In the News - Interactive Questions

Read the In the News article below and then answer the questions:

11 January 2006
Market Structure
This market sells 10 billion units a year - which equates to 100 units for each person in the UK every year. The market value of the product concerned is in excess of £2 billion. Despite these staggering figures, one of the firms in the market has had to go into administration after mounting losses. The firm made a loss of £10.8 million in 2004 and this has been reported to be much worse in 2005.

Golden Wonder, a private limited company, has announced that it has employed the services of accountants Kroll to act as administrators. Golden Wonder has three main factories, one in Corby in Northamptonshire, which employs 350 people, one in Scunthorpe in Lincolnshire, which employs 380 and one in Market Harborough, Leicestershire that employs 120. There are conflicting reports about what will happen to these plants. The Corby plant makes own label brand crisps and this operation is being moved to Scunthorpe. Some reports suggest that Corby will close within a fortnight, others that the factory will remain open.

Golden Wonder has a number of high profile brands, including Nik-Naks, Ringos and Wheat Crunchies. In March 2004, Chief Executive Ed Jackson oversaw a £25 million launch of the Midas Crisp in an attempt to win back some market share. The new crisp was given a new recipe, cooked in different oil and new packaging that was designed to keep it fresher for longer - the normal shelf life of crisps is around 12 weeks. The new product clearly did not make the difference Jackson, who was formerly the head of Unilever and United Biscuits, had hoped.

Golden Wonder's problems stem primarily from being in a market structure that is very obviously a monopoly - not in the sense that there is only one supplier, but due to the fact that over 50% of the market share is held by Walkers. Walkers began as a small family concern but they are now backed by PepsiCo, the world's biggest snack food company, worth £25 billion. Such a competitor helps put the £87.8 million worth of sales made by Golden Wonder in 2004 into perspective.

In such a market structure, Golden Wonder have simply not been able to compete. Walkers have managed to build their market share significantly. One of the factors that has led to this has been the developments of new production techniques and packaging to push up the quality of the product but there is also no doubt that a very successful advertising campaign has also led to the firm claiming market share.

In 1995, Walkers launched a series of ads featuring soccer star Gary Lineker. Lineker was a highly successful player for both club and country and was famous for never having been booked during his career. Walkers exploited this and put Mr Lineker into the role of 'no more Mr Nice Guy' as he went round stealing Walkers crisps from unsuspecting people - including children. Sales of Walkers crisps in 1995 stood at 1.34 billion packets a year. By 2002, it had risen to 2.75 billion packets a year.

The association with Lineker has been very lucrative for both him and Walkers. Despite having retired from soccer in 1994, Lineker has managed to remain as the face of Walkers crisps. His £1.5 million contract is reported to finish in 2006 and it will be interesting to see if Walkers renegotiate a new deal.

For Golden Wonder, such a luxury was not available. They lagged behind when Walkers were looking to innovate and the words of Ed Jackson now look hugely prophetic - "to stand still you have to innovate. You have to innovate or die - that's the name of the game". It appears that Golden Wonder not only failed to stand still, they did not innovate either.

The administrators are hoping that they will be able to find a buyer for the remaining parts of the Golden Wonder business - the employees will be watching in hope and expectation for the outcome of their efforts.

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Using an example, explain what is meant by the term 'market value'? (4 marks)

What are the main characteristics of a market that is said to be a monopoly? (6 marks)

Analyse TWO ways in which Golden Wonder would find it difficult to compete with a firm like Walkers. (8 marks)

Discuss the costs and benefits to a firm of using a high profile celebrity to help market their products. (10 marks)

Assess the extent of the welfare loss that monopolies generate. (12 marks)