A Research on Pizza in Bangladesh: Practical Analysis

Prepared For
Dr. A.K.M SaifulMajid Professor Institute of Business Administration, University of Dhaka

Prepared by
Z. FerdousNur-E-Shashi Sifat Ishtiaq Hossain TanzeerSiddiquee JarinTasnimNoshin Roll: 09 Roll: 10 Roll: 49 Roll: 50

BBA 19th batch, Institute of Business Administration, University of Dhaka Date: November 21, 2011
Table of Contents 1

Page No 1.0 2.0 3.0 4.0 5.0 6.0 Letter of Transmittal Executive Summary List of Figures List of Tables List of Abbreviations Body of the Report 6.1 Introduction 6.1.1 Origin of the study 6.1.2 Background 6.1.3 Current market scenario 6.1.4 Objectives and scope 6.1.5 Methodology Integrating 10 Principles into product research 6.2.1 How people make decision 6.2.2 How people interact 6.2.3 How the economy as a whole works Economic Model 6.3.1 Circular flow diagram Market and competition 6.4.1 Definition of market and competitive market 6.4.2 Is pizza market monopolistic? 6.4.3 Price comparison 6.4.4 Pricing Strategy 6.4.4.1 Skimming strategy for Pizza Hut and Dominos Pizza 6.4.4.2 Penetration Pricing for Pizza corner 6.4.4.3 Cost-plus pricing for Pizza Inn 6.4.5 6.5 Survey 20 04 05 06 06 07 08 08

6.2

10

6.3

15

6.4

16

Current Market Demand and Supply 6.5.1 Demand curve 6.5.1.1 Shift in the demand curve 6.5.1.2 Factors affecting current demand and shift in demand curve 6.5.2 Supply curve 6.5.2.1 Shift in the supply 6.5.2.2 Factors affecting current supply and shift in supply curve

6.6 Equilibrium 6.7 Elasticity 6.7.1 Price elasticity 6.7.2 Cross-price elasticity 6.7.3 Necessity or luxury 6.7.4 Graphs to show elasticity of supply 6.8 Government Policy 6.8.1 6.8.2 7 8 9 10 Conclusion Recommendation Reference Appendix Taxation and VAT Mobile Food court

25 25

27

28 28 29 29

1.0 Letter of Transmittal

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November 27, 2011

To, Dr. A.K.M Saiful Majid Professor Institute of Business Administration, University of Dhaka

Subject: Presentation of Report Sir, We are hereby presenting the report titled A Research on Pizza in Bangladesh: Practical Analysis, and assure you submission of our report in compliance with the instruction envisaged. Without your guidance and help this learning experience would not have been the way it has been. Hope you enjoy reading the report as much as we enjoyed writing and working for it.

Regards, Z. Ferdous Nur-E-Shashi Sifat Ishtiaq Hossain Tanzeer Siddiquee Jarin Tasnim Noshin Roll: 09 Roll: 10 Roll: 49 Roll: 50

2.0Executive Summary

Recently the pizza industry has boomed in our country. Consequently, sudden escalation of demand has incited a broad change in the pizza industry. Numerous factors affecting the demand and supply of pizza industry has come into play. We have done a detailed research on the current market situation in order to portray the new market context, and forecast probable market outcomes. Pizza is mainly geared towards the younger end of the market and the employees of the fast paced corporate world. Being a part of the developing countries, Bangladesh has her fair share of action. Today, Pizza Hut, Dominos Pizza, Pizza Inn and Pizza Corner are the only licensed pizza franchises in the country. The income levels of the pizza consumers have gone up and resulted in higher purchasing capabilities. The prices of substitutes of pizza(such as chicken broast/burger etc) have gone down due to extreme competition in those product markets. The prices of complements (such as sauce, garlic bread) of has gone down as well. But the change in taste is the most important factor affecting the demand of pizza. More and more people are consuming pizza. Moreover, several sales promotions have brought changes in expectations. So, as a whole the demand for pizza has increased. In case of the supply, due to the profitability in this market, many new firms have come forward to selling pizza. The cost of ingredients (wholesale price of cheese, bread) of pizza has also decreased. The technology involved in preparing pizza(oven, processes) has advanced. And on the wake of sales promotions, the suppliers even supply additional quantities. In fine, we conclude that the supply has increased for the pizza market. Putting the above two changes together, we find a higher price and a higher quantity of pizza sold.

