Folgers Coffee

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Folgers Coffee

• Tyler Raspat
• Chris Vogel

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Table of Contents

• History of Folgers Coffee
• Factors of Production
• Explicit and Implicit Costs
• Substitutes and Complements
• Determinants of Elasticity
• Normal and Inferior Goods
• Partnerships and Corporations
• Costs Incurred
• Characteristics of Perfect Competition
• Characteristics Of Monopoly
• Monopolistic Competition and Oligopoly
• Advertising
• Summary of Presentation

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Folgers History

• In 1849, J.A. Folger and two of his brothers set
  out for California to strike it rich in the newly
  settled mining town of San Francisco.
• Being short on money, 15 year old J.A. Folger
  stayed behind and worked at a local mill to make
  money for their expenses.
• It was during this time that he realized that
  ground coffee was unheard of in the area, and
  with the help of a local pioneer set up his own
  coffee mill.

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• Under J.A.s leadership, the company grew,
  eventually becoming the principle coffee maker
  for the entire West Coast.
• In 1963, Proctor and Gamble bought out Folgers
  from the family, doubled production, and helped
  make Folgers become Americas top selling coffee,
  where it remains to this day.

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Factors of Production for Folgers Coffee

• Land
• In their annual reports, Proctor and Gamble lists
  over 642 million worth of taxable land owned by
  the company
• Capital
• P G also lists 19,456 million worth of
  physical capital.

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Factors of Production (Continued)

• Labor
• Proctor and Gamble employs 98,000 people
  worldwide, in countries from Algeria to Yemen.
• Entrepreneurship
• J.A. Folger and his original partner, William H.
  Bovee, who spent the money to set up their own
  spice mill in the frontier in the 1800s, with
  relatively little background.

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Inputs vs. Resources

• These factors of production, especially land and
  labor, are essential in the production of other
  inputs, including coffee beans.

• Workers in a coffee processing plant in Ethiopia

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Explicit and Implicit Costs for Coffee Producers

• Folgers lists its costs incurred to be
  approximately 30.9 of net salesTherefore
• Folgers posted net sales of 1.7 billion dollars
  in the 2003 fiscal year
• 1.7 .309 .525
• Total explicit costs of producing Folgers coffee
  are 525 million.
• These expenses include selling, general (paying
  for resources and variable inputs), advertising,
  and administrative costs.

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Implicit Cost

• Defined as the value of something sacrificed when
  no direct payment is made .
• These are included in what an economist would
  call opportunity costs. Possible implicit costs
  are rent, interest, wages, and profit.
• These match with the four factors of production-
  land, labor, capital, and entrepreneurial
  activity.

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Demand Topics for Folgers

• Substitute Goods- goods that can be used in place
  of another good that fulfill the same purpose.
• For coffee these include
• Tea
• Caffeinated Beverages
• Milk and Juice (Breakfast drinks)
• When defining the market more narrowly (Folgers
  coffee)
• Maxwell House coffee
• Starbucks
• Columbia

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Demand Topics (continued)

• Complement- a good that is used together with
  some other good
• For coffee this includes
• Milk
• Sugar
• Breakfast foods (Doughnuts, Bagels)
• Creamer

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Movements Along and Shifts of The Demand Curve

• Entire demand curve shifts leftward when
• income or wealth ?
• price of substitute ?
• price of complement ?
• population ?
• expected price ?
• tastes shift toward good

D1
D2
Principles of Economics Hall and Lieberman
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Supply Topics

• Technology and its importance
• Technology is one of the ceteris paribus factors
  of supply mentioned in the text.
• For Folgers, technology has been changing greatly
  in recent years
• ex. Folgers AromaSeal package
• Folgers abandoned the traditional metal can in
  favor of a more environment friendly package that
  stayed fresher longer

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• Traditional Can
• Metal, less environmentally friendly can.

• AromaSeal Can
• Plastic, fresher, made for todays environment.

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Market for Folgers Coffee
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Determinants of Price-Elasticity of Demand

• A measurement of responsiveness (generally to a
  change in price, the independent variable)
• Most important factor in determining elasticity
  is the number of available substitutes.
• Availability of substitutes depends on several
  things

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Narrowness of the Market

• The more narrowly we define a good, the easier it
  is to find substitutes, and vice versa. For
  example
• Defining our topic as food, there are very few
  substitutes for food or beverages.
• Defining our topic as Folgers
• Maxwell House
• Starbucks
• Coke
• Pepsi
• Milk
• Juice
• Etc.

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Necessities vs. Luxuries and Time Horizon

• If a consumer considers a good a necessity, it is
  harder to go without it, and is therefore more
  inelastic.
• Time horizon
• The time period during which it takes to find
  substitutes for a good.
• The shorter the time period, the harder it is to
  find substitutes, and the more inelastic demand
  for a good will be.
• Ex. Local Coffee Shop

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Conclusion?

