Factors that Determine the Demand and Supply of Fast Moving Consumer Goods.

2296 words (9 pages) Business Assignment

5th Jun 2020 Business Assignment Reference this

Tags: Business AssignmentsFinanceConsumersSupply and Demand

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Introduction

The nature of fast-moving consumer goods (FMCG) prompts the marketers to come up with new promotional strategies every day. While businesses cannot survive without product promotional strategies it is important to understand the factors that lure customers towards purchasing a certain brand that is highly differentiated. Even though the presentation of messages and the nature of packaging play a great role in how consumers perceive these products, the factors of demand and supply play a critical role in determining the purchasing behavior.  This research shall specifically examine the factors that determine how consumers perceive the trends in FMCGs. It shall also examine the elements that motivate suppliers to bring their products to the markets.

Objectives

Thesis Statement: The research emanates from the argument that fast-moving consumer goods exist in a perfect competition kind of environment and as such the suppliers are price takers.

Thus the study pursued the following objectives.

i)    Identify the factors that determine the demand for fast-moving consumers goods.

ii)    Establish the elements that determine the changes in the supply of FMCGs.

iii)    Examine the importance of these demand and supply elements to the marketer.

Methods

Data Collection and Analysis

To establish the factors that determine the demand and supply of fast moving consumer goods the researcher designed a questionnaire where consumers were supposed to list the factors that determine their purchase behavior for these daily products such as toiletries, beverages, tooth paste over the counter drugs among others. Additionally, suppliers were given a different questionnaire where they were also asked to provide the factors that motivate them to take their products to the market. The respondents were also allowed to give explanations where necessary. The sample of the respondents were picked using random sampling method. The study thus had 30 consumers and 30 suppliers.

Since, the sampled respondent from 25 states after which the researcher forwarded an online questionnaire to the participants who had accepted to participate in this research. All the respondents returned their duly filled forms. The collected data was analysed using the excel spreadsheet tool and the output presented in form of graphs and tables.

The research design employed in this study had some limitations that would otherwise affect the conclusions that the researcher arrived at after the analysis. Firstly, the sample study was small and therefore it may not be optimally representative. Secondly, the time frame within which the results were obtained was quite short yet the market conditions are quite dynamic. The fact that the survey was conducted through an online platform it lacked the personal touch where the respondents could clarify some of their reasons. Nevertheless, the study ensured that it gets opinions from respondents in different locations within the united states.

Findings

The study collected data from adults who frequently purchase fast-moving goods as well as the sellers who were classified as suppliers. In total, the respondents were 60 comprising 36 women and 24 women. The consumers were 18 women and 12 men. Supplies, on the other hand, were 12 women and 18 men.

Table 1: Number of Participants

Gender Supplies Consumers
Male 18 12
Female 12 18
Total 30 30

Figure 1: Number of participants

Factors determining demand

The consumers were required to list the factors that motivate them to choose or stick to a certain brand of any fast-moving product. 26 respondents representing 88.7% listed price as the biggest factor that determine their choice of product A over B. 18 respondents felt that the income they earn would determine the frequency and the quantity that they purchase. Twenty-three consumers also noted that the availability of other products with the same uses often determined their purchase behavior especially when there were price changes. 19 participants further stated that the packaging and the frequency of advertisement would often lure them towards certain products. Fifteen consumers also listed their tastes as an important factor when purchasing some items such as soap, milk, toothpaste because they preferred certain flavors. As such, they would still purchase these products even when the prices changed.

Table 2: Factors Determining Demand of FMCGs

Factor Respondents
Price 26
Income 18
Availability of substitutes 23
Advertisements 19
Tastes and Preferences 15

Figure 2: Factors Determining Demand of FMCGs

Factors Determining the Supply of FMCGs

The suppliers were also requested to outline the factors that motivate to sell their products. All the suppliers stated that price was a major factor only that they had little control over the price since the products were highly differentiated. While the price was a major determinant, they were forced to match their prices to the relative market price. 29 participants listed the cost of production or obtaining the products as the core factor. Another 20 listed the cost of transportation as a major determinant. The nature of the population also determined the kind of FMCGs that these suppliers brought to the market. This factor was listed by 17 respondents. 12 respondents felt that the government policies also affected the goods that they brought to the market citing examples of over the counter drugs. 14 respondents pointed out the prices of related products as a determinant in their effort to supply their goods to the market.

