Inflation Price Level - Free Essay Example

Sample details Pages: 7 Words: 2016 Downloads: 10 Date added: 2017/06/26 Category Finance Essay Type Analytical essay Did you like this example? When we consider inflation, which describes the general increase in the aggregate price level, we usually associate this with a monetary policy as the remedial measure. In the past governments were usually the sole body that were in charge of maintaining a sustained inflation rate. However, over the past 50 years there seems to have been a movement in most western countries towards fashioning anti-inflationary policy to an independent central bank. Don’t waste time! Our writers will create an original "Inflation Price Level" essay for you Create order This results in the central bank being able to use interest rates to maintain the level of inflation in the economy without any political interference. Countries such as Germany Switzerland have adopted this path and have given their central banks the full independence to control inflation and whilst the UK has adopted this methodology, they have not fully reached the level independence in their structure. We will discuss further the implications of this switchover and how it may enhance the credibility of the monetary policy, we use monetary policy as good target in our discussion because the policy attribute we care about cannot directly measure credibility but maps directly into a policy outcome we can measure, inflation which seems to give a good indication on credibility. Firstly, it is necessary for us to consider what inflation is and why it may be a problem for governments or an economy? Inflation measures the annual rate of change of the general price level in the economy . Inflation is a sustained increase in the average price level of goods and services. We focus here on the overall level of prices throughout the economy rather than prices in one particular market or industry. The stem of the problem can have negative implications for the economy as a whole. If inflation is low, the effects may be small. But in periods of high inflation, known as hyperinflation, the negative effects will cripple an economy, a common problem associated is uncertainty this occurs when future prices are unknown, making it difficult to plan investment and consumption decisions. The problem of inflation can be limited by the effective use of monetary policy which involves changing the base rate of interest to influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. Monetarist economists advocate that monetary policy is a more powerful weapon than fiscal policy in controlling inflation. So who should take the responsibility of implementing and maintaining a low inflation? The government is good candidate for the role as they have a general prediction of where the economy is heading and therefore is able to set targets which coincides with other economic objectives. However, handing the monetary policy to an independent central bank will give the entity the responsibility of maintaining the stability of the national currency and money supply. The idea of the changeover is to enhance the social implications and trustworthiness of the monetary policy this changeover would result in a better move for society. We will show some of the benefits of having an independent central bank in charge of the monetary policy. The main purpose of central bank independence is primarily to protect interest rate choices from interference from the government in the belief that, due to imperfections in the electoral process, governments face incentives to choose interest rates that are lower than would be consistent with the inflation target. Governments are interested in being popular and low rates are always more popular then high rates. It is often assumed that governments have a shorter time horizon than the society they serve. Therefore, they might be tempted to hold down interest rates to stimulate spending ahead of an election, disregarding the longer-term potential consequence of inflation. Another incentive for governments to lower inflation is that inflation helps the governments budget. When price levels rise, the demand to hold currency also rises, so inflation provides governments with extra seigneurage (the income from issuing currency). Inflation also reduces the real value of government debts. But for this to be beneficiary, inflation expectations must be low when the government borrows by selling its fixed-interest long-term bonds. On the other hand if high inflation was expected, long-term interest rates would also be higher to reflect this. Thus the ideal short-term behavior f or a government that wishes to finance its debts most cheaply is to induce the belief that there will be low inflation so that it can borrow cheaply, then to cheat by allowing some inflation to write down the real value of its debts. This incentive is strong for those governments with large national debts, for whom debt interest forms a substantial part of expenditure. A further justification for central bank independence is that it is supposed to give credibility to monetary policy. People know about