Market Structure Conduct And Performance Of Some Selected Large And Medium Scale Food Manufacturing Companies

The objective of this project work is to explain the characteristics of selectedrnpasta, macaroni and biscuits producing firms in terms of the industrialrnorganization model of structure-conduct-performance. The finding reveals thatrnthe market is highly concentrated . The concentration of pasta and macaronirnproducing firms as measured by CR3 of i.e. three of the firms producing pastarnand macaroni - Dire Dawa Food Complex, Kaliti Foods SC, and Kokeb Flour andrnPasta Factory have been dominating the market from 2002/03 to 2005/06 with arnconcentration ratio of 76% to 46% respectively. As the concentration ratiorndropped from 76% to 46% due to new entrants so did the performances to arncertain extent. The combined performances of these three firms as measured inrnterms of their operating profits and return on investment dropped from 7.75% torn0.19% and from 7.10% to 0.14% respectively in the period under review. Thernreturn on invest was lower than the bank interest rate which proves the poorrnperformances of these firms.rnMarket entry in terms of capital requirement and access to quality wheat supplyrnin the pasta and macaroni business is higher than that of biscuits investment.rnThat is why the number of existing firms operating in the biscuits market arernfourteen, while that of pasta and macaroni markets are eight.rnLike that of the pasta and macaroni producing firms, the biscuits market isrncharacterized by high degree of concentration. The concentration ratio (CR4) ofrn.'rnthe four firms that was 53% in 2002/03 grew to 91 % in 2005/06. Two of the firmsrnnamely NAS Foods and 2Brother had 85% of the market share. NAS Foodsrnalone had 55% of the market in 2005/06, followed by 30% of 2Brothers. Althoughrnthe biscuits market is somehow concentrated, the market leader or dominant firmrndoes not charge higher prices at the retail level as that of Pasta and Macaronirnsub-sector. At the wholesalers level however, firms charge different prices with arnrange of Birr 2 to Birr 4 per carton.rnThe overall average capacity utilization of the five firms covered in this study wasrn65% in 2006. Their capacity utilization in 2006 declined mainly because ofrnexpansions made by Dire Dawa Food Complex on its pasta and macaroni linesrnfrom 7272 tons and 7272 tons to 16059 tons and 18786 tons per yearrnrespectively, and that of 2Brother's additional biscuits line with a capacity of 6000rntons per year.rnHowever the capacity utilization of individual firms vary significantly. Dire DawarnFood Complex that contributes 67% (34845 tons) of the production capacity ofrnthe three firms has contributed 68% (22956 Tons) of the total products producedrnin 2005/06. In terms of capacity utilization by product, pasta had higher utilizationrnrate (69%) than the rest of products. Dire Dawa Food Complex, the marketrnleader in the sector, had 70% capability utilization for pasta (Spaghetti) product,rnfollowed by Kaliti Food SC at 69%. Kokeb and Kaliti Foods had relatively betterrncapacity utilization in 2006 although their combined capacity was much lowerrnthan that of Dire Dawa Food Complex.rnThe average capacity utilization rate of the four biscuits producing firms in 2006rnwas the lowest in the sector i.e. only 47%. This below average performancesrnwere attributed to the poor performances of the two firms, namely Dire DawarnFood Complex (34%) and Kaliti Food Complex (3%). NAS Foods which leads thernbiscuits industry had a capacity utilization of 97% followed by 2Brother, arnchallenger in the industry, by 67%.rnThe evaluation of the five firms with the application of the structural-conductperformancernmodel of industrial organization reveals the following key findings:rn• The Ethiopian food processing firms of pasta, macaroni and biscuits arernhighly concentrated and mainly dominated by the two major firms, DirernDawa Food Complex and Kaliti Foods for Pasta and Macaroni Productsrnwith a combined average market share of 55% from 2002/03-2005/06; andrnNAS Foods and 2Brothers in the case of biscuits market with a combinedrnaverage market share of 85% in 2005/06.rn• Competition among the biscuits firms is more intensive than the macaronirnand pasta markets due to the larger number of firms, and low level ofrnproduct differentiation although attempts are made to differentiate throughrnbranding and advertised. However, there is a tendency where a dominantrnfirms are emerging in each case, followed by infringe firms that arerncompeting at low level.rn• Market entry to pasta and macaroni manufacturing is more difficult thanrnbiscuits production in terms of capital requirements and lack of access tornsupply of quality wheat (or high cost of imported Durum wheat).rn• Firms are not integrated be it is forward, backward or horizontal. Lack ofrnback ward integration has made firms vulnerable to lack of continuousrnsupply of raw materials that constitutes about 55% of the cost ofrnproduction for biscuits and 75% for pasta and macaroni production.rn• Prices are not determined in consultation among rivals, no collusion. Butrnin the case of biscuits producing firms, NAS Foods, the market leader,rnsets its wholesale prices higher than its competitors. At the retail level allrnthe prices biscuits of same sizes have uniformity. In the case of pasta andrnmacaroni market, Dire Dawa Food Complex, the market leader, Chargesrnhigher than its rivals due to its brand preference among consumers.rn• The profitability of firms measured in terms of operating margin except forrnNAS Foods and Kokeb Flour and Pasta Factory that have continuousrngrowths reveals a discontinuous of growth of profits.rn• The five firms had an average capacity utilization rate of 65%in 2006. Thernthree major reasons, besides expansions of production capacity of DirernDawa Food Complex and 2Brothers in 2006, for the poor performancesrnthese firms were:rno Shortages of working capital has been ranked as the first reason forrnnot working at full capacityrno In inadequate supply of raw materials and inputs on time due tornfinancial constraint.rno Lack of demand for their products and fierce competition has beenrnthe 3rd reasons for poor capacity utilization mainly for the biscuitsrnproducers of government owned companies.

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