3.0 List of Figures

1. Trade off

2. CFD 3. Survey a. Priority b. Market share c. Toppings preference 4. Demand curve 5. Supply curve 6. Equilibrium 7. Survey on consumption frequency

4.0 List of Tables:

1. Inflation rate schedule 2. Price comparison schedule 3. Demand schedule 4. Supply schedule

5.0 List of Abbreviations:

1. CFD: Circular Flow diagram 2. USP: Unique Selling Proposition 3. CSP: Central Selling Proposition 4. VC: Variable Cost 5. FC: Fixed Cost 6. MC: Marginal Cost 7. MR: Marginal Revenue

6.0

Body of the Report

6.1 Introduction

6.1.1 Origin of the Study: We are basically assigned to do the study by our honored faculty Dr. A.K.M. Saiful Majid. We were acquainted with some important Microeconomics concepts under his efficacious instruction. Now we are allotted to integrate those concepts with the product we are studying here.

6.1.2 Background:
Pizza is mainly geared towards the younger end of the market and the employees of the fast paced corporate world. The preparation and service times are relatively quick in case of pizzas. Pizza can be clearly distinguished from snack/confectionery items by its perishable nature. Being a part of the developing countries, Bangladesh has her fair share of action. Pizza was first introduced in Bangladesh in 2003 by Dominos Pizza at Mohakhali among all the international franchises. Later in the same year, Pizza Hut, the first International Chain Restaurant in Bangladesh, opened its flagship restaurant in 2003 at Gulshan. From the day of its launching Pizza Hut remains the acknowledged leader of the Pizza Industry, evident from the continuous crowds the restaurant successfully draws in. It was not until 2005, when the Pizza Inn and Pizza Corner franchise launched, that this industry truly began to escalate. Today, these four are the only licensed pizza franchises in the country.

6.1.3 Current Market Situation:

With the recent increase in the price of key pizza ingredients like meat, cheese and wheat, the costs of production elevated, consequently making a large hit to the pizza industry. In an attempt to restart sales, pizza franchises offered a variety of promotions, altering their marketing strategies through websites and other forms of social media. As a result, innovative trends like Hilsha Pizza and World Cup Pizza soon proliferated across the pizza industry, reviving the industry after its decline during the price increase in key ingredients. Now, pizza franchises are always inventing new innovations to the traditional pizza concept, consistently keeping their business up to date with current trends in the food industry. One of the greatest highlights of the pizza industry is its high versatility and customization for consumer preferences. In our survey, we discovered that 86% of pizza lovers would like to choose their own toppings rather than order a pre-customized pizza.
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Additionally, Bangladeshi fast food lovers have started to trend away from dining out and towards take out and fast-delivery foods. These quick-service pizza concepts allow people to take advantage of the new technologies that are available at home, all the while subtracting the extra fees from tips, drinks, and gas. What could feed a hungry family better than a heaping stack of hearty pepperoni pizzas? In a survey conducted by us, we found out children of ages 8 -13 claim to prefer pizza or burger out of all lunches and dinner selections. Despite the concentration in Bangladeshi families and the stigma that they prefer rice over any other fast food item, pizza has proved to be popular among people of all ages up to 40. Bangladeshs social media network is more involved than ever before, and pizza franchises are taking advantage of this recent trend in their marketing strategies. For example, nearly one half of pizza eaters will search for recommendations on blog sites or Facebook before deciding on their purchase. Additionally, ordering online and through text messaging is a youth-targeted trend that is expected to continue to expand in the future. In fact, in our survey we found out that only six percent of people in Dhaka have ever placed a pizza order online. All in all, pizza franchises are constantly on their toes, revamping their business strategy to maintain long term profitability. As long as this sense of innovation never runs dry (and so far, there is no evidence that it will) the pizza industry will continue its success in the future.

6.1.4 Objective & Scope:

Our objective here is to relate the Microeconomics concepts that we learned throughout the semester with the product that we chose. Our product is Pizza. It is more clearly the practical implication of the concepts that we accomplished through our learning process. The bright sides are Theories of Microeconomics were elaborately described in the class. Real-life examples related to the theories were also cited which made the learning an easier process. A workshop regarding the making of the report set a pattern of an ideal report before us. It is easier to relate our product to the concepts that we studied since we all have a generalized idea about it. We all are well-aware of the reliable external information sources which incited a veritable flow of information. In spite of all these we still undergo through some limitations Since we are no experts on Microeconomics so there might be some amateurish slips. And we hope those will be considerately pardoned by our wise and judicious examiner. Our report may hold slight deviations from the ideal report writing which we are hoping to knock out by our authentic and arduous effort.

But there is no exception of trying hard. So accepting all our limitations we focused on our strength and came up with the report.

6.1.5 Methodology:
Our methodology constitutes all the tactics we implemented to do the study. The tactics are Studying few widely appraised Microeconomics books and journals. Advices and instructions from our erudite professor. Sharing of our knowledge regarding the Microeconomics concepts that we used during the study. Effective brain-storming through group discussion. Surveys (questionnaire) done on both consumer and market level. Internet research. Data gathering. Data processing and analysis. Face-to-face interviews of few persons directly associated with Pizza market.

