The level of market concentration is quite high which is proved using the HHI as shown below. (Considering the banana sales of 1994 as given in the case)
Brand Banana Sales Market Share %
Chiquita 2,377,032 48
Dole 960,400 19
Fyffes 563,324 11
Geest 528,719 11
Noboa 280,000 6
Del Monte Produce 240,000 5
TOTAL 4,949,475 100
Because there are few players in the industry, comparatively less competition and high concentration in the market, we consider the banana industry to be an Oligopoly market, which has high barriers to entry. The barriers to entry are:
• High start up cost: A new firm entering the banana market will need to have huge capital to make banana ...view middle of the document...
The first determinant is the availability of substitutes. A banana does not have a direct substitute, however, it can be classified as a fruit, and there are many substitutes for fruits depending on what is in season. Snacks also can be considered as a substitute. The second determinant is the proportion of total expenditure. Thus, if a consumer spends a large proportion of his or her income on the product, then the product becomes price elastic. Due to the low price of bananas, consumers spend a very small proportion of their income. The third determinant is whether the product is a necessity or luxury good. In this case, bananas are a commodity and a food item. Initially, the case points out that the fruit was exotic and tropical when it was first introduced to the US. However, it has become a common commodity over time.
Thus, based on the determinants, Chiquita faces an inelastic demand curve, which means that small changes in price minimally impact the quantity demanded. Calculating inelasticity of demand based on Exhibit 5 can further prove this. For the world, the elasticity of demand between 1991 and 1992 is 0.67. Elasticity of demand in Germany is 0.18. The US however, surprisingly has an extremely elastic figure of 16.61. This is because the price of banana imports is extremely low compared to Germany and the rest of the world and there may be some bias. Details of our calculations can be found in Appendix 1.
The investment in “brand equity” for a company like Chiquita is important because it differentiates itself from its competitors such as Dole. Since the products are elastic and the margins are very minimal, companies have to start looking for ways to differentiate themselves and appeal more to the public. Having brand equity allows customers to know that the bananas they are buying are quality bananas. For example, if a consumer is faced with two bananas, both exactly the same price, but one has the Chiquita sticker, they would probably go for the Chiquita banana since they are familiar with the brand.
Furthermore, there has been a lot of negative press and ethical issues surrounding Chiquita. The brand awareness campaign would separate the bananas from the company’s negative image. They could also be creating a case that in some point in time people will begin asking for Chiquita’s instead of bananas such as asking for a coke when asking for a soda, or Google instead of search.
Banana supply is very sensitive to external factors, such as floods, hurricanes, crop disease, and political constraints. The case explains that a hurricane or flood can destroy a large portion of the crop in one or more countries, creating a short supply. Also, periodic outbreaks of fruit disease can greatly reduce the amount of bananas produced annually. Companies such as Chiquita have developed crop management techniques to counter these threats by holding excess land for cultivation, and by using modern disease control...