Elasticity Analysis for

the Bru coffee Brand

 1. Data Collection logic
I have taken data of past 10 year’s sales of Bru coffee (HUL). I have taken substitute as Nestle Sunrise
which is the closest competitor of Bru in the coffee segment and compliment as Milk. I have taken
Advertisement of HUL as a proxy for tastes and preferences, as advertisement done by the marketing
department keeping in mind the actual trend in the market at a point of time for the particular product. Per
capita income is used as a proxy for income as it shows average increase in GDP per person which can
be used to gauge their purchasing capacity. From the 2001 population consensus I have calculated the
population for the other years assuming a 1.6% CAGR. All the prices and income are nominal and not
inflation adjusted. They are good approximates of regression done with price index adjusted prices
because I have nominal value for each factor. Regression is best done with data with high degree of
freedom.

1.1 Table of Bru sales figure and product prices for past 10 years.

Bru Bru Nestle Sunrise Per capita Advertise Milk

Year Population
sales Prices Prices income ment Prices
1999-00 285.72 31.00 122.00 15852.00 1012536846.46 715.40 18.00
2000-01 296.91 32.50 125.00 16487.00 1028737436.00 696.58 18.00
2001-02 307.39 32.50 125.00 17736.00 1045197234.98 823.82 20.00
2002-03 325.93 32.50 125.00 20989.00 1061920390.74 841.86 20.00
2003-04 336.32 32.50 125.00 23308.00 1078911116.99 759.09 20.00
2004-05 377.86 32.50 125.00 26003.00 1096173694.86 835.98 20.00
2005-06 419.10 37.00 140.00 29382.00 1113712473.98 1005.67 24.00
2006-07 478.63 39.00 145.00 33877.00 1131531873.56 1272.88 24.00
2007-08 561.23 43.00 155.00 38084.00 1149636383.54 1440.22 26.00
2008-09 645.14 47.00 183.00 40216.00 1168030565.67 2130.91 30.00
 2. Regression Output
Dependent Variable: LOG(Q)
Method: Least Squares
Date: 08/15/09 Time: 14:38
Sample: 1999 2008
Included observations: 10

Variable Coefficient Std. Error t-Statistic Prob.  

C -11.93064 43.84489 -0.272110 0.8032

LOG(Px) 0.556517 0.495742 1.122595 0.3433
LOG(Py) 0.391057 0.585797 0.667564 0.5522
LOG(Pm) -0.507012 0.348889 -1.453218 0.2421
LOG(I) 0.436950 0.303144 1.441394 0.2451
LOG(P) 0.429099 2.246422 0.191015 0.8607
LOG(A) 0.206377 0.162979 1.266280 0.2948

R-squared 0.997026     Mean dependent var 5.962402

Adjusted R-squared 0.991079     S.D. dependent var 0.281966
S.E. of regression 0.026632     Akaike info criterion -4.217414
Sum squared resid 0.002128     Schwarz criterion -4.005604
Log likelihood 28.08707     F-statistic 167.6484
Durbin-Watson stat 2.551340     Prob(F-statistic) 0.000707

Parameters:
Px = Price of Bru

Py= Price of Sunrise

Pm= Price of milk

I= income

P= Population

A= Advertisement

Equation: ls log(q) c log(px) log(py) log(i) log(p) log(a) log(m)

Data used given in table1.1

3. Interpretation and Analysis

At 95% confidence (which is typically taken) level with degree of freedom 3 the critical value of t is
3.182. As none of the t ratio exceeds the critical value the relevance of individual parameter is
circumspect. Critical f ratio with k1=6 and k2=3 at 95% confidence level is 8.94. As the f statistics of 167
is significantly high as compared to critical f stats we can conclude that not all the coefficients are equal
to 0.

3.1. Price Elasticity = 0.556517

The price elasticity of 0.56 suggests that with the increase in price the demand also goes up. As Bru price
was pretty much constant for first 6 years and within the last 4 years there were other factors also which
affected the demand of coffee we cannot say with certainty the effect of price on demand.

 Theoretically the increase price would be followed by decrease in demand but that would be
assuming the other things being constant.
 Minimal volatility in price would not affect demand considerably, clinical experiments would
give a better picture of elasticity of coffee.
 We are taking price and demand relation for a particular brand and not for the whole industry,
thus we are negating the fact that brand value and other related aspect would also play a part in
the elasticity analysis.

Conclusion: Bru could be a brand which has a lot of brand value and be considered a premium product
with the rise in price there will be an increase in demand from the upscale market. Bru should increase
its price to increase its revenue. This can be interpreted from the derived elasticity value only. With the t
ratio of 1.122595 we accept the null hypothesis at even 90% confidence interval.

3.2. Cross Elasticity

Cross price elasticity with respect to Nescafe Sunrise suggests that both for Bru, Sunrise is a substitute
(which is true) and with respect to milk that it is a compliment (which again is true).

Sunrise: As the cross price elasticity is only 0.39 that with every increase in price of 10% in Sunrise the
demand for Bru will rise by 3.9%. Sunrise actually commands a greater market share than Bru so keeping
that into account the elasticity from the model seems appropriate. Bru should go for superior brand
bulding relative to Sunrise, so when Sunrise increase price more people will switch to Bru resulting in
higher revenue.

Milk: Milk is a compliment for Bru. With the increase in price by 10% the demand of Sunshine would
go down by 5.1%. The company should come launch a variation of the product which can be used
without milk.

3.3. Income Elasticity = 0.436950

It shows that with the increase in income by 10% the demand of coffee increase by 4.4%. Coffee is
considered as a normal product. There is a limit to the consumption of coffee as excess drinking is
harmful due the presence of caffeine, the rise in income wouldn’t result in proportionate increase in
demand. To lever their revenue from income effect the company should increase the aspirational value
of the brand.

3.4. Effect of population and advertisement

Advertisement is a proxy for tastes and preferences, as the advertisement rises the demand for the
product rises. With the increase in the advertisement by 10% the demand rises by 2.1% which is a costly
affair. The company should work on their advertisement campaign more efficiently.

With respect to increase in population by 10% the rise in demand is 4.2% or we can interpret from this
that 42% of the population consume coffee in a broader sense.
4. Assumptions, References and
Limitations
4.1. Assumptions

1. I have taken advertisement expense of the whole company assuming it is proportionately

distributed amongst product categories.
2. The populations for various years have been calculated from the 2001 census assuming 1.6%
CAGR.
3. I have used MRP of HULs milk packets as a proxy for the price of milk.

4.2. References and Tools

1. Capitaline database
2. Indiastats.com
3. CMIE reports
4. http://www.hul.co.in
5. www.nestle.in
6. www.censusindia.in
7. www.livemint.com
8. www.rediff.com
9. ISI emerging markets
10. Eviews5

4.3. Limitations

1. Data constraints
2. Time constraints