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Lipton vs Arizona

In: Business and Management

Submitted By wirusni1993
Words 2895
Pages 12
Lipton and AriZona: price competition and equilibrium in the Unites States RTD market.

Group essay for Managerial Economics
Authors: Serebrennikov Artem, Salzberg Arthur


Abstract 3 Introduction 3 RTD Tea Industry Profile in USA market 5 Price competition on USA market 2010-2014 6 Marginal Costs 9 Using Cournot and Bertrand models 10

The purpose of this essay is to investigate price strategies of Uniliver (Lipton Iced Tea) and Arizona Beverages USA (stylized as AriZona) and find equilibrium in the ready-to-drink (RTD) market. These two companies compete in USA market and possess great market power. Our team use Cournot and Bertrand approaches to find equilibrium.
We have completed a thorough analysis of : * Ready-to-Drink (RTD) tea industry * Competitive landscape * AriZona and Lipton brand perception * AriZona and Lipton sales and financial position
We also believe that we can revitalize these brands through : * A better focused target market * Rebranding * Reformulation and new flavors * Increase in marketing expenditures * New line extensions * Building stronger partnerships with distributors

In 2005, the tea industry reached the $1.7 billion category and it is expected to continue growing indefinitely. Market analysts believe the tea industry will continue to boom and is not expected to reach saturation level in the near future.
Unilever is aiming for global processes and alignment of their human resource activities. “Unilever is working with Accenture to identify supply opportunities within the marketplace and will look to develop longer term relationships with a rationalized base of preferred suppliers. In order to help with the increase in revenue, Unilever changed companies focus to places with higher potential for growth. Concentration on new emerging markets like China, who had a high young population with increasing incomes, caused their developing world sales to increase by substantial amounts.
Arizona Beverages USA company roots trace back to 1971 when friends John Ferolito and Don Vultaggio opened a beverage distribution business in Brooklyn, New York. The company was a successful beer distributor. In 1990, they saw the success of Snapple (also a Brooklyn-based company founded in the 1970s) bottled juices and teas, and attempted to make their own product. In 1992 they produced the first bottles of their own AriZona teas. According to the official company website, the company's name has no relation to the state of Arizona, but rather influence of Don's spouse
Arizona, known for its oversized 99¢ cans, has found success with an aggressive pricing strategy and bold flavors. Meanwhile Lipton, which includes Lipton Brisk, Lipton Iced Tea and Lipton Pure Leaf, has been deliberately remaking its trademark one line at a time - and as a result, brisk sales are growing at a double-digit pace even as other parts of its portfolio drag.

| | | Position in the world | Producer of many flavors of iced tea, juice cocktails and energy drinks | Supplier of consumer goods in foodhome and personal care markets | Presence | Worldwide (USA,United Kingdom, Canada, Colombia, Norway, Sweden, Turkey) => 7 countriesHeadquarters :Woodbury, New York, United States | Worldwide160 countriesHeadquarters: For food:Unilever Plc – UK-London For home and personal care:Unilever NV – The Netherlands - Rotterd | Workforce | 1.288 | 171.000 | Activities | Flavored Iced Tea | Food – Hot Beverages Home CarePersonal care |

RTD Tea Industry Profile in USA market

* Off-trade Sales of RTD Tea by Category: Value 2009-2014 USD million | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Carbonated RTD Tea | 127.8 | 156.9 | 195.4 | 340.5 | 431.1 | 529.1 | Still RTD Tea | 3,789.8 | 4,141.7 | 4,342.2 | 4,534.5 | 4,646.5 | 4,787.5 | RTD Tea | 3,917.5 | 4,298.6 | 4,537.6 | 4,875.0 | 5,077.7 | 5,316.6 |
Overall market = $5.316 billion

