Pret - Demand and Supply Analysis - Case Study Example

Pret a Manger Demand and Supply analysis Name: Lecturer: Course: Date: Table of Contents Table of Contents 2 Introduction 3 Demand and Supply in fast-food service sector 4 Shifts in supply curve 4 Costs of production 4 Government taxes 5 Climatic conditions 5 Rise in number of fast-food restaurants 6 Shifts in demand curve 7 Prices of substitutes 8 Changes in the prices of complements 9 Consumer income 9 Tastes and preferences 10 Strategic plan to deal with the shifts 10 Altering demand 10 Controlling Supply 11 Conclusion 12 Reference List 13 Introduction Pret a Manger, also known as Pret, is a fast-food chain. Headquartered in the United Kingdom, the company was founded in 1986 in London as a small fast-food restaurant. Over the last three decades, it has steadily grown and currently has 265 stores across the United States, Hong Kong, and France. Financially, the company’s annual turnover is estimated at £270 million (Dimant et al 2010). Concerning its business model, the company concentrated on quality and effective customer service. Its current workforce consists of nearly 2200 people. It deals in freshly prepared natural food. Its offerings range from coffee, filled baguettes, sandwiches, and soup. Additional treats include croissants, cakes, muffins, and desserts. Some locations, such as Hong Kong also offer noodles and sushi. The company also has a variety of vegetarian options, such as hummus wraps and roasted vegetable sandwiches. The company specialises in offering fresh fast food, prepared using natural ingredients (Dimant et al 2010). The company mainly targets middle- to upper-class income groups. Its main customers include business people and white-collar workers, specifically in those working in the cities. Consequently, the company is often situated adjacent to train stations and city centres, such as Central London. This paper examines the biggest likely cause of a shift in supply and demand over the next three years in Pret’s target market. It further outlines strategies to address these developments (Dimant et al 2010). Demand and Supply in fast-food service sector The concepts of demand and supply in the fast-foodservice sector are crucial for determining Pret’s performance over the next three years. The underlying logic in the UK restaurant sector is that customer will be willing to buy less quantity of food products at higher price than at lower price (Jain & Ohri 2011). This justifies the application of supply and demand curve in explaining the biggest likely cause of a shift during the next three years in Pret. Shifts in supply curve There are several underlying reasons why the supply curve of the Pret’s products will shift from left to right leading to a change in quantity supplied and the market price. These include: Costs of production Over the next three years, a rise in cost of production is expected in the foodservice market due to the rise in prices of grocery, rent for space, wages and utilities, such as water and electricity (Drew 2014). Rise in costs of production will lead to a decrease in the supply of food. The supply curve will shift inwards to the left. Higher costs mean that Pret will supply less at each price. Figure 1: shift in supply curve inwards Government taxes Increased government involvement in the foodservice market will have a significant impact on supply in the sector over the next three years. Greater taxation on producers of agricultural products is expected to increase costs (EY 2014). Consequently, Pret will need to increase costs of its food products. The trend will lead to an inward shift of the supply curve (S1) to the left see figure 1. The company will supply less after higher taxation (Jain & Ohri 2011). Climatic conditions Change in climate will have significant impact on Pret’s food supply. For instance, the climate is expected to be unfavourable for production of agricultural products, such as fruit, coffee, wheat and vegetables, potatoes, and field beans due to the effects of climate change. Hence, low harvest is expected a cross the United Kingdom. This will lower the supply of raw materials for Pret, leading to higher costs of production. Low harvest of fruit, coffee, wheat and vegetables, potatoes, and field beans will lead to a decrease in their supply. The supply curve is expected to shift inwards (S2) to the left (See Figure 2). Figure 2: shift in supply curve inwards Rise in number of fast-food restaurants The number of fast food restaurants affects the total supply in the food service market. Since new fast food restaurants are projected to enter the sector, supply of fast foods will increase. This will exert downward pressure on the market price (EY 2014). Entry of new fast food chains in the sector will increases supply in the market leading to fall of market price the consumers pay, as the consumers will have greater choice. The supply curve will move outwards and to the right (Jain & Ohri 2011). Figure 3: shift in supply curve outwards Shifts in demand curve The demand curve for foodservice products will shift to the right or left after a change in the primary factors that determine demand. Increased demand for Pret’s products will cause the demand curve to shift to the right as indicated in the diagram below. On the other hand, decreased will lead to a shift of the demand curve to the left as indicated below. Prices of substitutes Full-service restaurants are in competitive demand in the UK. Eating-out sales increased by 2 percent for full-service restaurants, pubs and casual dining, between the year 2013 and 2014 (EY 2014). However, the full-service restaurants, pubs and casual dining are expected to increase the prices of their foodservice causing a substitution effect towards fast-food restaurants. Hence, causing an outward shift in Pret's demand curve as more will be demanded at D2, as consumers in the restaurant industry will switch to quick-service restaurants. Eating-out food chains are projected to perform better than full-service restaurants. In 2014, foods spend per meal increased to £8.70 from 2012’s £8.45. Spending in the fast-food service sector is expected to increase further through 2015 (EY 2014). Figure 4: shift in demand curve Changes in the prices of complements Complements refer to goods that go together with other goods. Example in the foodservice sector includes fish and chips, or tourism and cuisine. For instance, decreased cost of flights from New York to London Heathrow over the next three years will increase the number of tourists coming to the UK. This will increase the demand for restaurants, Pret’s included. Hence, the demand for Pret’s products will increase. The demand curve will shift outwards to the right (D2) (See Figure 4). Consumer income Consumer incomes are expected to increase over the next three years due to increase in demand for higher wages in the UK. Hence, their disposable income will