Integrating 10 Principles into product research

6.2 Ten principles of Microeconomics: 6.2.1 How people make decisions

The 1st four sets of principles are all about how people make decisions. Its because behavior of economy reflects the behavior of the individuals who make up the economy. So study about individual decision making is important.

Principle 1: People face trade-offs Making decisions calls for trading off one thing against the other. That is to get one thing we like we have to give up the other thing we like. Now in case of consuming Pizza we have to fight against our appetite for chicken fries, burger or sandwiches. We have to eat either of these food items. It is because we lose the appetite for the other if we have one of those. Money constraints are also involved here because these food items are not that cheap. Moreover the food shops which serve good chicken fries, burger or sandwich rarely serve good pizzas. We generally go for good pizza shops if we feel like having pizzas. Best examples for this is if we want to go to Pizza Hut for lunch then more likely we are in no state of going to KFC afterwards. So trade-off is clearly visible in case of Pizza. We did a survey on 50 people about what they would prefer among pizza, chicken fries, and burger.

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5% 15% chicken fries/burger 50% pizza anyone of them none 30%

25 of them answered with chicken fries or burger and 15 with pizza. So a clear and distinct trade-off is visualized here. Principle 2: The cost of something is what you give up to get it Since people face trade-offs so while decision making comparing costs and benefits of alternative courses of action is crucial. Now if one chooses to have pizzas instead of chicken fries, burger or sandwiches most likely the other food items are the costs here. Here comes the concept of opportunity cost. Opportunity cost is whatever must be given up to obtain some item. So opportunity cost here is the satisfaction that we were supposed to get after having the food items other than pizzas. More incisively, we are also giving away our traditional food habit and leaning to outside- home food if we have pizza on a regular basis. So these could be included as opportunity costs as well. Principle 3: Rational people think at the margin Rational people systematically and purposefully do the best they can do to achieve their objectives, given the opportunities they have. Their decision making is often tempted by comparison between marginal benefits and marginal costs. Here benefits of consuming pizza might be satisfying appetite for having it or savoring Italian dishes. This is absolutely dependent on individuals personal taste. The costs here is the money we are paying for it, the health complications (e.g. obesity, acidity etc.) we face due to over eating pizzas or our apathy towards the traditional foods. Rational people would balance their personal satisfaction and costs of having pizza. They would rather have pizza occasionally rather than regularly to differentiate everyday food course. This wont cost them much and wont make a disadvantageous effect on their health. Principle 4: People respond to incentives

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As rational people take decisions comparing costs and benefits, so subsequently they will respond to incentives. An incentive is something (such as the prospect of a punishment or a reward) that induces a person to act. In case of pizza consumption, customers bump in while there is a discount offer in pizza shops. The Ramadan offer of Pizza Hut which includes unlimited pizzas and drinks at a fixed reasonable price is quite a good example of this. This has been a successful move due to customers huge response. Pizza Hut also publishes newspaper advertisement on arrival of a new pizza. Pizza lovers cant do without responding to the scrumptious looking pizzas as they go through the newspaper. A survey of ours among people of 15-25 age group shows that out of 30 people go to Pizza Hut during the Ramadan offer and 21 people plan to taste the new pizza after the watching the newspaper advertisement. All these actions bear witness to the above principle.

6.2.2 How people interact

If we think really deep then we can realize that many of our decisions are also molded by other people. They can get to influence us mainly because of the interaction that takes place among us. So the following three principles bear on how people interact with each other. Principle 5: Trade can make everyone better off Trade brings in the competition and thus allows each one to specialize in its strong points leaving the whole market a better exposure. In our pizza market a feeble competition lies between Pizza Hut and Dominous Pizza. Pizza Hut rules out the later because of its superior food quality and better taste. But the later provides pizza for a cheaper rate and already created a market of its own for the customers who prioritize price over quality. But both the shops are trying continuously to improve due to the competition they will be facing if they start going to other shops. Eventually we the customers are having better quality and yummy pizzas more than before and the shops are making profit out of it. So it is harmless on both ends. Principle 6: Markets are usually a good way to organize economic activity A market economy is an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. So the principle states that markets are a good place to practice organized economic activities. Economists Adam Smith talks about an invisible hand here which serves both the sellers and buyers to get desirable outcomes. Price is a very important factor here. Pizza Hut first opened its branch at Gulshan in 2003 making it available only for the high income range people. Later it focused on outside Dhaka market and opened another branch at Chittagong. Then it planned to broaden the market by including higher middle class people and initiating a third branch in Dhanmondi in 2008. Finally it came down to middle class with a fourth branch in Baily Road. It also made adjustments to its pricing in a subsequent manner. It initiated divisions like normal, small size, crusted, vegetarian etc. to serve all age groups, all income ranges and people of all tastes. So market is a big factor in economy. 12

