“Nestlé’s Nescafé Sales: Balancing Price Hikes and Consumer Demand Amidst Soaring Costs”

QUESTION

Nestlé SA, the maker of Nescafé coffee and Purina pet food, reported a decrease in sales volume for the fourth quarter after raising prices to compensate for soaring production costs. Nestlé’s sales volume fell 2.6 percent over the last three months of 2022 while prices rose by an average of 10.1 percent. Other consumer-products companies are struggling with how much they can raise their prices without consumers cutting back on their purchases.

The article explains that Nestlé’s: “… sales volumes fell 2.6% in the last three months of 2022, with prices rising by an average of 10.1%.” Assume that sales volume refers to the number of packages of Nescafé coffee sold. Holding everything else constant, if the sales volume of Nescafé coffee decreases by 2.6 percent in response to a 10.1 percent increase in price would this mean that the demand for Nescafé coffee is price-elastic or inelastic? Briefly explain your answer.

Refer to your answer to the previous question. Holding everything else constant, if the sales volume of Nescafé coffee decreases by 2.6 percent in response to a 10.1 percent increase in price would the revenue from sales of Nescafé coffee increase or decrease? Briefly explain your answer.

ANSWER

“Nestlé’s Nescafé Sales: Balancing Price Hikes and Consumer Demand Amidst Soaring Costs”

The reported decrease in sales volume and the corresponding increase in prices for Nestlé’s Nescafé coffee in the fourth quarter of 2022 prompt an analysis of the price elasticity of demand for this product.

Price elasticity of demand measures how responsive the quantity demanded of a product is to changes in its price. It can be classified into three categories: elastic, inelastic, and unitary elastic.

In this case, when the price of Nescafé coffee increased by 10.1 percent, and the sales volume decreased by 2.6 percent, we can determine the price elasticity of demand as follows:

Price Elasticity of Demand (PED) = (% Change in Quantity Demanded) / (% Change in Price)

PED = (-2.6%) / (10.1%) ≈ -0.257

The negative sign indicates an inverse relationship between price and quantity demanded, which is typical. However, the magnitude of the elasticity coefficient is less than 1, suggesting that the demand for Nescafé coffee is inelastic.

Inelastic demand means that consumers are not highly responsive to price changes. When the price increases, the decrease in quantity demanded is proportionally smaller. In this case, despite a 10.1 percent increase in price, the quantity demanded only decreased by 2.6 percent, indicating that consumers continue to buy Nescafé coffee even at the higher price.

Now, let’s consider the impact on revenue. Revenue is calculated as:

Revenue = Price x Quantity

In this scenario, while the price increased by 10.1 percent, the quantity sold decreased by 2.6 percent. To determine the overall impact on revenue, we can multiply the percentage change in price and quantity:

Change in Revenue = (% Change in Price) x (% Change in Quantity)

Change in Revenue = (10.1%) x (-2.6%) ≈ -0.263%

The negative sign indicates a decrease in revenue. So, despite the price increase, Nestlé’s revenue from sales of Nescafé coffee decreased by approximately 0.263 percent.

In summary, the demand for Nescafé coffee is price-inelastic, meaning that consumers are not very responsive to price changes. While Nestlé raised prices by 10.1 percent, the sales volume only decreased by 2.6 percent, indicating that demand remains relatively stable. However, this price increase had a negative impact on revenue, as the decrease in quantity sold more than offset the gains from higher prices.