Dr. Ray Wooden
May 02, 2016
This economic analysis will focus SaniTea (Sanity), a high end specialty tea company. SaniTEA operates within the retail and wholesale ready to drink tea industry. The company is a subsidiary of Bozeman Holdings Incorporated. SaniTea headquarters is located in Newark, New Jersey. We operate an online website where customers can choose from our assortment of high end premium teas. There are also six storefront locations within the New York metropolitan area. The company is looking to expand its reach on the retail business side, down the east coast into the southeast. We are ...view middle of the document...
Â This environment gives SaniTea an opportunity to gain market share and differentiate ourselves from our competitors. Our competitors include Teavana, Stash Tea Company, Davidâ€™s Tea, Adiago, and many others. â€œUnilever United States Inc. continued to lead tea in the US in 2015, commanding an 18% share of retail value sales, well ahead of any other competitor. RC Bigelow Inc., Starbucks Corp and R Twining & Co Ltd ranked second, third and fourth, respectively, with value shares of around 6-7%â€ ("Tea In The U.S.",Â 2016). As trends continue to grow the market is expected to introduce new flavor offerings. In 2015 consumers maintained industry growth and enjoyed a wide variety of flavors. â€œHerbal teas in particular became more attractive to consumers due to their many healthful properties, nearly endless varieties and blends, as well as the fact that they are naturally caffeine-free. In current value terms, herbal/medicinal teas grew by 14% in 2015. Consumers were also increasingly willing to trade up to teas with higher unit prices, such as organic teas, because of their health attributesâ€ ("Tea In The U.S.",Â 2016). Consumers are willing to pay a premium when it pertains to their health. However, tea has substitutes such as coffee and other ready to go drinks. Therefore, it is an elastic product. We not only see tea manufactures as competition (generic tea companies included), we also view other substitutes as competition. â€œIn case the two goods are substitutes for each other like tea and coffee, the cross price elasticity will be positive, if the price of coffee increases, the demand for tea increasesâ€ (economictimes.com, 2016). If the price of coffee went up by $0.50 consumers will seek to consume tea as an alternative and vice versa. That being said, if the price of caffeine which is an ingredient in tea and coffee were to go up, consumption would not change for either product.
Since tea is an elastic good, if tea prices were to increase the demand of tea would fall because of the amount of inexpensive substitutes on the market. Â However, if price falls 20% and demand increases 80%, the price elasticity of demand would = 4.0
Price of Product
SaniTea prices range from $1.25 per ounce to $25 per two ounces. SaniTea has some control over price operating within a monopolistic market. However, the control has narrow limits. Raising prices will turn consumers in the direction of our competition and substitutes that are available on the market.
By expanding we must consider the added cost of expansion. This relates to marginal cost, the added cost of producing output. New stores will bring more overhead. Our total cost will increase as variable cost such as labor change as we hire more employees to increase production. Raw material such as tea bags, cups, and pastries will also have to be taken into account. In addition, we must consider the fixed cost, which does not change with production....