Principle 7: Government can sometimes improve market outcomes Government ensures property right and certain other policies making the market a fair ground for both the service providers and the customers. Property rights assure the ability of an individual to own and exercise control over scarce resources. This is what ensures the rights of the pizza shops over the things they produce and serve. Moreover, government allowed Transcom Food LTD to work as franchisee for Pizza Hut under the franchising policy of our country. This is how our government let the pizza shops do their businesses and make money. On the customers end, we are provided with tasty pizzas as government allows the pizza shops to do so. Moreover, we are paying VAT (generally9%- 15%) on the pizzas we are having which is increasing governments money. This money will later on be allocated for public welfare. So we can estimate that government can play a vital role even in this moneymaking market economy.

6.2.3 How the economy as a whole works

In first seven principles we talked about decisions and interactions which all together make the economy. The last three principles deal with how the economy as a whole works. Principle 8: A countrys standard of living depends on its ability to produce goods and services This principle puts stress on the relationship between a countrys standard of living and its productivity. By productivity we mean the quantity of goods and services produced from each our of a workers time. US rank 6 in living standard list and Bangladesh ranks 96. That surely incurs a big difference in our productivity. Pizza production is also no exception as well. Pizza Hut in Gulshan and Dhanmondi alone earns Tk. 400-450 thousands daily. In the US pizza accounts for more than 10% of all food service sells with an annual sales of approximately $6 million. And 94% of Americans have pizza every day. So pizza production and consumption has a lot to do with countrys living standard. Principle 9: Prices rise when government prints too much money This principle is concerned with inflation. Inflation means an increase in the overall level of prices in the economy. The main reason behind inflation is the growth in the quantity of the money. When a government creates large quantities of a nations money, the value of money falls. Sometimes this inflation leads to syndication i.e. the state when the market goes under control of a specific group. This results in unreasonably high pricing of goods and commodities.

Country Bangladesh

1998 9

2000 5.8

2002 3.1

2003 5.6

2004 6

2005 7

2006 7.2

2007 9.1

2008 8.9

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In 1998, inflation rate on consumer prices was 9% and in 2010 it was 8.1%. The inflation rate was highest in 2007 which was 9.1% and lowest in 2002 which was 3.1%. Though inflation is omnipresent here, it didnt show any drastic change in product pricing. In case of pizza pricing, according to the information that we collected from the authority is that back in 2004, Pizza Hut used to charge Tk. 250 for a small size pizza and right now the price of small pizza is in between Tk.260-380. So inflation has meager effect on pizza pricing. Principle 10: Society faces a short run trade-off between Inflation and Unemployment According to most economists, inflation i.e. increased amount of money is followed by more spending and rise of demand for goods and services. Now to meet up this raised demand quantity of goods produced should be increased which results in more hiring. Eventually more hiring of workers stands for lower unemployment rate. Though most economists agree on this, this effect is rather short-run. Since inflation has its least effect on pizza pricing so this principle really doesnt work here. But regarding unemployment issue pizza shops here are offering quite a good number of job opportunities.

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6.3

Economic Model
6.3.1 Circular Flow Diagram

Revenue Pizza sold

Markets for Goods and Services: -Firms sell Pizzas -Households buy Pizzas

Spending on Pizza Pizza Bought

Firms: Dominoes, Pizza Hut, Pizza Inn, Pizza Corner -Hires waiters, chefs and management staff -Produces and Sells Pizza

HOUSEHOLDS: Buy Pizza Owns and Provides labor, capital and land required for pizza making.

Wages of waiters Capital of Investors Floor of landlords Markets for Factors of Production: Wages, Salaries, Profit Capital Markets(DSE, private investment) Labor Market Land market Land, Labor and capital

Income for Households

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Circular flow diagram of pizza industry:

The outer loop of the circular flow diagram represents the flow of Taka. Households spend money to buy pizza from the firms and the firms sell the pizza to the households and receive revenue. The households spend their money(income) on pizza. So, the flow of money is perceptible. The inner loop of the circular flow diagram represents flow of pizza and services. Land, labor and capital flows into the firms in exchange of the income and Pizza is transferred to households in exchange of the price.

