Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

Market Features of Cargills Magic Ice Cream

(Individual Assignment)

By

C.L. Ratnasuriya (2010/MBA/WE/05)

Semester I – Second Half

15th of May, 2011

Course: MBA: 534 – Managerial Economics

Dr. Prabhath Jayasinghe

Postgraduate and Mid-Career Development Unit

Faculty of Management and Finance

University of Colombo

Contents

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

Abstract and Introduction..........................................................................................................3

1.0 Product Differentiation.........................................................................................................4

2.0 Barriers to Entry...................................................................................................................5

3.0 Market Power.......................................................................................................................6

References..................................................................................................................................7

Abstract and Introduction

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

This report brings out certain market features in terms of product differentiation, potential
barriers to entry and market power of the supplier of a selected good in an imperfectly
competitive market.

Accordingly, the selected product is Cargills Magic Ice Cream. This was launched in Sri Lanka
in the year of 2002 by Cargills (Ceylon) Limited. It is one of the fastest growing and reputed
brands in the country at present. Cargills has 44 variants of ice cream and introduces new flavors
for every festive and holiday season. Today, these products are spread across all 25 districts of
Sri Lanka including North and East and have been able to reach a million litres in sales per
month since of late. Their focus on food safety, quality and the highest management practices
including environmental sustainability has made Cargills Magic ice cream, the only dairy
production plant in the country with comprehensive ISO certification.

After a careful study, it was identified that Sri Lankan ice cream industry falls under Oligopoly.
There are few firms in this industry with either homogeneous or differentiated products. There
are strong entry barriers in the market. Ice cream has a relatively inelastic demand. That is,
changes in the price of ice cream have a relatively small effect on the quantity of the ice cream
demanded. Since ice cream is a popular fast food item among all types of consumers and is
priced at an average price, there are no significant changes in demand for its price changes.
Rivalry in the ice cream market is somewhat high. This is evident by intensive price competition
within each of the individual categories. The rivalry is decreased to a great extent by the amount
of product differentiation.

If we are to further analyze the Sri Lankan market structure for ice cream category, it can be
specified as a ‘Duopoly’. Duopoly is “a specific type of oligopoly where only two producers
exist in one market.” (http://en.wikipedia.org/wiki/Duopoly).

In reality, this definition is generally used where only two firms have dominant control over a
market. Accordingly, the two dominant players in the Sri Lankan ice cream market are Cargills
Magic (Cargills Ceylon Limited) and Elephant House (Ceylon Cold Stores PLC).

1.0 Product Differentiation

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

Cargills Magic Ice Cream is a highly differentiated product. Even though ice cream products in
the dairy industry are used to be homogeneous in general, Cargills has made its ice cream unique
from that of the competitors mainly through their innovation and marketing strategies. This
successful product differentiation has created a huge competitive advantage for Cargills. Based
on two main factors, we can identify how Cargills Magic ice cream products have been
differentiated.

 Real Factors

Factors like flavor, size, quality, convenience can be taken under this. From the initial three ice
cream flavors - vanilla, chocolate and strawberry, that were in the Sri Lankan market, Cargills
has brought in to 44 flavors and varieties through its products. As such, they have given variation
to the customer to try out different experiences by moving away from the more traditional ice
cream segment. In terms of quality, they use the best of local ingredients. They have a separate
range for the health conscious consumers including sugar free ice cream. Cargills Magic is
unique for being purely fresh milk based and it is free of any vegetable oil or fat. They have ice
cream for every age group, in different sizes. Accordingly, the sizes of ice cream tubs, cups and
cones in various volumes have been designed as per the company’s segmentation on customer
age – Adults/Teenagers/Kids and on income level - Upper class/Middle class/Lower class.

 Artificial Factors

Factors like packaging, brand name, persuasive advertising can be considered under this. Cargills
use creativity and powerful communication in marketing Cargills magic ice cream. They are
using persuasive advertising strategies to differentiate their products and to create a good brand
image among consumers. One such best example is choosing the world class cricketer, Sanath
Jayasuriya as their Brand Ambassador and using him to promote Cargills Magic ice cream across
the country. This was one of the contributing factors to the huge sales and financial gains they
made lately. The packaging of the products is done quite nicely and distinctively. The use of
multi color wrappers, designs and logos is in line with the magical experience and sensational
feeling that Cargills is hoping to offer through their Cargills Magic ice cream range.

2.0 Barriers to Entry

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

There can be several strong barriers to entry that a new comer would face, with regard to ice
cream product category in the dairy industry. They are as follows.

 Economies of scale

Both the main two ice cream suppliers of Sri Lanka - Cargills and Ceylon Cold Stores are large
scale producers. For example, Cargills produce around eight million litres per annum. Thus, low
cost of production and other gains enjoyed by those two players due to being large, established
and dominant in the market, the new entrants find E.O.S as a major entry barrier.

 Production facilities and cheaper resources

New entrants face higher absolute costs since existing players have access to cheaper resources,
production facilities with high capacity, farm lands, state of the art machinery, technical
knowhow etc.

 Distribution network

Ice cream as a fast food item needs a well-established, broad network of buyers and extensive
distributing facilities. Cargills for example has around 30,000 general trade outlets and 138 Food
City super market outlets. Also, it has a network of more than 5,000 dairy farmers who supply
fresh milk. For a new comer, apart from the limited access to above major distribution channels,
the limited shelf space in super markets is also a critical entry barrier.

 International accreditations

Cargills is the only diary company in Sri Lanka which has ISO certification for areas like Quality
Management, Environmental Management and Food Safety Management systems. These
international accreditations have placed a major difficulty on the new entrants to be in par with
the high standards of the existing players.

 Advertising

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

Since the existing two major players are huge companies, their scale of advertising is also very
large. Hence, the new entrant has to spend more on advertising which will be too costly for him
and he is not in a position to enjoy various economies of scale of advertising as well.

3.0 Market Power of the Supplier

Market Power is the ability of a firm to raise price without losing all its sales. As previously
mentioned, ice cream has an inelastic demand. Hence, even if the prices are increased, there will
not be a significant change in the quantity demanded and consumed. As such, the degree of
market power of supplier is great.

Furthermore, ice cream has few close substitutes; more precisely, only two dominant players in
the Sri Lankan context. Again the elasticity of demand will be lesser since customers do not have
much option to move on to another similar product due to price changes. In such instances, the
supplier - Cargills has more market power.

The other important determinant of market power is barriers to entry. As clearly explained above,
there are strong entry barriers in the ice cream category. Hence, it is difficult for new firms to
enter this market where the existing firms are making economic profits. These barriers thus
protect the firms that are already in the market and such suppliers can enjoy more market power.

References

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 Running Head: MARKET FEATURES OF CARGILLS MAGIC ICE CREAM 2

Thomas, C.R. and Maurice, S.C. (2009). Managerial Economics. New Delhi: McGraw–Hill
Education

http://www.businesstoday.lk/cover_page.php?article=1951 – Retrieved on 13.05.2011

http://www.lankabusinessonline.com/fullstory.php?nid=748003025 – Retrieved on 13.05.2011

(http://en.wikipedia.org/wiki/Duopoly) - Retrieved on 14.05.2011

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