% off-trade value | 2014 | Pepsi-Lipton Tea Partnership | 24,70% | AriZona Beverage Co LLC | 23,70% | Dr Pepper Snapple Group Inc | 9,40% | Coca-Cola Co, The | 7,90% | Millenium Products Inc | 6,50% | Beverage Partners Worldwide SA | 3,00% | Turkey Hill Dairy | 2,80% | Monster Beverage Corp | 2,30% | Red Diamond Inc | 1,70% | Nestlé Waters North America | 0,90% | High Country Kombucha LLC | 0,20% | Dean Foods Co | 0,20% | Kombucha Wonder Drink LLC | 0,10% | Private Label | 3,80% | Others | 12,80% | * NBO Company Shares of Off-trade RTD Tea in % Value 2014

Overall sales for Lipton = 5.316.000.000 * 0,247 = 1.313.052.000 $
Overall sales for AriZona = 5.316.000.000 * 0,237 = 1.259.892.000 $

* Off-trade Sales of RTD Tea by Category: Volume 2009-2014 million litres | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Carbonated RTD Tea | 19.3 | 23.2 | 28.8 | 51.3 | 63.1 | 75.7 | Still RTD Tea | 2,242.8 | 2,489.0 | 2,496.8 | 2,617.7 | 2,677.9 | 2,735.5 | RTD Tea | 2,262.1 | 2,512.2 | 2,525.6 | 2,669.0 | 2,741.1 | 2,811.2 |
Overall liters of RTD tea in USA = 2,811 million liters

* NBO Company Shares of Off-trade RTD Tea in % Volume 2014 % off-trade volume | 2014 | Pepsi-Lipton Tea Partnership | 27,40% | AriZona Beverage Co LLC | 23,30% | Dr Pepper Snapple Group Inc | 7,70% | Coca-Cola Co, The | 6,40% | Turkey Hill Dairy | 4,30% | Beverage Partners Worldwide SA | 3,10% | Red Diamond Inc | 2,50% | Monster Beverage Corp | 1,90% | Millenium Products Inc | 1,60% | Nestlé Waters North America | 0,70% | Dean Foods Co | 0,30% | High Country Kombucha LLC | 0,10% | Private Label | 5,00% | Others | 15,70% |

AriZona = 2.811.000.000 * 0,233 = 654.963.000 liters
Lipton = 2.811.000.000 * 0,274 = 770.214.000 liters
Price competition on USA market 2010-2014
We use information from different sites and built this in excel file. Here you can see all competitors in RTD USA market. We use data from 2010 to 2014.
Let us build graph with prices per liter for different companies for 4 years. | 2010 | 2011 | 2012 | 2013 | 2014 | Pepsi-Lipton Tea Partnership | 0,615397 | 0,587622 | 0,602456 | 0,603212 | 0,586559 | AriZona Beverage Co LLC | 0,587972 | 0,519902 | 0,530576 | 0,520397 | 0,519835 | Dr Pepper Snapple Group Inc | 0,430451 | 0,435195 | 0,43799 | 0,431865 | 0,407144 | Coca-Cola Co, The | 0,384956 | 0,393033 | 0,421834 | 0,420751 | 0,497656 | Turkey Hill Dairy | 0,777316 | 0,763246 | 0,736276 | 0,773758 | 0,812023 | Beverage Partners Worldwide SA | 0,505255 | 0,539017 | 0,579692 | 0,556701 | 0,546384 | Red Diamond Inc | 0,737833 | 0,752969 | 0,760399 | 0,793869 | 0,777587 | Monster Beverage Corp | 0 | 0 | 0,452272 | 0,445947 | 0,436801 | Millenium Products Inc | 0,128319 | 0,141999 | 0,144619 | 0,136972 | 0,130156 | Nestlé Waters North America | 0,461948 | 0,458539 | 0,469275 | 0,472352 | 0,411257 | Private Label | 0,769913 | 0,784102 | 0,792416 | 0,744091 | 0,695736 | Average for market | 0,577435 | 0,550247 | 0,547487 | 0,539831 | 0,528759 |
As we can see Lipton and Arizona iced tea place in the similar segment on the USA market – price category between $0,5 and $0,65 per 1 liter. What is more interesting, that as these two companies are leaders on USA market (for volume) – from their prices depends average price of market (on graph average price for market = $0, 54).
Therefore, there are three main market segments: Segment | Price | Competitors | №1(High price) | 0,69 – 0,81 | Red Diamond Inc Turkey Hill DairyPrivate Label | №2(Medium price) | 0,41 – 0,58 | Pepsi-Lipton Tea Partnership AriZona Beverage Co LLC Dr Pepper Snapple Group IncCoca-Cola Co, The Beverage Partners Worldwide SAMonster Beverage CorpMillenium Products IncNestlé Waters North America | №3(Cheap) | 0,13 | Millenium Products Inc |