6.4 Market and competition:

6.4.1 Definition of Market & Competitive Market:
By market we mean a group of buyers and sellers of a particular good or service. Markets exist because we arent self-sufficient but instead consume many products produced by other people. A typical person is not self-sufficient but instead specializes by doing a particular job and uses his or her earnings to purchase goods and services. A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

6.4.2 Is Pizza Market Monopolistic Market?

Analysing the pizza market in our country we have reached a conclusion that we have a monopolistic competition. The main reason is more than half of market share is possessed by Pizza Hut as per our survey. Though Pizza Inn maintains a reasonable share as well, the other two have least and negligible share. Other than that we can discuss the three main characteristics of monopolistic market here. Those are Many sellers: In this report we talked about Pizza Hut, Pizza Inn, Dominos and Pizza Corner. But there are other non-branded pizzerias as well. Some other food shops also include pizza in their menu. So apparently presence of many sellers in pizza market is evident.

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Slightly differentiated products: If we all go through the menu of those four pizza shops well barely find any identical names there. Pizza shops differentiate the names of their pizza for the sake of attracting the customers and it also helps them to justify the different pricing strategies they follow in pricing their trademark dishes. Each seller may set price for its own product: Each of the pizzerias follow different pricing strategies and that allows them to price their menu accordingly. So there is a slight difference in prices. So it can be inferred that pizza market of our country is undergoing through a monopolistic competition. More of the evidences appear in the next section.

6.4.3 Price Comparison:

Pan Pizza Pizza Hut price Dominos Pizza price Smal Med l ium 250 250 490 490 Larg e 890 890 Pizza Inn price Pizza Corner price

Smal Med l ium Beef Chicke n Cheese Vegeta bles 260 260 500 500

Larg e 900 900

Smal Med l ium 240 240 470 470

Larg e 870 870

Smal Med l ium 230 230 450 450

Lar ge 850 850

210 210

380 380

700 700

220 220

400 400

720 720

230 230

440 440

800 800

200 200

380 380

650 650

6.4.4 Pricing Strategy

6.4.4.1 Pizza Hut and Dominos: Being the leaders in the global pizza market as a whole, both Pizza Hut and Dominos Pizza use market skimming pricing strategy, a strategy where high initial price is set to skim revenues layer by layer from the market. For market pricing strategy to function properly, the products quality and image must support its higher price and enough buyers must want the product at that price. Again, the costs of producing a smaller volume cannot be so high that they cancel the advantage of charging more. However, Pizza Hut has used this strategy far better than Dominos Pizza. From the price comparison table we can see that the price of beef and chicken pizzas offered at Pizza Hut and Dominos Pizza are relatively similar. The same goes for cheese and vegetable pizzas. But as we have discussed before, Dominos Pizza has failed to capture the Bangladeshi pizza market as opposed to Pizza Hut due to poor marketing strategy. As a result, the globally recognized and esteemed brand name of Dominos Pizza has not worked in their favor. On the contrary, the market demand and brand name of Pizza Hut has flourished manifolds in the meantime. 17

So we can conclude that Dominos Pizza needs to change its pricing strategy to compete with Pizza Hut in Bangladesh.

6.4.4.2 Penetration Pricing for Pizza Corner: Pizza corner is a relatively new player in the pizza market and it intends to enter the pizza market with a lower price proposition. They currently have the lowest price and they are increasing their share of market with this price. Cost-Plus Pricing for Pizza Inn:
A pricing method used by companies to maximize their profits. The firms accomplish their objective of profit

maximization by increasing their production until marginal revenue equals marginal cost, and then charging a price which is determined by the demand curve.

6.4.5 Survey on pizza:

We have done a survey among 50 people a few questions. Then analysing the data we came up with following chartsThe first chart is about the first thing that comes to a customers mind while choosing which pizza he/she would consume.

16 14 12 10 8 6 4 2 0 Brand Price Taste Quality

It is evident that most of them go for a better brand and then there is a slight difference in terms of price and taste. Quality is least considered as the customers assumed that it comes with brand factor. In case of brand choosing we again asked them questions and the following pie-chart shows the result.

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Pizza Hut

Pizza Inn

Dominos Pizza

Pizza corner

9%

6%

51% 34%

So we can see Pizza Hut grabs the more than half of the customers and is followed by Pizza Inn. Dominos pizza and Pizza Corner hold least shares. Finally we wanted to know about the taste of the customers about their pizza topping and the chart went on like this-

Cheese

Vegetable

Mushroom

Chicken sausage

Beef sausage 0 5 10 15 20

Here beef sausage and chicken sausage topping have minimal differences in terms of customers demand. They are followed by cheese, mushroom and vegetable toppings.