 Table 3: Factors determining the Supply of FMCGs

Factor Respondents
Production cost 29
Transport cost 20
Population Orientation 17
Price of substitutes 14
Government Policies 12

Figure 3: Factors determining the Supply of FMCGs

Analysis of Findings

In this research, the respondents were not restricted to specific factors and as such, they were allowed to use their own words to describe the factors they thought determined why they made a purchase or decided to make a sale. Farmer (2013) defines fast-moving consumer goods as those products that are purchased quite often or sold frequently at low prices. They include items such as packed food, toiletries, body lotions and beverages among others. While these products are not classified as necessities because human beings can survive without them, modern households have made relatively necessary. The products are sold by many firms who simply attempt to differentiate them through packaging, and various flavors. Consequently, these products cannot be classified as purely normal goods and neither are they fully inferior goods.

However, the demand for these products is affected by changes in price as the respondents in this research stated. Additionally, the incomes of the consumers would affect the quantity purchased per cycle. For instance, low-income earners may not purchase expensive perfumes and body lotions. They will opt for cheap products as long as they satisfy their need to “smell nice.” Thus, the availability of substitutes come in as a strong factor for the sellers. Consumers who are not restricted by the prices and income will, however, focus on their tastes preferences as a determinant of which product to purchase.

The responses from the suppliers affirmed the fact that they have limited control over the price of the FMNGs. Nonetheless, some companies have set the price limits of these products making it difficult for new entrants to set higher prices. A majority of the suppliers pointed out the cost of factors of production as a determinant of the quantity they bring to the market. Generally, an increase in the factors of production forces the suppliers to pass the cost to the consumers through pricing. Therefore, when the factor cost is quite high they reduce the profits that the firms make especially in a highly competitive market.

The research thus established that the fast-moving consumer goods market in the United States somewhat operates in a perfect competition environment. According to Becker (2017), this market is characterized by many buyers and many sellers. As such the suppliers are price takers while the sellers are price takers. The market also has no barriers to entry and exit. As such firms can only maximize their output at the point where the marginal revenue is equal to marginal cost. Firms that attempt to sell their products at a price above P1 shall incur losses and hence they will exit the market.

Figure 4: Perfect Competition Market Structure

Unfortunately, the perfect market model is an ideal situation that was created by economists that may not exist in the normal world. Firstly, there is a component of the perfect flow of information and no transport costs. While the Americans have access to the components that provide them with information about the prices of various products in different states, the transport costs will always hinder perfect transference of these items. Moreover, another assumption of an ideal perfectly competitive market states that firms produce and sell homogeneous products. As observed in this case, the FMCGs market is highly differentiated. Each firm has its way of being unique even though the items being sold are either substitutes or complementary products. Lastly, the FMNGs market has price leaders who have set the pace, especially on pricing. Besides, consumers have the autonomy to choose the kind of goods that they purchase.

Rationale and the Implication to the Marketing Departments

The researcher while conducting the survey did not request the suppliers to state the size of their firms or their pricing policy. Since the majority of the suppliers stated that they could not set their unique price revealed that no supplier was a price leader. The research thus dismisses the assumption fronted in the thesis statement that Fast-moving consumer goods should be categorized in perfect competition. On the contrary, the market structure for the FMCGs is monopolistic in nature. Firstly, there are many buyers and sellers in this market just as is the case with perfect competition (Schweinberger & Suedekum, 2015). The price leaders can increase the prices marginally and the consumers have the freedom to choose the products that will satisfy their needs.

Resultantly, individuals promoting first moving consumer goods should not be afraid to popularize their items. One of the components that came out from the survey that affect the behavior of the consumer was an advertisement. Therefore, marketers should continue being as unique and creating lasting impressions in the minds of the consumers. The uniqueness of the product can even allow them to set a unique market price.

Conclusion

The research was prompted by a belief that the first moving consumer goods operate in a perfectly competitive market structure. Consequently, the research sought to establish the factors that determine demand and supply in the FMCGs market. The survey revealed that price affected demand, price of substitutes, tastes and preferences as well as the income of the consumers. The suppliers on their part stated that government policy, factor costs and the constitution of the population affected the quantity of the products that they brought to the market. Additionally, the researcher noted that the FMCGs market was highly differentiated and that consumers could make a choice of what they want to purchase. It thus concluded that this market structure is monopolistic and not a perfect market.

References

  • Becker, G. S. (2017). Economic theory. Routledge.
  • Farmer, N. (Ed.). (2013). Trends in packaging of food, beverages and other fast-moving consumer goods (FMCG): markets, materials and technologies. Elsevier.
  • Manders, J. H., Caniëls, M. C., & Paul, W. T. (2016). Exploring supply chain flexibility in a FMCG food supply chain. Journal of Purchasing and Supply Management, 22(3), 181-195.
  • Schweinberger, A. G., & Suedekum, J. (2015). De-industrialization and entrepreneurship under monopolistic competition. Oxford Economic Papers, 67(4), 1174-1185.

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