Let us see how price for 1 liter of iced tea changes for 4 years in segment №2 for Lipton and AriZona
Retailer’s price:
1) AriZona
Prices for 23.5oz (695ml) cans is US$0.99(2015)
$0,99/695 ml * 1000 = $1,4244 this is a price for 1 liter of AriZona in Retail Store.
Let’s find how many dollars earn retailer from selling 1 liter of AriZona iced tea: 1) The trade markup for Retailers is: 1,42/ (0,52/100)= 273% 2) The Retailer Profit for 1 liter of AriZona is : (1,42-0,52)/(0,52/100) = 173%
2) Lipton
Prices for 20 oz (592ml) bottles is US$2.00 (2015)
$2,00 /592 ml * 1000 = $3,37 this is a price for 1 liter of Lipton in Retail Store.
Let’s find how many dollars earn retailer from selling 1 liter of Lipton iced tea: 1) The trade markup for Retailers is: 3,37/ (0,59/100)= 571% 2) The Retailer Profit for 1 liter of Lipton is : (3,37-0,59)/(0,59/100) = 471% Product | Original price*for 1 liter | Retailer Price*for 1 liter | Markup for retailers*for 1 liter | Profit for retailers*for 1 liter | Lipton | 0,59$ | 3,37$ | 571% | 471% | AriZona | 0,52$ | 1,42$ | 272% | 173% |

That is so interesting that Lipton and AriZona have the similar original prices ($0,52 and $0,59 for 1 liter) , but on the retail market the difference is $1,88 ($2,78 – $0,9).Why the retailers set the difference markups for similar products? We think that there are several reasons for that: 1) AriZona wants to attract new customers and retain the old ones. Price attractiveness. But in this case AriZona loses additional profit per liter (appr. 1,8 per one liter)

Marginal Costs
Having 3 phases of production (Tea gardens, Central processing facility and Bottler) in iced tea sphere, one of the most expensive is the first – Tea Gardens, occupying about 45% of expenses (the most expensive confirm from maintenance of tea gardens). Then there is Central Processing facility occupying about 40% of expenses and at the end, there is Bottler within 15% of expenses. Unfortunately there are no expenses given in open access about exact quantity, however proceeding from a huge number of articles which we read on internet and other resources, Marginal Costs (MC) in the iced tea industry usually For example costs of production of one 1L bottle of iced tea Lipton equal (0.21 + 0.23) =.44 or 44 cents. And this 44 cents from a last price of Lipton iced tea in 2014 (59 cents), equal about 74%, therefore, we will take this percent as marginal costs basis (MC = 74%*Average Price in last year):

So, we obtained data of 44 American cents for one bottle 1L cold Lipton teas, and about 38 cents for one bottle 1L AriZona iced teas. Having taken the total average price for Lipton iced tea for one liter, we received 60 cents US. After that, having taken the total average price for AriZona tea (which we took proceeding from 5 data on the prices for 2010-2014), we received 54 cents US.
According to previous information, we assume that the Ready To Drink tea market of United States of America is setting prices on oligopoly market in duopolistic style (because Lipton and AriZona iced tea have the highest market share), that`s why we consider Lipton`s and AriZona`s pricing by means of Cournot and Bertrand approaches.