increase. As a result, their ability to purchase will increase (Drew 2014). After a rise by 2.5 percent in 2014, consumer spending is projected to increase to 2.3 percent in 2015. In 2016 and 2017, it is expected to rise further by 2.2 and 2.0 percent respectively. In 2018, spending will increase by 1.8 percent (EY 2014). This will cause the demand curve to have an outward shift to D2 due to increased demand for quick-service restaurants (See Figure 4). Tastes and preferences The tastes will be highly volatile, as more consumers in the industry will prefer faster service yet quality food. Additionally, more consumers are becoming more eco-conscious. Consumers have become more time-sensitive and value conscious, with the fast-food service sector expected to experience increase customers by 4.2 percent (EY 2014). Pret has a reputation for fast and quality service and environmental sustainability. This will increase demand for its products, leading to outward shift of the demand curve to D2 (See Figure 4). Strategic plan to deal with the shifts The collective effects of recession, declined incomes, increasing food costs and the rapid increase in the amount of branded coffee shops in the UK market signals a difficult environment for Pret over the next three years. Still, Pret is well placed to gain from the rise in consumer demand for fast-food service. Critically, the company faces unpredictable demand and supply shifts in curves over the next three years. It needs to alter demand and control supply. Altering demand The company should use a differential pricing scheme to shift demand to nonpeak periods from the peak periods over the next three years. This will increase primary demand during periods of low demand. For instance, it could give night and weekend rates or coupons (Sasser 2015). During the periods of low demand, the company should come up with non-peak demands by diversifying on its product offering. For instance, it should add breakfast items to its menu. Alternatively, it should being to give out dinner to compete against full-service restaurants. This will however, call for additional skills, equipment and workforce, as well as supervision (Wessels 2000). Additionally, Pret should come up with complementary services to move demand away from the peak periods. This will lure its customers from the bottleneck operations during the peak periods as increased consumer spending is expected over the next three years. For instance, it can offer them alternative services, such as cocktail while queuing during capacity-restricted operations when waiting for service or tables to clear (Sasser 2015). Controlling Supply The company has more direct influence on the supply aside than on the demand side. To control supply, it should use part-time workforce, increase efficiency, engage in promotional activities, and increase consumer participation. Since Pret expects its peak to vary by season, such as during end months, weekends, or high tourism season, it is likely that its full-time employees may not handle the high customer traffic during the peak hours. This is since high consumer spending is expected over the next three years. It should hire part-time workers, such as college students to support the full-time employees (Sasser 2015). However, Pret will also need to maximise efficiency during the peak demand periods. During the peak periods, it should provide continued training for its employees, as well as ensure they are highly motivated to enable them be more productive. It should also use cross training to manage the peak capacity. Basically, Pret’s service delivery system is made up of a range of elements. When its system delivers a single service at a full capacity, its other sections may end up becoming underused. However, when the employees in its redundant sections are made to assist during the peak service, they are likely to increase capacity during the bottleneck periods. Hence, during shifts in demand that create a bottleneck in other sections of the system, the workforce can be made to shift back yet again (Wessels 2000). The company can as well increase consumer participation to reduce the anticipated high cost of production. For instance, it should integrate more self-service options to increase customer participation in service, as this will reduce labour cost. For instance, it should offer buffets to the business class customers. Looking for the best fit is also essential. The challenge for Pret is finding the best fit between capacity and demand. To manage effectively the shift in balance between demand and supply, Pret will need to make demand forecasts. Later, it should break down its service delivery system into sections. Afterwards, it should determine the current capacity of each element, and decide an estimate of what each section should do, depending on the forecasted demand. Lastly, Pret should advertise more on its high quality service, fast service and environmental sustainability to maximise its sale. (Sasser 2015) Conclusion Over the next 3 years, the market prices of food are expected to rise. Favourable climatic conditions for food production are also projected. The supply curve will shift inwards from S1 to S2. However, rise in the number of fast food restaurants show that the supply curve will move outwards. When it comes to demand, an increase in price of substitutes will cause demand curve to have an outward shift. Concerning consumer preferences, more consumers are becoming more eco-conscious, value conscious, time-sensitive. This will increase demand for Pret’s products, leading to outward shift of the demand curve. Hence, Pret is positioned to experience high demand over the next three years. Still, Pret is well placed to gain from the rise in consumer demand for fast-food service. Critically, the company faces unpredictable supply shifts and positive shift in demand in over the next three years. The company should, therefore, alter demand and control supply. The company should use off-peak pricing strategies, use of reservation systems, nonpeak promotions, and complementary services to influence demand. Additionally, it should use part-time workforce, increase efficiency, engage in promotional activities, and increase consumer participation to control supply. Reference List Dimant, E, Dysart, M, Lanoix, K, Leung, T & Lindner, S 2010, Prêt A Manger. A Business Model Analysis, Munich, GRIN Publishing GmbH, viewed 19 Feb 2015, < http://www.grin.com/en/e-book/165865/pret-a-manger-a-business-model-analysis> Drew, W 2014, Hazy sunsgube with cloudy spells is forecast for UK easting-out market, viewed 19 Feb 2015, EY 2014, Restaurant & Casual Dining Insight Report, viewed 19 Feb 2015, Jain, T & Ohri, V 2011, Principal of Microeconomics, FK Publications, Delhi Sasser, E 2015, "Match Supply and Demand in Service Industries," Harvard Business Review, Nov 1976 Issue Wessels, W 2000, Economics, Barron's Educational Series, New York Read More