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6.5 Current Market demand and Supply:

6.5.1 The demand curve for Pizza market:
The demand curve for pizza basically demonstrates the relationship between price and quantity demanded. The quantity demanded explicates the amount of pizzas that buyers are willing and able to purchase. According to the law of demand, The price of pizzas and the quantity demanded are negatively related to each other. When price of the pizzas are more, the quantity demanded grow lesser. The decline in price sets the bar for quantity of pizza demanded much higher. The following demand curve verifies the fact.
600 500

Price
400 300 200 100 0 0 200 400 600 800 1000 1200

The quantity demanded Here we can see that when the price is lower the pizza sells much and rise in price cuts down the sale. The negative relation between price and quantity demanded is better clarified in the demand schedule below: Price of Pizza (in TK.) 275 425 550

quantity demanded 1050 700 450

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6.5.1.1 Shifts in the demand curve:

The demand curve for pizza depicts how much pizza people buy at any given price, holding constant the many other factors that might influence consumers buying decision. As a result, this demand curve doesnt need to be stable over time. If something happens to alter the quantity demanded at any given price, the demand curve of pizza will shift or move. For example, if the price of pizza starts to fall, the demand for pizza will rise according to the law of demand then it will cause a movement along the demand curve. But if in case it is revealed that kitchen of the pizza shops are not hygienic then people tend to have less pizza although the price remains unaltered. In this case, the demand curve will shift from right to left. Factors responsible for shift in demand curve of pizza: Income:

Income is an important issue for the consumers when it comes to their demand for pizzas. Pizza is a normal good. So when the income of a pizza lover rises, then he or she will spend more money for pizza consumption. On the other hand, if he/she loses job or experiences a cut down in income, he or she is likely to spend less for pizza consumption. Price of related goods: a. Substitutes: Changes in the price of substitute goods tend to cause changes in demand of main good. Chicken fries and burger are the main substitutes of pizza. Changes in price of any of these items can cause noticeable change to demand of pizza. So we can infer that, if the price of chicken fries/burger tends to fall, demand for pizza will become less. b. Complements: Sauces like tomato sauce, garlic sauce etc., mayonnaise and beverages like Coke, Pepsi, Sprite, Mountain Dew etc. are the complements of Pizzas. When price of pizzas fall then we have more pizzas subsequently raising the demand bar for sauces and beverages. It is because we are to consume beverage and sauce along with more pizzas. Taste:

This is a very important determinant of customers demand for pizzas. More people are now eating pizza. The taste of people have changed and this one of the main reasons of the big increase in demand of pizza. Now there are certain aspects the change in tastes. Considering the fact of diversified taste of their customers, the pizza shops bring variations in toppings and breads.

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Topping: Toppings like beef sausage, chicken sausage, mushroom, cheese, onion, vegetable etc. are available to satisfy customers of all tastes. Bread: Breads are differentiated with sausages making the two categories for pizzas- plain bread or sausage bread. Pizza Hut even has the freedom for the customers to customize their own pizza incurring some extra charges. So, demand for pizza increases if the customers are satisfied with taste and vice versa. Expectations:

Expectations about future might affect demand for the present. Pizza Hut offers an unlimited pizza consumption offer during Ramadan. This is happening for past few years. So customers might expect the same for next Ramadan. Now if he feels like having pizza just a week before Ramadan then his future expectation about coming Ramadan might diminish his demand for a time being. Again if someone is expecting of running short of money at the end of the month he would inhibit his demand for pizza at that moment. This is how expectations make a demand shift. Number of buyers:

We all know that market demand is a summation of individual demands. So, when number of buyers in the market increases, no matter what the price is the demand increase and experiences a shift. In case of pizza assumption it can be induced that demand for pizza has increased over time. It is only because pizza is being a popular dish among general people especially the youngsters and eventually number of buyers increased.

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6.5.2 The supply curve for Pizza market:

The supply curve for pizza basically pictures the relationship between price and quantity demanded. The quantity demanded is the amount of pizzas that sellers are willing and able to sell. According to the law of supply, The price of pizzas and the quantity supplied are positively related to each other. When price of the pizzas are more, the quantity supplies rises. The turn down in price keeps quantity of pizza demanded much lesser. This has been testified in the following supply curve700 600 500 400 300

Price

200 100 0 0 200 400 600 800 1000 1200

Here we can see that when the price is lower the pizza supply decrease and rise in price cuts increase the supply. The positive relation between price and quantity demanded is better clarified in the supply The quantity supplied schedule belowPrice(in TK) Quantity supplied 575 1000 425 700 300 500

6.5.2.1 Shifts and movement in supply curve:

The supply curve for pizza shows how much pizza producers offer for sale at any given price, holding constant all factors other than price that influence producers decisions about how much to sell. This relationship can change over time, which is represented by a shift or a movement in the supply curve. If 23

supply increases with the increase of product price, it will cause a movement along the supply curve. But if the supply changes even for the constant pricing, it will cause a shift in supply curve. When the price of cheese or bread rises, company will buy less cheese or bread with the previous investment and thus produce less supply causing a shift in supply curve.