Using Cournot and Bertrand models COURNOT MODEL
In USA market Lipton and AriZona have about 50% share, that`s why let us suppose that there are only 2 iced tea producer and they compete a la Cournot. We can say that iced teas are the same as in Lipton and as in AriZona case, and our products are homogeneous. Both companies can produce a lot of iced tea. Also they have same marginal costs (MC) which in average 41 cents US per 1L bottle. AriZona and Lipton also have goods substitute, as, for example, cola, juice or even water (cheapest product), so to maximize their profits, they need to cooperate. Max. price, that retailers agree to pay for iced teas is about 81 cents US. So let 0.81$ price be the limit price for our RTD market and all share of the market is about 50% of 3 bn, so 1,5 bn of liter bottles sales by AriZona and Lipton. According to all these data our demand function will be something like this one Q = 3 – 3.75 (or 3.7)P. Let us draw it:

Then we find inverse demand function:
3.7P = 3 – Q => P = 0.81 – 0.27Q, and Q = Q of Lipton + Q of AriZona
Total revenue function of Lipton Iced Tea:
TR = (0.81 – 0.27Ql – 0.27Qa)Ql = 0.81Ql – 0.27Ql^2 – 0.27QlQa
Total revenue function of AriZona Iced Tea:
TR = (0.81 – 0.27Ql – 0.27Qa)Qa = 0.81Qa – 0.27Qa^2 – 0.27QlQa
Marginal revenue function of Lipton:
MRl = dTRl => MR = 0.81 - 0.54Ql – 0.27Qa
Lipton maximize its profit when MR = MC:
0.81 - 0.54Ql – 0.27Qa = 0.41
And the reaction function for Lipton Iced Tea is:
0.54Ql = 0.4 - 0.27Qa => qQl = 0.74 – 0.5Qa
Similarly, the reaction function for AriZona is:
0.54Qa = 0.4 - 0.27Ql => qQa = 0.74 – 0.5Ql
So, our optimized output for 2 firms will be:
Qa = Ql
0.74 – 0.5Qa = 0.74 – 0.5Ql
Qa = 0.74 – 0.5 (0.74 – 0.5Qa)
Qa = 0.74 – 0.37 + 0.25Qa
0.75Qa = 0.37
Qa = 0.4933
Qa = Ql = 0.493
So, in equilibrium Lipton and AriZona produce 493 bottles per 1 liter each (493*2 = 986), that is about 2/3 of maximum output in USA market in 2014. To calculate Q we need to multiply our Q of Iced Tea producers by 3, and our Q = 1479, but here is a proof:
1,479 = 3 – 3.7P => 3.7P = 1.521 => P = 0.411 => Q = 3 -3.7*0.411 = 1.479
P = 0.81 – 0.27*0.986 = 0.81 – 0.266 = 0.544
To calculate profit of each firm we just ad these data to formula:
Profit = 0.544 * 493 – 0.411 * 493 = 268.19 – 202.62 = 65.57 mn $
And our market equilibrium will look like this one:

In this graph 2 reaction functions of Lipton and AriZona iced teas. Our equilibrium as we said before is 544 mn liters from each producer. In 2014 they produce total 1 425 177 000 liters(654 963 000 + 770 214 000), in our case with Cournot competition they must produce total 1 088 000 000 liters to maximize profit, which isn`t so far from real life.
Assume that Lipton and AriZona producers start compete by Bertrand model and now all decisions depends on price of product. According to Bertrand, in short-run companies usually forget about quantity and focus only on prices. In our case it`s quite possible situation and our iced tea producers actually do this kind of practice including the same marginal costs and methods of producing iced tea as usual. By using same marginal costs which equal to 41 cents US and same demand function Q = 3 – 3.7P.

So, we find our P max which equal 61 cents US. In this case Lipton and AriZona iced tea producers will set their prices lower then P max again and again until a moment then our price becomes equal to marginal costs or 41 cents US (P=MC=0.41) and it would be our nash equilibrium, the point in which our competitors earn zero profit. The idea of this system is that competitors will always charge prices lower then P max or equal to it.