the incentives that the government faces, so if the government is responsible for day-to-day interest rate decisions, there is the suspicion that it will be tempted to set them too low. If there is high inflation, people will expect high inflation to continue and they will doubt any promises by the government that it will strive for low inflation. However, if there is an independent central bank that is immune to the incentives that tempt the government, people will believe that it will genuinely try to meet its inflation target. On the other hand, Muscatelli notes, some problems may arise when monetary policy is delegated to an independent central bank, especially when the central banks preferences are uncertain. Two conclusions emerge from his theoretical analysis: First, in countries where there is a low degree of agreement over the relative merits of maintaining low inflation as opposed to stabilising output and employment, the central bank may have very different preferences from those of the average voter. This means that an unelected central bank may have different aims from those of an elected government. The result is a degree of inflation control and output stabilisation that is unacceptable from societys point of view. A natural implication is that central bank independence cannot be imposed when there are sharp divisions in society over the relative merits of low inflation and stabilisation policy. This explains why independent central banks have emerged in countries where there is a stronger consensus on the costs of inflation (such as Germany and the United States). The second key conclusion is that, when an independent central bank does turn out to be desirable from societys point of view, mechanisms have to be put in place to make the central bank accountable. Examples include setting specific inflation targets for the central bank to meet, and the use of contracts where central banks are penalised for poor performance. But uncertainty in the central banks desired economic objectives means that it is difficult to design such targets and contracts. There is also the argument that full central bank independence has the disadvantage of severing co-ordination between monetary and fiscal policy. The government can engage in expansionary fiscal policy without regard for the inflationary consequences because the central bank is responsible for inflation control and can take the blame. Muscatelli argues a mechanism to reduce the distortion from the existence of uncertain central bank preferences is to grant the independent central bank goal independence: the central bank should be allowed to set and announce its own inflation targets. He shows that the central bank has an incentive to reveal its preferences through setting the inflation target. Accountability may then be achieved through full independence. Arguably, economies where the central bank has operational independence but not goal independence (such as the UK, Canada and New Zealand) may not be reaping the full benefits of central bank independence. We can illustrate this using the diagram below which shows the corresponding countries independent bank plotted against the average inflation for the period 1955 to 1988. We can mathematically show that high levels of independence can lead to lower levels of inflation. This would therefore lead to a more credible entity controlling the monetary policy. Firstly, we start with the gov ernment and give them the sole responsibility of implementing the monetary policy; We represent the government loss function as follows: Lg = ?2t + Bg(yt -y*)2with respect ?, where yt = ?t ?et + ?t The term ?t represents a white noise error term which is normally distributed with a zero mean and a constant variance. The terms ?t and ?et represent the inflation rate and the expected inflation, respectively. The term y* is a time-invariant output target whilst (yt -y*) represents the output gap. The parameter Bg characterises the government preference regarding the tradeoffs between inflation and output. Private actors know their long term contractual decisions and particularly their inflation targets will be built into these decisions, this will affect government inflation policies subsequently. They know, in particular, that the government will solve for the inflation outcome that is minimisation of equation (1); After taking expectations, solving for expected inflation and substituting the expression for expected inflation back into (3) the problem yields the following; ?t = BGY* ? BgY* is the inflationary bias which is the amount of extra inflation generated by the inability of the government to credibly commit to its announced inflation policy. We now do the same but designate the central bank in charge of the monetary policy. In order to do this we generate the central banks loss function which is as follows; Lcb = (1 +) ?2t + Cb(yt -y*)2 The central bank will choose ?t that will minimise the social loss equation (5) subject to the output constraint equation (2) taking ?e as given. Under rational expectations; ()Y* ()ut ()Y* measures the inflationary bias Therefore, ()Y* BgY* (this assumes that ? 