Economic Individual Assignment [Gardenia Bakeries KL]

Introduction of the company

Gardenia bakeries (KL) Sdn Bhd is an associate company of Padi Beras Nasional Berhad. Gardenia is 30% owned by Tan Sri Syed Mokhtar Al-Bukhary. The year of establishment of this firm is 1986. Within four years, it became the bread leader in the industry. The factory located at Shah Alam, Selangor. Gardenia produces all type of bread with different kind of flavor and jam for consumers to choose from. For example European Cottage style bread, Twiggles, Squiggles, Delicia, Quick Bites, Fluffy Buns, Bonanza, Butterscotch and Breakthru. We can find Gardenia’s product in supermarket, mini mart, grocery shop and etc in all state in Malaysia. Gardenia bakeries concerns about consumers health by using healthy ingredient as recipe to make all kind of bread product. It is also a halal product which suitable for muslim and non-muslim consumers. (IT, 2013)

Demand and its determinants

Gardenia supplies different kind of bread to satisfy human needs and wants and also the demand of consumers. Demand defines as the consumer’s desire and willingness to pay for a specific goods or service. Law of demand states that when the price of goods and services decrease, demand for the goods or services will increase and vice versa. 

 The price of 400g loaf of Gardenia bread had increased from RM2.70 to RM3.00 in Sabah. (Freemalaysiatoday.com, 2013)  This result as the quantity demanded of Gardenia product in Sabah decrease as the consumers who have lower income can’t accept the price increase. They will tend to shift to other brand of bread which has lower price compare to Gardenia. Substitution effect happens in this situation. The quantity demanded of Gardenia will decrease if people switch to other brand which is affordable. Whereas there are still consumers will continue support Gardenia’s product because of brand loyalty. Although there is lots of bakeries and firms producing bread every day but Gardenia still the market leader in the industry as it has been a part of our morning routine for decade years. But Massimo bread that establish few years ago soon become the great competitor of Gardenia. Last year, Gardenia had arises political and racial issue with Massimo. 

Gardenia had stopped purchasing flour from Federal Flour Mills Bhd (FFM) but Padi Beras Nasional Bhd (Bernas). Bernas is controlled by Tan Sri Syed Mohktar Al-Bukhary while FFM is owned by hong kong based Malaysian, Tan Sri Robert Kuok. Soon after, an online boycott through mass emails and Facebook to stop purchase Gardenia product but Massimo because Massimo bread brand by FFM is priced lower than Gardenia. Gardenia then came up with an advertorial in newspaper clarify that they choose Bernas insist of FFM due to commercial reasons. (Hidayat, 2013) Malaysian Chinese believe that Gardenia stop purchasing flour from FFM due to racist issue but not commercial purpose and started to switch to Massimo. Some grocers and retailer had reduced the price of Massimo to encourage consumers to purchase instead of Gardenia. As a result, the demand of Gardenia product decreases and the demand of Massimo increase.

Supply and its determinant

As a market leader in bread industry, Gardenia needs to supply enough bread products to fulfill the market needs. Supply defines as total amount of a specific good or service that is available to consumers. Law of supply states that when the supply of a certain product and service decreases, the price will increases and vice versa. 

When the cost of production remain the same but the price of a loaf of bread increase, Gardenia has to supply more bread to consumers to generate more net profits. Wheat is the main ingredient of making bread. United States and Australia is the main supplier of wheat to Malaysia. According to the articles, the price of wheat increase and this directly increase the price of bread.  (Worldwatch.org, 2013) When the price of wheat increase, the supply curve will shift to the left, this cause the price of bread increase. Nowadays, there is lots of mini mart opening around all the housing area. The increasing retailers also increase the demand of bread and this affect the supply of bread too. Hence, the supply curve will shift to rightward because Gardenia bakeries need to supply enough of bread every each day. 

For the determinants of supply, the technology in Gardenia factory is very important to meet the consumer’s need. The modern the technology of Gardenia factory, the more supply can provide to consumers every day. According to the Gardenia official website, Gardenia bakeries is producing 2million of bread every day to fulfill the demand in 22,000 outlets around all the state in Malaysia. This makes the supply curve shift rightward.

Elasticity of Demand

The elasticity defines as the degree of sensitivity to the good or the service to the changes of the price. Gardenia bakery is inelastic demand as the price of demand increase or decrease, the quantity demand changes less than the prices of demand. This kind of situation is when there is very less substitution goods exist. For example, the price of Gardenia is RM3.20 while the price of Massimo is RM3.50. Both the prices do not differentiate that much and so the consumers are not sensitive to the price. This less affect the consumer’s willingness and the elasticity of demand are inelastic.