If we assume that, our products become heterogeneous now and our products (Lipton and AriZona) have not similar tastes and different bottles. Next step is to create demand functions to both products:
Ql = 3 – 3.7Pl + 3.7Pa and Qa = 3 – 3.7Pa + 3.7Pl
Total revenue function of Lipton Iced tea:
TRl = (Pl – 0.41) (3 – 3.7Pl + 3.7Pa) = 3Pl – 3.7Pl^2 + 3.7PaPl – 1.23 + 1.517Pl – 1.517Pa
Total revenue function of AriZona Iced tea:
TRa = (Pa – 0.41) (3 – 3.7Pa + 3.7Pl) = 3Pa – 3.7Pa^2 + 3.7PaPl – 1.23 + 1.517Pa – 1.517Pl
Marginal revenue function of Lipton Iced Tea:
MRl = 4.517 -13.69Pl + 3.7Pa
Lipton maximize its profit in point when MR = MC
4.517 -13.69Pl + 3.7Pa = 0.41
Reaction function for Lipton:
4.107 – 13.69Pl + 3.7Pa = 0 => 13.69Pl = 4.107 + 3.7Pa => Pl = 0.3 + 0.2702Pa
Similarly reaction function of AriZona:
Pa = 0.3 + 0.2702Pl
Optimal prices:
Pl = 0.3 + 0.2702 (0.3 + 0.2702Pl)
Pl = 0.3 + 0.08106 + 0.073Pl => Pl = 0.38106 + 0.073Pl
0.927Pl = 0.38106
Pl = 0.41106 (41 cents US) = Pa and = MC
Optimal outputs will be this ones:
Ql = Qa = 3 – 3.7 (0.41106) + 3.7 (0.41106) = 3
And our reaction functions:

So, comparing with Cournot, price lower on 10 cents, and now it is actually equal to company`s marginal costs. If one of them set price below of this Nash equilibrium, they got losses and now they get zero profit.
According to Bertrand, in 2014 Lipton and AriZona producers were in Nash equilibrium getting zero profits, but according to Cournot, they still have possibility to move.…...

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...Miranda v Arizona Westwood College Miranda v. Arizona Every time someone is arrested the police officer reads them their right, which was not always the case. They read as followed "you have the right to remain silent anything you say can and will be used against you in the court of law. You have the right to an attorney, if you can't afford one, one will be provided to you." But why do the officers have to remind the people of their rights, because of the Miranda v. Arizona case. Before the Miranda v. Arizona case people were not reminded or even aware that they had such rights. In the 1963 Ernesto Miranda was arrested for kidnap and rape. He was accused of kidnapping and raping a young girl and when the officers arrested Miranda and then the victim identified him. After the trial was done Miranda was found guilty because after being interrogated for a couple hours he confessed to the crime not knowing that the 5th amendment states you don't have to plead guilty if you do not want to. That is what self incrimination is, for example when Miranda was being asked about the crime he did not have to answer he could of just said he plead the 5th and said he wanted to wait for an attorney to both consult him and be with him while he was being interrogated. If Miranda would have known that he had that right he probably would not have incriminated himself. Miranda was also known to have some mental problems......

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Miranda vs Arizona

...Facts In March 1963, Ernesto Miranda, of Phoenix, Arizona, was arrested in connection with the rape and kidnapping of women. While in custody and after 2 hours of interrogation, he confessed of robbery and attempted rape. His confession and the testimony of the victim were used in the trial. The judge of the Superior Court allowed the confession was used and Miranda was convicted and sentenced to 20-30 years in prison Miranda appealed the case to the Arizona Supreme Court; His lawyer argues that his confession should not be used in court because he had not been informed of their rights. Arizona Supreme Court rejected his appeal and upheld his conviction. Miranda then petitioned for the case to be heard by the United States Supreme Court. Intimidation deprives suspects of their basic freedom and may lead to false confessions. The defendant's right to a lawyer is during interrogation allows the offender to tell their story without fear, effectively, and in a way that all his rights will be protected. Issue: Legal issue The issue of this case is if the government is required to notify the accused detainees of their constitutional rights of the Fifth Amendment against self-incrimination before questioning the accused. The government has to notify detainees of their constitutional rights of the Fifth Amendment. The Amendment explain “the right to remain silent, it just mean all that they confess could be used against them in court, his right to counsel and their right......

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