0 and ? 0) From this we can conclude that inflationary bias from an independent central bank will be smaller than the inflationary bias produced by the government. Meaning the extra inflation produced by the central bank will be smaller than the inflation produced by the government. In conclusion the argument follows whether or not central banks should be designated the role of the monetary policy one suggestion is that the central bank may not pursue the necessary targets and therefore will not act in favour of the public. However, this arrangement does seem to have worked in achieving and maintaining low inflation in developed Western economies. Germany and Switzerland are believed to have had the most independent central banks since the last war and also the best records of inflation control. The evidence also suggests that inflation is negatively correlated with independence which has be come widely accepted as the norm, which further cements our thoughts that credibility can be enhanced by delegating the central bank in charge of the monetary policy. Bibliography Mankiw, N., Macroeconomics (5th ed.), Worth Publishers, 2003, ISBN: 0-7167-5237-9 Alesina, A., Summers, L. â€Å" Central Bank Independence and Macroeconomic Performance†. Journal of Money, Credit and Banking(1993): 151-162. Panagiotidis, Theodore, and Afroditi Triampella. Central Bank Independence and Inflation: the Case of Greece. (2002). Haan, Jakob, Helge Berger, and Erik Fraassen. How to Reduce Inflation: an Independent Central Bank or Currency Board? the Evidence of Baltic Countries. Emerging Markets Review (2001): 218-243. Hayo, Beranard, and Voigt, Stefan. â€Å"Inflation, Central Bank Independence and the Legal System†(2004). Maloney, John. â€Å"Let the Bank of England chose the inflation Target.† Economic Journal (2003). Stasavage, David and Keefer, P hilip. â€Å"The limits of delegation : veto players, central bank independence, and the credibility of monetary policy.† American political science review, 97 (3) (2003): 407-423. Fawcett, Nick. British and European Union Inflation. Tutor2u. 01 Dec. 2007 https://www.tutor2u.net/economics/content/topics/inflation/uk_inflation_record.htm. King, Mervyn. How Should Central Banks Reduce Inflation? Conceptual Issues. Federal Reserve Bank of Kansas City (1996). What are the Main Difficulties the Central Bank Might Encounter in Attempting to Reduce the Rate of Inflation? Economics Help. 2 Dec. 2007 https://www.economicshelp.org/macroeconomics/macroessays/difficulties-controlling-inflation.html. Thoma, Mark. Limits to Central Bank Independence. Economists View. 19 Nov. 2005. 02 Dec. 2007 https://economistsview.typepad.com/economistsview/2005/11/limits_to_centr.html. Rogoff, Kenneth. The Myth of Central Banks and Inflation. FT.Com. 29 Aug. 2006. 01 Dec. 2007 https://www .ft.com/cms/s/0/ff05c5b6-3783-11db-bc01-0000779e2340.html?nclick_check=1.

What Were Andrew Jacksons Policies on Banking and Tariffs Essay

Essays on What Were Andrew Jackson's Policies on Banking and Tariffs Essay The paper "What Were Andrew Jackson's Policies on Banking and Tariffs?" is a brilliant example of an essay on history.   Banking and tariffs were two critical issues that almost every president had to deal with, during the early years of post-colonial America. From the time of his election as the president in 1829, Jackson strongly opposed the idea of a central national bank. He cited the bank’s monopoly in concentrating the nation’s financial strength under a single institution and the likelihood of loss of the government’s sovereignty to foreigners. He also accused s of serving the interests of the rich, at the expense of the poor, as well as regional biasness. However, Jackson supported the tariff system that he claimed was in good spirit to support the growth of America’s young industries (Adams 137). This, he believed, would draw from high tax levies put on foreign imports. Even long before his election into office, Jackson was famous for relentlessly fighting for the economically marginalized citizens in America. Besides citing political threats from the bank, he also saw his moves as those that could better the lives of the poor by liberating them from oppressive monopolistic financial institutions that promoted capitalism to the advantage of the rich. At some point, however, it was purely of political gain other than pro-poor benefit. It is arguable whether Jackson’s policies hurt the America economy or not. First, the banking policy he advocated for during his tenure kept instilling fear of economic sabotage and depression among the public. Frequent threats of financial service withdrawal issued to the public by the national bank, as the counter effect on Jackson’s proposals, sabotaged economic security in most low-income neighborhoods that were dependent on bank loans for development. Second, his strong support for the imposition of t ariffs on foreign imports assisted the American economy. For the country’s sustainable economic growth and development, it was imperative to control the influx of foreign products into the country’s market to promote homemade consumption and enhance industrial development.

