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|Title: ||Market structure, conduct and performances of some selected Large and Medium Scale Food Manufacturing Companies|
|Authors: ||Yifru, Tafesse|
|Advisors: ||Dr. Rakesh Belwal( Assistant Professor of Management)|
|Copyright: ||2007 |
|Date Added: ||24-May-2008 |
|Publisher: ||Addis Ababa University|
|Abstract: ||The objective of this project work is to explain the characteristics of selected
pasta, macaroni and biscuits producing firms in terms of the industrial
organization model of structure-conduct-performance. The finding reveals that the
market is highly concentrated. The concentration of pasta and macaroni
producing firms as measured by CR3 of i.e. three of the firms producing pasta and
macaroni - Dire Dawa Food Complex, Kaliti Foods SC, and Kokeb Flour and
Pasta Factory have been dominating the market from 2002/03 to 2005/06 with a
concentration ratio of 76% to 46% respectively. As the concentration ratio
dropped from 76% to 46% due to new entrants so did the performances to a
certain extent. The combined performances of these three firms as measured in
terms of their operating profits and return on investment dropped from 7.75% to
0.19% and from 7.10% to 0.14% respectively in the period under review. The
return on invest was lower than the bank interest rate which proves the poor
performances of these firms.
Market entry in terms of capital requirement and access to quality wheat supply in
the pasta and macaroni business is higher than that of biscuits investment. That is
why the number of existing firms operating in the biscuits market are fourteen,
while that of pasta and macaroni markets are eight.
Like that of the pasta and macaroni producing firms, the biscuits market is
characterized by high degree of concentration. The concentration ratio (CR4) of
the four firms that was 53% in 2002/03 grew to 91% in 2005/06. Two of the firms
namely NAS Foods and 2Brother had 85% of the market share. NAS Foods alone
had 55% of the market in 2005/06, followed by 30% of 2Brothers. Although the
biscuits market is somehow concentrated, the market leader or dominant firm
does not charge higher prices at the retail level as that of Pasta and Macaroni
sub-sector. At the wholesalers level however, firms charge different prices with a
range of Birr 2 to Birr 4 per carton.
The overall average capacity utilization of the five firms covered in this study was
65% in 2006. Their capacity utilization in 2006 declined mainly because of
expansions made by Dire Dawa Food Complex on its pasta and macaroni lines
from 7272 tons and 7272 tons to 16059 tons and 18786 tons per year
respectively, and that of 2Brother’s additional biscuits line with a capacity of 6000
tons per year.
However the capacity utilization of individual firms vary significantly. Dire Dawa
Food Complex that contributes 67% (34845 tons) of the production capacity of the
three firms has contributed 68% (22956 Tons) of the total products produced in
2005/06. In terms of capacity utilization by product, pasta had higher utilization
rate (69%) than the rest of products. Dire Dawa Food Complex, the market leader
in the sector, had 70% capability utilization for pasta (Spaghetti) product, followed
by Kaliti Food SC at 69%. Kokeb and Kaliti Foods had relatively better capacity
utilization in 2006 although their combined capacity was much lower than that of
Dire Dawa Food Complex.
The average capacity utilization rate of the four biscuits producing firms in 2006
was the lowest in the sector i.e. only 47%. This below average performances were
attributed to the poor performances of the two firms, namely Dire Dawa Food
Complex (34%) and Kaliti Food Complex (3%). NAS Foods which leads the
biscuits industry had a capacity utilization of 97% followed by 2Brother, a
challenger in the industry, by 67%.
The evaluation of the five firms with the application of the structural-conductperformance
model of industrial organization reveals the following key findings:
• The Ethiopian food processing firms of pasta, macaroni and biscuits are
highly concentrated and mainly dominated by the two major firms, Dire
Dawa Food Complex and Kaliti Foods for Pasta and Macaroni Products
with a combined average market share of 55% from 2002/03-2005/06; and
NAS Foods and 2Brothers in the case of biscuits market with a combined
average market share of 85% in 2005/06.
• Competition among the biscuits firms is more intensive than the macaroni
and pasta markets due to the larger number of firms, and low level of
product differentiation although attempts are made to differentiate through
branding and advertised. However, there is a tendency where a dominant
firms are emerging in each case, followed by infringe firms that are
competing at low level.
• Market entry to pasta and macaroni manufacturing is more difficult than
biscuits production in terms of capital requirements and lack of access to
supply of quality wheat (or high cost of imported Durum wheat).
• Firms are not integrated be it is forward, backward or horizontal. Lack of
back ward integration has made firms vulnerable to lack of continuous
supply of raw materials that constitutes about 55% of the cost of production
for biscuits and 75% for pasta and macaroni production.
• Prices are not determined in consultation among rivals, no collusion. But in
the case of biscuits producing firms, NAS Foods, the market leader, sets its
wholesale prices higher than its competitors. At the retail level all the prices
biscuits of same sizes have uniformity. In the case of pasta and macaroni
market, Dire Dawa Food Complex, the market leader, Charges higher than
its rivals due to its brand preference among consumers.
• The profitability of firms measured in terms of operating margin except for
NAS Foods and Kokeb Flour and Pasta Factory that have continuous
growths reveals a discontinuous of growth of profits.
• The five firms had an average capacity utilization rate of 65%in 2006. The
three major reasons, besides expansions of production capacity of Dire
Dawa Food Complex and 2Brothers in 2006, for the poor performances
these firms were:
o Shortages of working capital has been ranked as the first reason for
not working at full capacity
o In inadequate supply of raw materials and inputs on time due to
o Lack of demand for their products and fierce competition has been
the 3rd reasons for poor capacity utilization mainly for the biscuits
producers of government owned companies.|
|Description: ||A Project Paper
Submitted to the School of Graduate Studies
of the Addis Ababa University in partial fulfillment for the
requirement of Masters of Business Administration
|Appears in:||Thesis - Business Adminstration|
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