (ADFCA) Al Ain goes the extra mile in ensuring the quality of their products by regularly delivering samples to the ADFCA and accredited third-party laboratories. Moreover, the company ensures that all minerals added into their products are FDA-approved and all machinery used in manufacturing their products come from leading industry suppliers such as Husky, Erca and Illig. Al Ain has been recognized with local and international quality certifications, including the H.H. Sheikh Khalifa Award for Industry and Quality, ISO 90001, HAACP, and NSF certification. Al Ain is currently under the management of Agthia (PJSC), the leading food and beverage group of Abu Dhabi, under their consumer business division in UAE. The following are the core values maintained by Al Ain Mineral Water as they aim to deliver superior value to stakeholders. Consolidating and leveraging its leading brand position Bringing innovative high-quality products to consumers in line with their desires and needs Driving the growth of categories that they choose and, by servicing their customers in a reliable, efficient and profitable manner, forging enduring partnerships. Achieving organizational excellence through a corporate culture which makes Al Ain an employer of choice Being a socially responsible and environmentally friendly organization. B. Opportunity Cost of Production Like any for-profit company, the main consideration that a firm has to consider in their production decision-making process is explicit cost. Explicit cost is one half of the total cost that a company pays in the course of their production process, the other half being implicit cost. Explicit cost comprises the direct payments made by the company to third parties in the course of running the business; these include the acquisition of the factors of production, such as labour, capital and land. The company is heavily invested in the latest and most advanced technology used in the processing, bottling, and packaging of their mineral water. The cost of purchasing capital is immense and continuously updating their machineries to remain in line with their quality certifications should be a constant consideration for the firm. In addition to capital, one major explicit cost that Al Ain has to consider is their raw material, water. Although their plant is situated in an oasis with an abundant underground water supply, there is a dwindling supply of water throughout the region. Chances are, the local aquifers might completely run out in the next 50 years (Abu Dhabi Water Resources Master Plan). This suggests that Al Ain will soon face the threat of scarcity and therefore increasing prices in their primary raw material. Finding a new water supply or establishing a desalination plant are the evident solutions but they increase explicit costs. On the other hand, Al Ain must also take into consideration their implicit cost when it comes to their product line. Implicit cost is considered as foregone benefits when one takes an alternative action without making an actual payment. Excluding cash, it is the opportunity cost related to other decisions or projects, e.g. lost interest or income on funds, depreciation, and maintenance costs. PJSC has a variety of products under its wing, including Capri Sun and Monster Energy Drink; some products earn the firm more than others. Al Ain Mineral Water itself has a variety of sizes along with flavoured varieties. The firm does not have infinite production capabilities. Thus, Al Ain must balance production between the different varieties of beverages. An increase in the production of one variety would mean sacrificing another variety. Al Ain must take into consideration which varieties and package sizes are more popular and garner better sales than the rest. In doing so, production of a more profitable beverage can be increased while the less popular beverage’s production can be reduced, thus earning the company increased profits. C. Al Ain Water Company: Supply and Demand 1. Consumer Income Bottled water products from Al Ain Water Company are considered as normal goods. Normal goods are defined as goods whose demand increases proportionally with the increase in consumers’ income. However, in the case of bottled water, the increase in consumer income is not directly proportional to the increase in demand for the product. Consider the example where a factory worker currently buys 5 300mL bottles of Al Ain Mineral a day. If the next day his salary were doubled, it does not follow that the worker would start buying 10 bottles of water a day. Having said that, bottled water can therefore still be considered as a normal good but under the category “necessity good”. In the case of necessity goods, when real incomes increase by a certain percentage, the demand for the good tends to rise but by a smaller percentage (Sullivan & Sheffrin 68). Figure 1: Shifts in the Demand Curve Figure 1 shows an example of shifts in the demand curve according to an increase or decrease of income. D1 represents the original or baseline demand curve. When consumer income decreases the demand curve shifts to the left into D2; however, when income increases the curve shifts to the left into D3. 2. Prices of Competing Products or Services Al Ain has a great deal of competition in the Emirates; Gulfa, Masafi, and Aquafina are just a number of brands available in the market. As the law of demand states, as price increases, demand decreases and vice versa, ceteris paribus (assuming all other things constant). In this analysis, the price of the competitors is the influential variable. As an example, if the three brands mentioned above were to increase their prices and Al Ain maintained theirs, then the rational expectation would be that consumers would opt to buy the (now relatively) cheaper-priced Al Ain bottled water products. If, on the other hand, Al Ain were to increase prices ahead of the competition, then the quantity demanded for Al Ain mineral water would decrease. Again by representing the current demand by D1, a decrease in competitor’s prices would shift the demand curve to the right into D2 where quantity demanded of Al Ain mineral water would decrease due to its higher pricing (see Fig. 1). On the other hand, an increase in competitor prices would make the demand curve shift to the left, to D3, as quantity demanded of Al Ain Water products would increase due to its lower pricing, again with the caveat “ceteris paribus”, assuming competition did not offer greater value in terms of promotions, better packaging, or a celebrity endorser. 