6.5.2.2 Factors responsible for shift in demand curve of pizza:

Input price: Cheese, bread, sausage, machine are some of the basic raw materials for pizza preparation. Besides, production buildings and labor forces are also considered as input price for pizza preparation. Change in cost of any of these inputs is responsible for the change in pizza supply. Rise in input cost will cause less supply and cost reduction in inputs causes increases in production and thus increase in supply. Let us consider the example, for some reason, the price of cheese falls down. Pizza production companies will tend to buy more cheese with previous investment which will allow them to prepare more product than before and thus increase the supply for pizza. Availability of raw materials: Availability of raw materials is another issue for supply shifting. If the amount of bread production decreases because of the occurrence of natural disaster, supply of pizza will decrease because of the shortage or unavailability of raw material. Technology: Advancement of technology has increased the production amount and decreased time and labor forces. It has also reduced the cost of production. Mixers, pizza making oven are some of the pizza making machineries. These things have substituted the labor force and raised the supply of pizza.

Numbers of sellers: Number of sellers also affects the supply of pizza. The more the sellers selling pizza products, the more the supply increases. Expectations: Future expectation is another factor causing shift in supply curve. If the pizza business expects the price of pizza to rise in future, it will put some of its current production into storage and supply less to the market in present. It might make them to gain more profit in future by selling pizza in higher price.

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6.6 Equilibrium:
The figure below shows the equilibrium point of market of pizza. The down-sloping curve shows the demand curve and the upward sloping curve shows the supply curve.

700 600 500 400 300 200 100 0

200

400

600

800

1000

1200

The above graph portrays the state of equilibrium in the pizza market. Equilibrium is a situation in which the market price reaches such a level at which quantity supplied equals quantity demanded. Up above, the figure displays that demand and supply curve merges at a certain point. This intersecting point stands for what we call market equilibrium. Equilibrium price is the price that balances quantity demanded and quantity supplied. At this price the quantity of pizzas that the buyers are willing and able to buy exactly balances the quantity of pizzas the sellers are willing and able to sell. This is also called market-clearing price since this price satisfies all. According to our research our pizza market will acquire an equilibrium stand if we manage to keep the price per pizza Tk.425 and if the quantity of pizzas can be limited to 700. But this situation has a very low probability factor. So we are yet a far away from establishing equilibrium in our pizza market.

6.7 Elasticity
6.7.1 Price elasticity:
Price elasticity seems to have an enormous effect on pizza production. Price elasticity is a measure of how much quantity demanded/supplied of a good responds to a change in the price of that good. It is computed as the percentage change in quantity demanded/supplied divided by the percentage change in price. Variation of price staggeringly alters pizza consumption. We can exemplify this with Pizza Huts Ramadan Deal 2011 which offered customers to have pizza as many as they can and bottomless Pepsi at an amount of Tk.699 for 1st 15 days of Ramadan and Tk. 799 for last 15 days. This offer increased the daily sales of Pizza Hut by 70%. 25

So the above example clearly speaks for price elasticity.

6.7.2 Cross-price elasticity:

This is a measure of how much the quantity demanded/supplied of one good responds to a change in the price of another good. This is computed in percentage as well. This has feeble effect on pizza pricing. Cross-price elasticity is visible when price of necessary ingredients for pizza preparation increases. When price of white flour (a major pizza ingredient) went up by Tk. 20 this month the price of pizza in normal pizza shops increased. This also lessened the pizza consumption by 4%. But in case of branded pizzeria like Pizza Hut and others it showed negligible effect.

6.7.3 Necessity or luxury?

Pizza here is a way far from being a necessity. First of all this is not our traditional food item. Even pizza was officially brought here in 2004. But it cant be called a luxury anymore. It is because it has gained popularity among youngsters here.
16 14 12 10 8 6 4 2 0

This is a survey done among 50 people of 15-25 age groups about their pizza consumption. 15 of them consumed pizza more than twice a month. So we can visualize pizza in the transition state gradually leaning towards being a necessary good. Considering all the above mentioned points and logics we can conclude that pizza is a moderately elastic as a food item.