Government Intervention- Subsidy

Flour is a necessity for house-hold use and also some manufacturers. Every day, Gardenia needs a lot of flour to produce enough bread to satisfy the market. Flour is a controlled item in Malaysia. Government provides subsidy to flour as the retails price of flour is RM1.35. Without the government subsidy, flour would cost RM2 per kg. (Theedgemalaysia.Com, 2013)  The new supply curve with subsidy is form and this shift the curve to the right. According to the law of demand, when the price decreases and this increases the quantity demand of flour.  The new equilibrium point will also shift to the right and meet at the price of RM1.35. The total amount of subsidy provide by government is RM0.65, this make the price more affordable and decrease the burden of Gardenia company.

Government Intervention- Price Ceiling, Shortage, Black Market

The Government set price ceiling to avoid supplier from setting the price high above the price ceiling and so consumers can buy it at an equilibrium price. A price ceiling is a regulation that makes it illegal to charge a price higher than a specific level. When the price ceiling is set above the equilibrium, it has no effect. The market works as if there were no ceiling and it is illegal. But if the price ceiling is set below the equilibrium line, it has powerful effect. This will affect the suppliers as the price has to remain low. To increase the demand and maximize the profit, suppliers will produce less amount of flour. This will cause a shortage and some consumers are willing to pay more which is above the equilibrium price to get the same amount of flour. Shortage goes serious when flour produces in Malaysia who export flour to overseas are taking advantage of the higher price. (Thestar.com.my, 2013)  This will create a black market due to high demand and higher price. Black market defines as a transactions conducting ‘under the table’ to avoid government price controls or taxes and the price of goods sold are above legal maximum prices. When consumers willing to pay more than the market price, peoples will try to get flour from other country and sell it with higher price to generate more profits. This make the illegal region happens. Gardenia has no choice and so to increase the price of bread product.

Government Intervention- Price Floor, Unemployment

There are lots of workers working in Gardenia factory and also work as a drive to deliver fresh bread to all the retailers in Malaysia every day. As earlier in year 2012, the prime minister of Malaysia has set the minimum monthly wage of RM900 in Peninsular and RM800 in east Malaysia. (Thestar.com.my, 2013) A minimum wage defines as the lowest price for workers that any employer may pay. 

Minimum wage can be considered as a price floor which is a regulation that makes it illegal to trade at a lower price than a specific level. Generally, the market is at risk of being distorted when the minimum wage is higher than the equilibrium level. The greater the wage level, the lower the quantity demanded of workers. Thus, Gardenia can only afford a few numbers of workers to work in their companies. In another point of view, when the wage rate increases, the quantity supply of workers also increases. As a result, there will be a surplus of workers where the quantity supply of workers exceeds the quantity demanded. The company has to reduce the number of workers since it cannot afford the minimum wage. The legal wage rate cannot eliminate the surplus and this creates the unemployment.

References

1.      Freemalaysiatoday.com. 2013. Price of bread up in Sabah? | Free Malaysia Today. [online] Available at: http://www.freemalaysiatoday.com/category/nation/2013/05/16/price-of-bread-up-in-sabah/ [Accessed: 24 Oct 2013].

2.      Hidayat, N. 2013. The Gardenia Bread Wars - Buzz Worthy, Malaysia - VenusBuzz.com. [online] Available at: http://www.venusbuzz.com/archives/4041/the-gardenia-bread-wars/ [Accessed: 24 Oct 2013].

3.      IT, G. 2013. Gardenia Bakeries (KL) Sdn Bhd. [online] Available at: http://www.gardenia.com.my/ [Accessed: 24 Oct 2013].

4.      Theedgemalaysia.Com, C. 2013. KFM: Higher flour prices will be seen as positive. [online] Available at: http://www.theedgemalaysia.com/in-the-edge-financial-daily-today/237949-higher-flour-prices-will-be-seen-as-positive.html [Accessed: 24 Oct 2013].

5.      Thestar.com.my. 2013. Archives | The Star Online.. [online] Available at: http://www.thestar.com.my/story.aspx?file=%2f2008%2f1%2f10%2fnation%2f19955254&sec=nation [Accessed: 24 Oct 2013].

6.      Thestar.com.my. 2013. PM: Minimum monthly wage is RM900 - Nation | The Star Online. [online] Available at: http://www.thestar.com.my/News/Nation/2012/04/30/PM-Minimum-monthly-wage-is-RM900.aspx [Accessed: 24 Oct 2013].

7.      Worldwatch.org. 2013. Increase in Grain Prices Affects U.S. Food Donations | Worldwatch Institute. [online] Available at: http://www.worldwatch.org/node/5408 [Accessed: 24 Oct 2013].