• Demand for Folgers coffee is rather elastic
• Narrowly defined
• Considered a luxury
• Many possible substitutes
• The elasticity of demand for Folgers coffee is
  therefore greater than -1.
• Ex. Change in quantity demanded/ change in price
• This is logical, as most brand names have elastic
  demands.

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University of Montana Econ 111- Dr. Barret
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Normal vs. Inferior Goods

• These types of goods are based on a consumers
  income, and how demand for these products changes
  in response to a change in income.
• People demand more normal goods as income goes
  up, and less inferior goods as income goes up.
• Coffee is an interesting good in this manner

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Normal vs. Inferior Goods (continued)

• It seems that some types of Folgers Coffee are
  inferior goods
• Instant Coffee
• While others are normal goods
• Folgers Cappuccino
• Folgers Café Latte
• Price is higher for these two goods

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What classifies a good as normal or inferior?

• The Substitution and Income Effects
• Substitution As the price of a good falls, the
  consumer substitutes that good in place of other
  goods whose prices have not changed (Hall and
  Lieberman).
• Income As the price of a good falls, the
  consumers purchasing power increases, causing a
  change in quantity demanded for that good.

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Combining the Income and Substitution Effects for
Coffee
Hall and Lieberman Principles of Economics
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Types of Business Firms

• Folgers Originally a partnership between J.A.
  Folger and William H. Bovee
• Partnership- A firm operated by several
  individuals who share in the profits and bear
  responsibility for any losses.
• Main difficulty in the Folgers partnership
  raising money to expand the business

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• 1963- Folgers became a subsidiary of Proctor and
  Gamble- a large, multinational corporation
• Corporation a firm owned by those who buy shares
  of stock and whose liability is limited to the
  amount of their investment in the firm.
• P and Gs acquisition of Folgers improved
  themselves and Folgers coffee company.

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Proctor and Gamble

• This large corporation was formed through growth
  via merger
• Proctor and Gamble is a conglomeration, or a
  company that grew by merger into unrelated areas

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Two Definitions of Profit

• A conception of costs used by accountants is
  accounting profit where only explicit costs are
  considered in determining profit.
• For PG, this would look like this
• Amounts in millions (PG Annual Report-2004)
• Total Revenue from Sales 51,407 -
• (Cost of products sold 25,076
• Selling, general and administrative costs
  16,504)
• Accounting Profit 9,827

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Economic Profit

• Includes the implicit costs mentioned earlier
  investment income foregone, rent foregone, and
  salary foregone
• Not included in the annual reports, as these are
  audited by accountants.
• It is possible that Proctor and Gamble is
  actually losing money when these costs are
  considered.

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Market Structures for Folgers Coffee

• Four Basic Types of Structure
• Perfect Competition, Monopoly, Monopolistic
  Competition, Oligopoly
• To determine structure, three important questions
  must be asked
• How many buyers and sellers are there in the
  market?
• Is each seller offering a standardized product?
• Are there any barriers to entry or exit?

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Characteristics of Perfect Competition in the
Market for Coffee

• Large number of buyers
• No single buyer is large enough to influence the
  price of the good.
• Perfect Knowledge
• Aware of cost and quality
• Aware of what others are doing
• Buyers and sellers have the exact same information

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Perfect Competition (continued)

• However, there are many characteristics of
  Perfect Competition that do not fit the model for
  Folgers
• Inability to earn a long-run profit
• PG not a price taker
• Different coffees- different products
• Many markets have characteristics of more than
  one system

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Characteristics of Monopoly in the Market for
Folgers Coffee

• Share of the coffee market controlled by Folgers
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• Large Producer of Coffee (large seller)
• Varied Products
• Many different types of coffee
• Consumers consider different coffees different
  goods
• Ex. Starbucks coffee

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Characteristics of Monopoly (continued)

• Difficulties to Entry
• Consumer Loyalty
• Large Share Owned by Corporations
• Ability to purchase inputs
• Coffee beans, machinery, etc.

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Characteristics of Oligopoly

• Few Firms Producing Most of the Product
• Differentiated Product
• Large Amounts of Advertising
• Government-created barriers
• Quality control
• Workers in other countries
• Seemingly most likely market system for Folgers
  coffee

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Duopoly

• Folgers main rival is Maxwell House, produced by
  Kraft foods
• Two companies control over 70 of the market for
  coffee in America
• Repeated Play Strategy
• Tit for Tat Strategy- doing to another player
  this period what he has done to you in the
  previous period
• Collusion (Cartels)

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Advertising

• Folgers advertisements strive to present a sense
  of warmth and home

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Conclusions

• Folgers turned out to be an excellent company for
  which to analyze economic principles.
• They have characteristics of many different types
  of market structures, and their parent company
  Proctor and Gamble also provided large amounts of
  important information on costs and revenue.
• Any questions?