Hind Oil Industries Case Study
Contents Background 2 Analysis 2 Price Drivers 2 Linear Regression 3 Estimated Linear Demand Function 3 Demand Elasticities 4 Own-Price Elasticity 4 Income Elasticity 5 Cross-Price Elasticity 5 Advertising 5 Recommendation 6 Increase Advertisement Expenses 8 Appendix A 11 Hind Oil Industries Sales History 11 1
Background Hind Oil Industries (HOI), a manufacturer of edible mustard oil, was incorporated in July 1992 with a single oil processing machine. Hind Oil has steadily grown, increasing capacity to three oil processing machines but is still considered a small edible oil manufacturer in Asansol, West Bengal. Hind Oil Industries sells its Maa mustard oil to the local consumers throughout the entire city of Asansol and its nearby suburbs. Around 60% of HOI’s Maa mustard oil sales are through the retail sales channel. Customers through this channel are very brand loyal due to the unique taste and signature pungent smell by brand. Customers that buy in bulk are compelled by lower prices and are not typically brand loyal. HOI had seen the price of mustard seeds, its primary raw ingredient, rise steeply because of harsh weather conditions in the previous harvesting season. The price of mustard seeds accounts for 75% of the total production costs of Maa mustard oil. Despite a history of selling their product at a price considerably lower than that of the market and earning a reputation of being a quality product, the company is now facing challenges in pricing strategy. HOI would need to raise the price of its product significantly in a price-competitive market dominated by larger companies. The company would like to increase the price of its only product, Maa mustard oil, to cover the substantial increase in production costs without suffering a loss in total revenue earned. Analysis Price Drivers The edible oil market in India was largely dependent on the production of soybeans, groundnuts, and rapeseeds. Because the demand for edible oil exceeded the supply manufactured, imports of edible oil rose about 30% in the years 2014-2015. The rise in imports also led to an increase in consumption of cheaper imported palm oil and palm oil blends and further complicated the price-sensitive market and made it harder for smaller manufacturers such as HIO to remain profitable. Additionally, HIO faced multiple direct competitors in Asansol market. There are as many as 20-25 mustard oil-processing mills operating in Asansol. The Asansol market accounts for a 1/3 of the total Maa mustard oil sales. Furthermore, the mustard oil industry faced internal competition as the rise in per capita income and fears of adulteration created a demand shift towards premium varieties and away from loose oils.