3. Number of Consumers Considering that this is a mineral water company and that it has already been categorized as a necessity good, one can easily state that there are is no specific market of consumers targeted by the product in terms of demographics, gender or age. However, income level is a consideration in terms of bottled water. Mineral water prices are quite high compared to other markets. Considering the clientele of Al Ain, institutional customers such as the hotels and the airlines, one can conclude that majority of their consumers are the middle to high income earners. An increase in the middle and high income earners of the population would lead to an increase in quantity demanded, thus shifting the curve at D1 to D3 ; inversely, if the number of middle to high income earners in the population would decrease then demand will shift from D1 to the right, to D2 (see Fig. 1). 4. Technology Al Ain ensures that the technology in their processing and manufacturing plants is constantly top-of-the-line and the most trustworthy brands available. Automation and efficient production is key to reducing the cost of production as it reduces the firm’s cost in terms of labour. Figure 2: Shifts in the Supply Curve A theoretical supply curve of Al Ain Water Company, where S1 is the present supply schedule, would be affected if Al Ain was to purchase more technologically advanced machines for the production plants (see Fig. 2). Al Ain would be able to produce more goods at lower cost. Therefore, regardless of an increase in manufacturing cost, the company would still be able to increase their quantity supplied, thus shifting the supply curve to the right, to S3. If Al Ain were to abandon their technological advantage and return to primitive machines that required more labor or refuse to upgrade to the next generation of technology for their plants, then it would increase their production cost and in turn would shift the firm’s supply curve from S1 to S2 with less quantity supplied. 5. Number of competitors The number of competitors is a key determinant in any capitalist market as the presence of competition plays a direct role in the regulation of prices and supply of the commodity in the market. In the case of Al Ain Water Company, aside from the three mentioned earlier, the firm also has to deal with Nestle, Arwa, Acqua Panna, Evian and Volvic mineral water brands that are available throughout UAE. The increased number of competitors means that there is an increase in the supply of available bottled water in the market. Thus, in accordance with the law of supply the entry of a new firm in the market would increase supply and thus decrease prices; conversely, if a firm were to exit the market, supply of bottled water would decrease and thus prices would increase, ceteris paribus. 6. Cost of Production Variable costs are always a concern for any firm as they are the “unforeseen” costs of a company and are subject to a great deal of changes. Any unanticipated major increase in variable costs can spell ruin for firm. In terms of variable costs, Al Ain is most concerned with the cost of raw materials. Governments throughout the region have begun to ration the use of water due to the decreasing reserves of the commodity (Todorova ). Thus, this could prove to be a scarcity problem for the firm and an imminent increase in raw material prices. An increase in the price of water would increase the cost of production thus shifting S1 to S2 (see Fig. 2). On the other hand, a decrease in the price of water would decrease the production cost, shifting it S1 to S2. 7. Government Regulation The Todorova report that increasing scarcity of the good will force government to regulate the use of water throughout the market catchment of Al Ain Water Company. This form of government regulation is another non-price determinant of supply. By limiting the use of water in the region the government has effectively controlled the supply of water in the market, thus increasing its price and, as mentioned in the previous section, affect the production cost of the firm. If government regulation continues to limit the supply of water in the market, Al Ain would either have to source their raw materials from other, farther sources and incur greater costs or decrease their quantity of goods supplied to the market. This would represent a shift from the current supply curve of D1 to the left to D2 (see Fig. 2). 8. Analysis of Price Elasticity of Demand Figure 3: Price Elasticity of Demand for Al Ain Mineral Water The price elasticity of demand refers to the responsiveness or elasticity of the quantity demanded of a good or service in accordance with a change in its price. (Klaiber 4) Computation-wise, price elasticity of demand gives the percentage change in quantity of goods demanded in response to every one percent change in its price, ceteris paribus. As already mentioned in previous sections, bottled water is a necessity good and therefore it has an inelastic demand curve. As it is in the nature of necessity goods, a percentage increase in its price results in a smaller percentage decrease in quantity demanded (see Fig. 3). Works Cited “Abu Dhabi Water Resources Master Plan”. 21 March 2009. Environmental Agency Abu Dhabi. 13 December 2013. Riley, Geoff. “Unit 1 Micro: Price Elasticity of Demand” 13 May 2012. A Level of Economics. 13 December 2013. Sullivan, Arthur and Steven Sheffrin. Economics: Principles in Action. Upper Saddle River, New Jersey: Pearson Prentice Hall. 2003. Todorova, Vesela. “Abu Dhabi Steps Up Efforts to Ration Groundwater as Depletion Looms”. The National. 3 January 2013. The National. 12 December 2013. . Klaiber, Allen. H. et al. “Estimating the Price Elasticity of Demand For Water with Quasi Experimental Methods”. 25 July 2010. Agricultural & Applied Economics Association.< http://ageconsearch.umn.edu/bitstream/61039/2/010260.pdf> Read More