Electricity Our Lifeline free essay sample

Electricity is the basis of our lives and is used in almost everything we have. For human beings, electricity is like our lifeline, it’s really important that we be careful while using it. If we do not preserve the electricity we have, we may end up losing it because we did not proceed with caution. Electricity is the most important form of energy that we have in our possession. We may not realize it, but electricity is everywhere, â€Å" It produces light and heat and it provides power for our appliances† (Bartlett 190). Everything that is plugged into outlet uses electricity, and that falls into the category of many things. Electricity must be handled with great care or else, â€Å" It can kill if a bare wire is touched with wet hands, or someone is standing on something moist† (Bartlett 190). It is unpredictable and even the slightest mistake can cost a life. Without electricity, our technology would be dated much farther back. Our whole world is constantly in communication with one another, but it could not be possible without electricity. We can see how dependent we are, â€Å" In communications, we use electricity for our radios, the telegraph, telephones, the Internet, and television† (Bartlett 191). We need the news and entertainment, but it all comes back to the one source: electricity. Electricity was discovered even in the Biblical time period, â€Å" Thales, a Greek philosopher, started learning the properties of electricity in 500 B.C† (Bartlett 196). Although we have made remarkable progress in communications, we should thank all of those who put time into figuring out all of the complex machinery that we use today. The main place that families use their electricity is basically in their own households and sometimes offices. Without power, we can’t produce, â€Å" Electric power uses electricity to do work. It lights, heats, cools, and provides power for our many appliances† (El-Hawary 182). Mostly everything we use in our household is powered by electricity. Breaking down components is a necessity, â€Å" Electric power is measured in units known as watts† (El-Hawary 182). Knowing how many watts you are dealing with could save your life. We get our electricity from distribution centers called power plants. Power plants are ran by natural resources, â€Å" These power plants first harness the energy of steam or running water to turn a turbine†(El-Hawary 182). Although people think this is a complex process, it really is not. Our voltage for the power plant is created through, â€Å" The magnetic field created by the rotor turns also. As it turns, it produces voltage inside the wires of the stator and causes a flow of electric current† (El-Hawary 182-183). The way scientists constructed these power plants is remarkable and effective. Generators, the source of our industrialized electrical energy, have completely changed our industry of production and solutions. Electronics are considered to be the branch of science and engineering closely related to the science of electricity. Electronics are like a helper, â€Å" Electronics does help electricity do what it cannot do alone† (Henry 206). Our cell phones, and iPods are specific electronics that are used to display signals that electricity transmits through the current. Important components are used in electronics, â€Å" Electronics depend on highly specialized electron devices; the most important and well known is called a transistor† (Henry 206). Engineers have figured out how to put millions of these into a silicon plate that is about the same size as your fingernail. Most of our luxuries come from the scientists who spend countless hours experimenting with these microscopic chips. Electronics and the science of electricity both deal with the nature of electric current. Current can have different uses, â€Å" Electricity uses it for operating lights and electronics uses it to carry signals which contain information† (Henry 207). Electricity uses current in the simplest way, even though it is still a very complex process that must be studied in and out if someone wants to know it thoroughly. Electron devices help change current, â€Å" Signals can be present if the current varies, but when changed, it produces signals† (Henry 207). Signals can transmit almost anything but it’s usually images and sound. Our life is so much more open because of the results of signals to learn of new news or even listen to your favorite song. Solar electricity is created by the use of photovoltaic cells by converting solar energy harnessed from the sun into electricity. Efficiency may not be the best word to describe PV cells, â€Å" They are really expensive to make and the amount of energy they produce is small† (SE 1). Although they really aren’t that great, they are coming along quite well. When combining, the output is much greater, â€Å" They connect multiple cells together so they get more electricity† (SE1). Even though the output is greater, the expense of producing the cells is still quite great. There are some good things about PV cells, â€Å" They have no moving parts, so maintenance is minimal, and it is environmentally sound because it emits no greenhouse† (SE 1). Overall, there are great things that make photovoltaic cells sound. Although it may not be efficient now, the production of solar electricity is gradually becoming better and better for the environment. Overseas in the United Kingdom, grid-connect PV systems are most commonly used there. This is used to be easily distributed, â€Å" The basic idea is that these systems are connected to the local electricity network that is central to a major city and its surrounding suburbs† (SE 1). This may be one of the best ways to distribute electricity. Connections are not even necessary, â€Å" For those applications that are unable to connect, they have created stand-alone PV systems† (SE 1). Effectiveness is the word to be used when describing these stand-alone photovoltaic systems. Electricity has many natural wonders about it but at the same time, human life has become dependent on what used to be a marvel. Deadly can be something very beautiful, â€Å" Lightning is one of nature’s most dramatic demonstrations of electricity at its fullest† (Parker 6). Although it awe’s our very hearts, lightning can kill instantaneously. It can be considered a lifeline, â€Å" About every second, electric signals spread throughout our bodies coordinating a heartbeat† (Parker 7). If people say we can live without electricity, then they are absolutely wrong because without it, our heart would not function. Whoever created this world knew that electricity would amaze us and allow us to live. As experiments were done, scientists observed that some substances let electricity pass through the current with ease while others not very easy. Some things are just better than others, â€Å" Experiments that were done showed that common metals are good conductors, but the rarer the metal, the better the conductivity† (Parker 20). Metals are usually put into the conductor category while mostly everything else was an insulator, or an object that resisted electrical current. George Ohm, a German scientist, showed us that everything is not perfect, â€Å" Even the best conductors put up some resistance; it all depends on the length and diameter of the wire† (Parker 22). Ohm, who created the units of resistance, new perfection could not be reached by natural means, which in this case, was that no metal is a perfect conductor. Classification of conductors and insulators show us how we can industrialize our homes with the most efficient method of transmitting electricity. For those who think that we deserve electricity are mistaken because if we overuse it or abuse it, we may never be able to wield it. We need electricity, but people don’t preserve it and if we lose it, our world would be in chaos. The world runs on electricity, and we have so many things that use it, even if we don’t realize it.