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6.8 Government policy and rules:

6.8.1 Taxation & VAT
Value Added Tax or VAT was first introduced in 1991 by Bangladesh Government. The important aspects of the VAT policy are(i) VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels. (ii) A uniform VAT rate of 15 per cent is applicable for both goods and services. (iii) 15 per cent VAT is applicable for all business or industrial units with an annual turnover of Taka 2 million and above. (iv) Turnover tax at the rate of 4 per cent is leviable if annual turnover is less than Taka 2 million. (v) VAT is applicable to all domestic products and services with some exemptions. (vi) VAT is payable at the time of supply of goods and services. (vii) Tax paid on inputs is creditable/adjustable against output tax. (viii) Export is exempt. (ix) Cottage industries (defined as a unit with an annual turnover of less than Taka 2 million and with capital machinery valued up to Taka 3, 00,000) are exempt from VAT; (x) Tax returns are to be submitted on monthly or quarterly or half yearly basis as notified by the Government. (xi) Supplementary Duty (SD) is imposed at local and import stage under the VAT Act, 1991. Existing statutory SD rates are as follows: On goods: 20%, 35%, 65%, 100%, 250% & 350% On services: 10%, 15% & 35%. (xii)Tax Base for VAT in import stage: Customs Assessable Value + Customs duty + Supplementary Duty Pizza shops here are the service providers and the same VAT policy applies for them making the money flow fair for everyone.

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6.8.2 Mobile food court

The mobile court was found by the government in April 3rd 2005 to battle the unhealthy and unethical practices of the corrupt restaurant owners all over the country who did not hesitate to serve impure food containing harmful substances for their benefit. A couple of loyal and trustworthy officials, led by Magistrate Rokon Ud-Doula, were handpicked for the task who would not fall for any bribe by any means. It was found that innumerable restaurants in Dhaka and other parts of the country serve unadulterated, stale food with detrimental substances which is sure to inflict serious damage to our health. From the makeshift ones to the big ones no restaurant could avoid being inspected and most of them were fined severely for unsatisfactory standard of hygiene. The main reason this endeavor was successful is because of the level of harshness and sever ness it implied. They not only heavily fined the condemned shops, but they also arrested the owners of these shops and put them in prison. Furthermore, the government introduced a bill in the national parliament proposing a fine of Tk. 75,000 and one years labor imprisonment for convicted if they are caught for the first time. For the second time, the fine will be augmented by 1 lakh more and the duration of imprisonment will be three years. (Law and our rights, 207).This caused a major upheaval among the food court owners and the majority of them took head and improved their shops as much as they could. All these government initiatives helped to protect the customers from food adultery and ensured proper share on the profits of pizza shop owners maintaining transparency.

7.0 Conclusion:
The increasing raw material prices for making pizza are a source of concern for all franchises involved in the pizza value chain and also for consumers as a whole. With the increasing demand that has been continuing since 2003, the three franchises apart from Pizza Hut have been unable to cope with the change in the demand-supply scenario, having suffered chronically from mismanagement issues and inability to reap substantial benefits from favorable public policies. If issues of high prices of the key ingredients for making pizza are not resolved, the adverse effects will hinder the business progress of all the franchises, even that of Pizza Hut.

8.0 Recommendations:
On a micro level, the following suggestions would help the pizza franchises in Bangladesh to minimize the adverse effect of price increase of key ingredients for making pizza: Buy raw materials while sharing individual auction lots with other buyers so as to minimize the upward push excessive bidding exerts on prices Purchase higher volumes at the auctions so as to gain further bidding power and influence over auction prices Evaluate the possibility of introducing imported blends of ingredients so as to counter the diluting effect current high pizza prices have on portfolio margins

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9.0
1. 2. 3. 4. 5. 6. 7.

References:
Principles of Microeconomics; N Gregory Mankiw; 4th Edition Economics; Paul A. Samuelson and William D. Nordhaus; 15th Edition Microeconomics; Robert S. Pindyck, Daniel L. Rubinfeld and Prem L. Mehta; 7th Edition www.pizzahut.com.bd www.pizzainn.com.bd www.wikipedia.org www.theeconomist.com

10.0 Appendix:
A. Ten Principles of Economics: i. ii. iii. iv. v. vi. vii. viii. ix. x. People face trade-offs The cost of something is what you give up Rational people think at the margin People respond to Incentives Trade can make everyone better off Markets are usually a good way to organize economic activity Government can sometimes improve market outcomes Countrys standard of living depends on its ability to produce goodss and services Prices rise when the govt. prints too much money Society faces a short-run trade-off between inflation and unemployment

B. Circular Flow Diagram: Visual model of the economy, that shows how money flows through the firms and households. C. Law of demand: The claim that, the other things unchanged, the quantity demanded of a good falls when the price of a good rises. D. Law of Supply: The claim that, the other things unchanged, the quantity supplied of a good increases when the price increases E. Law of Supply and Demand: The claim that, the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance. F. Elasticity: A measure of responsiveness of quantity demanded or supplied to one of its determinants. 29

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