Description
Scenario
You have been hired as a financial manager for N&D’s Pizzeria. In your role, you support the owners with budgeting and financial information and help them understand the impact of market forces on their business. The pizzeria owners, Nicole and Danielle, have asked you to provide some financial insight to inform their pricing strategies and other decisions.
Company Overview
N&D’s Pizzeria operates six pizzerias in the county of Sheffield. They provide the following products and services:
- Traditional pizzeria offerings: pizzas with a variety of toppings, breadsticks, and salads
- Take-out option plus delivery within 10 miles
- Dining-in option (each pizzeria has a small dining room with 10 to 15 tables)
N&D’s currently employs a total of 60 permanent staff as managers, cooks, servers, cashiers, bussers, dishwashers, and cleaners. It hires additional part-time and seasonal staff during peak periods. N&D’s also contracts with a local bookkeeper and another company to maintain its mechanical and IT equipment. It leases its restaurant spaces, ovens and other equipment, furniture and fixtures, and delivery vehicles.
You can assume that the company will have a single menu for all locations, a single set of prices, and probably the same hours of operation, and it will make capital and advertising decisions for operation as a whole. When discussing the impact of market forces and pricing decisions, consider the six locations collectively.
Local Market Environment
- Other pizza restaurants are opening downtown, potentially impacting Nicole and Danielle’s business. N&D’s Pizzeria also faces competition from other fast-casual restaurants and from local supermarkets that offer frozen pizzas and fresh alternatives.
- A significant portion of N&D’s revenue comes from downtown businesses and catering company lunches. There is currently an initiative underway to revitalize the downtown area: It is expected to make gradual progress during the next year, adding around 50 more office spaces to accommodate approximately 1,000 employees. The project could bring more potential customers but also more potential competitors.
Current Economic Environment
- In relation to the business cycle, the local economy is generally healthy. Local banks and business associations expect it to remain so for the foreseeable future.
- Local interest rates for unsecured small business loans range from 7.25% to 7.75% per annum. Small businesses often use these loans to fund their operations during seasonal dips in demand. (Secured loans, used for capital investments such as the purchase of equipment, have lower interest rates.)
- The regional unemployment rate is a seasonally adjusted average of about 3.5%.
- Inflation rate: The regional Consumer Price Index (CPI) should continue at an annual rate of about 2.2% or slightly higher. This means minimum upward pressure on labor, materials, and fixed costs.
Relevant Market Forces
N&D’s Pizzeria is working with Success Marketing, a market research firm that helps businesses by providing data to inform management operations and decisions. Success Marketing developed the following competition analysis for the pizzeria, which contains key information about the economic environment:
N&D Competition Analysis
| Competitors | Community Demographics | Number of nearby eateries (with and without liquor licenses) | Average price for a takeout meal from nearby eateries | Area businesses | Notes |
|---|---|---|---|---|---|
| Competing Pizzeria 1 | Approximately 2,000 students Aug–Dec and Jan–May Population of 10,000 all year, not including students | With liquor licenses: 2 Without liquor licenses: 5 | $20 | Nearby university | The university is planning an expansion to accommodate 500 more students in the upcoming year Most restaurants have public parking within walking distance and are within walking distance from the university |
| Competing Pizzeria 2 | Population of 25,000 | With liquor licenses: 3 Without liquor licenses: 4 | $30 | Nearby arena | Most restaurants have public parking within walking distance and are within walking distance from the arena |
| Competing Pizzeria 3 | 3,000 students Aug–Dec and Jan–May 12,000 all year, not including students | With liquor licenses: 3 Without liquor licenses: 6 | $25 | Nearby university | Most restaurants have public parking within walking distance and are within walking distance from the university |
| Competing Pizzeria 4 | Population of 45,000 | With liquor licenses: 2 Without liquor licenses: 6 | $25 | Nearby office buildings | One of the nearby office buildings is adding an expansion to accommodate 150 new employees Most restaurants have public parking within walking distance and are within walking distance from downtown offices |
| Competing Pizzeria 5 | Approximately 4,000 students Aug–Dec and Jan–May 20,000 all year, not including students | With liquor licenses: 4 Without liquor licenses: 4 | $20 | Nearby university | Most restaurants have public parking within walking distance and are within walking distance from the university |
| Competing Pizzeria 6 | Population of 47,000 | With liquor licenses: 2 Without liquor licenses: 3 | $30 | Nearby office buildings | Most restaurants have public parking within walking distance and are within walking distance from downtown offices |
Possible Operating-Hour Extension
N&D’s Pizzeria locations currently close at 10 p.m. and stop deliveries at 9 p.m. The local universities are expanding their populations of on-campus students. The pizzeria owners believe that staying open until 12 a.m. will increase business and help them stand out from competition. They will need 2–3 employees to work during that time (2 on Sunday through Thursday and 3 on Friday and Saturday nights). Employees are typically paid $9–$10 per hour, on average, including benefits.
Economic Policies and Trends
- N&D’s Pizzeria uses cheeses, tomato sauces, and olive oil imported from Italy, which they purchase from a U.S.-based wholesale company. The government is likely to impose an import tariff, which would raise the cost of N&D's ingredients by about 20%.
Current Pricing Information
The owners have indicated that they are willing to increase prices to address potential wage increases and increases in price for three of their main ingredients. They are concerned that if they raise prices too dramatically, they will drive their customers away. Based on their market research data, Nicole and Danielle know that, for all locations, their pizzeria is an average-priced option in terms of other similar restaurants. They generally receive high ratings for quality and service and average ratings for restaurant atmosphere.
N&D’s marketing consultants, Success Marketing, created a Demand Elasticity Spreadsheet, which shows the estimated number of meals that N&D’s pizzerias would sell at various prices. Higher prices would mean lower volume, of course. There is an average meal price that would maximize total revenue. Nicole and Danielle can use the spreadsheet to see the effect of various price levels.
Directions
Nicole and Danielle would like you to provide a financial recommendations memorandum that will inform their approach to pricing decisions. Based on the scenario, above, they would like specific guidance on the following: Should they raise, lower, or maintain average prices in response to the import tariff? With regard to expanding the pizzeria’s operating hours, should they move forward, knowing that it could raise revenue but also increase costs? They have asked that you support your recommendations with financial information from the spreadsheet and with evidence from the company scenario.
- Market Forces and Trends: Nicole and Danielle would like you to describe market forces that potentially impact their business decisions.
- Describe the basic market forces that are relevant to pricing and decision-making for companies. Include the following:
- What information would you want to have in order to make sound pricing decisions?
- With financial information, there is often some level of uncertainty and estimation. How would you explain any risk or uncertainty about information to senior management?
- How would you suggest monitoring and responding to competitors’ pricing actions?
- Discuss the overall economic ups and downs, such as business cycles, that inform financial strategies used at different times. Include the following in your response:
- What trends are important for business owners to consider, and what impacts do the different phases have on financial strategies?
- What trends are important for business owners to consider, and what impacts do the different phases have on financial strategies?
- Describe the impact of local economic trends, such as interest rates, on supply and demand, equilibrium prices, and business decisions. Include the following in your response:
- Describe how a major fluctuation in inflation and unemployment rates or the interest-rate outlook would affect businesses.
- Describe how a major fluctuation in inflation and unemployment rates or the interest-rate outlook would affect businesses.
- Describe the basic market forces that are relevant to pricing and decision-making for companies. Include the following:
- Pricing Information: Based on the financial information and information in the scenario about potential increases due to a tariff, Nicole and Danielle would like you to describe factors that influence price for determining the best strategy given the company’s current financial situation.
- Describe factors that influence price and inform pricing decisions. Include the following:
- What average price level would you recommend, and why? What is the revenue-maximizing price based on estimated demand for N&D Pizzeria’s products?
- How sensitive is demand to N&D’s pricing versus competitors’ prices?
- Determine the price impacts of resulting revenues, costs, and operating income using information from the spreadsheet. Include the following:
- What would the resulting revenues, costs, and operating income be?
- Define opportunity costs, and explain how those, along with budget constraints, such as acquiring more staff or equipment, might affect pricing decisions.
- How do overhead and other fixed and sunk costs affect pricing decisions?
- Explain how key takeaways from the competition analysis inform pricing strategies. For example, should N&D's strive to be the high-price, high-quality competitor or the low-priced but probably lower-quality competitor? Include the following in your response:
- Based on the information provided in the scenario, would you recommend expanding the hours of operation? Why or why not? What would be the estimated effect on revenues, costs, and profit? Provide examples from the company’s financial information to support your answer.
- What further analysis would you recommend based on the information presented?
- The federal government is considering imposing a substantial import tariff on foods from Italy, including the sauces, cheeses, and olive oil that N&D’s Pizzeria buys from a U.S. importer. Discuss how such a tariff might affect pricing and costs—for n&d’s, as well as for competitors. Include the following in your response:
- Should N&D raise prices to offset some or all of the tariff?
- Should they try to lower costs of raw materials or labor, possibly affecting the quality of their products and service?
- Should N&D consider buying those raw materials domestically, even if the quality might suffer? Review the Income Statement spreadsheet in the Supporting Materials section. Looking at N&D’s projected income statement and margins, how much of a drop in profit and margins can the company afford.
What to Submit
Every project has a deliverable or deliverables, which are the files that must be submitted before your project can be assessed. For this project, you must submit the following - Financial Recommendations Business Memorandum
- Your business memorandum will discuss the elements, above, and should inform the company about how market forces impact prices and decision-making, including how it should prioritize strategic initiatives based on economic factors and trends. The memorandum should be 3–5 pages in length.
- Reference List For each source that you cite, you need to include the author’s name, the publication year, the title of the source, and the location of the source in a References section at the end of your work. Cite all sources appropriately.
Supporting Materials
The following resource(s) may help support your work on the project - :Income Statement- attached down below!
Use this spreadsheet to inform your responses in the Financial Recommendations Business Memorandum.
- Demand Elasticity Spreadsheet- attached down below!
Use this optional spreadsheet to see the impacts of price elasticity. You may wish to download it so that you can explore the effects of changing the price and quantity information—it may help support your project deliverables.
- Demand Elasticity Spreadsheet- attached down below!
- Describe factors that influence price and inform pricing decisions. Include the following:
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Explanation & Answer
Please find attached memorandum and its respective outline. Go through it and send me your feedback. In case you eed any adjustments, get back to me and i will be glad to revise accordingly.
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How Market Forces Impact Prices and Pricing Decisions; Case Study of N & D Pizzeria
Student name
Course
Lecturer
Institution
Date of submission
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How Market Forces Impact Prices and Pricing Decisions; Case Study of N & D Pizzeria
To: N & D Pizzeria Management Team
From: Name……, Financial Manager
Subject: Analysis of Market Forces and their Impacts in Influencing Price and Pricing Decisions
of N & D Pizzeria Company
The long-term fundamental aspect of N & D Company is to increase profitability as the
company wants to open 50 more offices and recruit over 1,000 employees. Dynamic economic
business environment has necessitated conducting data analysis of the market forces and their
influence in determining the transfer price and pricing of the Pizzas in a competitive business
environment. In a perfect competitive market with an elastic demand and supply of pizzas, a
slight increase of prices causes a significant drop in the quantity demanded for the pizzas bought
in the market. Introduction of import tariff on the ingredients that are used to produce pizzas
result to increase in the cost of the raw materials that are used to produce pizzas. Creation of 50
more offices and recruiting over 1,000 employees requires proficient price and pricing strategies
that enables N & D Pizzeria Company to meet its financial obligations. Impact and incidence of
import tariff will determine the contribution margin of the company. If the business decides to
transfer the import tariff rates to the financial consumer of the pizza products, consumers will
divert to competitors thus reducing the volume of the pizza products sold in the market.
However, if the company opts to maintain the price, contribution margins will be low and the
business will be operating at high cost that may lead to short-term financial difficulties in the
company. The report will examine demand elasticity and price volume changes in regard to
imposition of import tariff of the raw materials that are used to manufacture Pizza products.
Market Forces, Trends, and Pricing Information
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Market forces are aspects that influence business decisions in an economy whose consideration
results to a profit or loss to a business. N & D pizza company should implement pricing
strategies according to data presented using the marketing consulting firms. The income
statement of the marketing team depicts that an increase in price results to a decline in gross
revenue generated by N & D Company. Incorporation of the market forces and trends will assist
N & D Company to maintain or increase the selling prices of the pizzas products. The company
has a wide market share due to quality products that the company produces. The major market
forces that influence price and pricing strategies include demand and supply, government, future
speculation, and international transactions.
Government
Government policies, for instance, monetary and fiscal policies influence the size and
level of economic activities occurring in the economy. Imposition of import tariffs will increase
the cost of the ingredients that are used to manufacture pizzas. When the cost of inputs increases,
selling price of the pizzas also increases. At high prices, contribution margin increases however
total volume of the pizzas produced reduces. For instance, at low prices, the company will
produce 5,000 units of pizza, at medium prizes, the company will produce 4,000 units, and at
high prices, the company will produce 3,000 units of pizza. Imposition of import tariff on
ingredients used to manufacture pizza would result to increased prices of the product. N & D
Company should focus on implementing the new project of expanding the business. Creation of
50 offices and recruiting more than 1,000 employees will result to increased production.
Imposition of tariffs on imports will help to promote local competitors thus N & D Company
should transfer the prices to the final consumer.
Elasticity of Demand and Supply
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Elasticity of demand and supply influences price and pricing stra...