Kingsford Charcoal Essay Example

Kingsford Charcoal Paper Brand managers Marcilie Smith Boyle (HBS MBA Class of 1996) and Allison Warren were getting together for their weekly Kingsford Charcoal (Kingsford) debriefing meeting in February 2001 at Cloroxs corporate offices in Oakland, CA. As the job-sharing brand managers for the $350 million charcoal business, Smith Boyle and Warren had a lot to discuss during their Wednesday overlap day. Both women were assigned to the brand in July 2000, just as it became apparent that the summer results were going to come in below forecast. Since the 1980s, Kingsford had continued to enjoy steady, moderate growth of 1-3 percent in revenues each year. During this time, the charcoal category as a whole had been growing as well. However the summer of 2000 represented the first softening in the overall charcoal category in several years, and Smith Boyle and Warren were tasked with determining the causes and coming up with recommendations. As the team analyzed various trends relating to competition, pricing, advertising, promotion, and production, Smith Boyle and Warren were faced with a series of critical strategic decisions that would impact the future trajectory of the Kingsford brand. Kingsford had not raised prices in several years, nor had it advertised in any significant way since 1998—options that now required consideration. With Kingsfords long track record of being heavily driven by sales and merchandising activities, Smith Boyle and Warren wondered whether there was an opportunity to balance this effort and invest more in rekindling consumer interest in charcoal grilling( ). They realized that this initiative could significantly impact the brand image and the advertising message. There were also some production issues looming( ) in the horizon—if Clorox did invest in building( ) the Kingsford business, would the existing capacity be adequate? We will write a custom essay sample on Kingsford Charcoal specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Kingsford Charcoal specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Kingsford Charcoal specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Smith Boyle and Warren were scheduled to meet with their marketing director, Derek Gordon, the following week and they were eager to get his feedback on their recommendations before Kingsfords annual business review later in the month. GRILLING IN AMERICA People cook over an open flame the world around but Americans do it more often and better Grilling is the essential American culinary art, ( ) a glorious birthright( ) celebrated everyday from coast to coast. Its a passion, a party, a way to cook that wont let you call it a chore( ). Its about playing with fire under an open sky, wielding a mean spatula ( ) in one hand, a cool drink in the other. Most of all its a surefire means ( ) to get yourself from here to a decent ( ) meal having loads of fun. Make that a great meal. —Excerpt from the front flap of Born to Grill:An American Celebration (1998) by Cheryl Alters Jamison and Bill Jamison By the late 1990s, three out of four U. S. households owned a barbecue grill which over 80 percent of grill ownership being among younger, larger, higher-income families. The total number of barbecue events In the United States had gone up from 1. billion in 1987 to 2. 7 billion in 1995 and over3 billion In 2000. Just over half of grill owners were heavy/medium users but they did the vast majority of the barbecuing (more than 85 percent of all occasions). Over 60 percent of barbecuers were men and the most popular occasions cited for grilling were: July 4, Labor Day, Memorial Day, ( ) and special occasions such as tailga ting ( , â€Å" †). Common reasons for a barbecuing included great flavor, desire to be outdoors, hanging out with family and friends, change of pace, easy clean-up, and informality. Although barbecuers had greatly expanded their cookout repertoire (all the things that a person is able to do) over time, the foods that typically topped the â€Å"cooked frequently† list had not changed much. The most popular foods for the grill included hamburgers, steak, hot dogs, chicken breasts, pork chops, ribs, and sausages. Roasted potatoes, steamed vegetables, and marinated vegetables ( ) were the side dishes grilled most frequently. Charcoal and gas grilling were the two most commonly used grilling methods. Although charcoal grilling took longer to set up and cook, most die-hard rillers preferred charcoal grilling over gas grilling for its hands-on experience and the flavor imparted to the food ( ). