Question 1

The problem with snacking

Extract 1: Kraft plans to split into two companies

Kraft is the latest in a string of US companies to separate its business to cater to

different niche markets. As companies increasingly look for ways to drive growth
during a difficult economic environment, there has been a major shift from thinking
bigger is always better to sharpening their strategy on smaller businesses that focus
on a group of brands.

The company said that after several years of acquisitions, sales and other changes, it
became clear that the company had built two strong but distinct portfolios. Hence, the
next step is to recognize the separate priorities for each of these portfolios. After the
split, Kraft intends to sell off its grocery business.

It will retain its snack food business, which will be twice the size of its grocery
business and is expected to grow quickly. The company has already been building its
snack food business for several years with high-profile acquisitions such as LU
biscuits and well-known brand Cadbury in recent years. Going forward, it will focus
on high-growth international business and the convenience stores, kiosks, and other
places where the small treats are sold. It already derives about 75 per cent of its
revenue from international markets and will put a heavy emphasis on emerging
markets like China, India and Brazil that represent a major growth opportunity.

While investors reacted well to the companys switch to the less-is-more strategy,
analysts were sceptic about the strategy. Some analysts question the split of what
they see as overlapping businesses, which will inevitably create competition for one
another. Additionally, although the companies will both each remain large businesses
after the split, the economies of scale may not.

Source: Associated Press, 4 Aug 2011

Table 1: Market share of snack food manufacturers in the US (2011)

Company Market share

PepsiCo 41%
ConAgra Foods 6%
Kraft 6%
The Proctor & Gamble Company 6%
General Mills 4%
Others 37%

Source: AccuVal Corporate Valuation & Advisory Services

Extract 2: Tax on unhealthy snacks, subsidise healthy foods

The snack food industry appears to be one that is incapable of promoting healthier
foods and has often relied on large-scale marketing campaigns to attract consumers
towards unhealthy snacks. But the mounting problem of consuming unhealthy snacks
is found at two distinct levels. One, most consumers do not know how unhealthy
these foods are and what health hazards they pose. Two, there is a class of aware
citizens who do know the risks involved but there is precious little they can do about it
since munching on such unhealthy snacks brings about euphoric pleasures.

Nearly 7 million Americans are currently walking around without even realizing they
have a life-threatening disease undiagnosed diabetes. Another 80 million are pre-
type 2 diabetic, the type associated with bad eating habits. New findings show that
employees with an unhealthy diet were 66 per cent more likely to report having
experienced a loss in productivity than those who regularly ate healthy foods.

A sane diet could save tens if not hundreds of billions of dollars in health care costs.
Yet the snack food industry proclaimed that their mission is not public health but
accountability to shareholders. Therefore, they will continue to sell health-damaging
food, until the market or another force skews things otherwise.

Perhaps taxes could be imposed to reduce consumption of unhealthy snacks and

generate billions of dollars annually. That money could be used to subsidise the
purchase of healthy foods like fruit, seasonal greens, vegetables and whole grains.

This program would, of course, upset the snack food industry, especially firms with a
major market share in the business. It would also bug those consumers who might
resent paying more for snacks as they claim that their right to eat whatever they
wanted was being breached. Perhaps the snack food industry could consider
producing healthier snacks that are less health-damaging.

Source: various

Extract 3: One in ten obese in Singapore

The latest National Health Survey results released last November showed that more
than 10 per cent are obese, up from the 6.9 per cent of a sample population
surveyed six years earlier. The obese are at greater risk of ailments such as diabetes
and heart disease.

The Health Promotion Board, citing a lack of exercise, a growing penchant for
snacking and eating out as major factors in expanding waistlines here, has over the
years targeted educational campaigns in schools to nip unhealthy eating habits in the
bud. Among the new initiatives is engaging food companies on responsible public
advertising.
 Source: The Straits Times, 5 February 2011

Table 2: Obesity rates in Singapore by gender

Gender 2004 (%) 2010 (%)

Male 6.4 12.1
Female 7.3 9.5

Table 3: Obesity rates in Singapore by age group

Age group 2004 (%) 2010 (%)

18 29 6.8 10.6
30 39 6.8 12.2
40 49 6.9 10.7
50 59 6.5 11.5

Source: Health Promotion Board, Singapore

Questions:

(a) (i) Describe the type of market structure operating in the US snack food [2]
industry.

(ii) Identify and explain a barrier to entry in the US snack food industry. [2]

(b) Explain the likely value of the cross-elasticity of demand between unhealthy [2]
snacks and healthy foods.

(c) Using Tables 2 and 3, compare the obesity rates between 2004 and 2010 in [2]
Singapore.

(d) Explain two reasons why there is inefficient allocation of resources in the snack [4]
food industry.

(e) Given the challenges of rising obesity rates and the possibility of a tax on [8]
unhealthy snacks, discuss whether the switch to a less-is-more strategy will
benefit Krafts snack food business.

(f) Assess whether a tax on unhealthy snacks is the key to reducing obesity in [10]
Singapore.

[Total 30 marks]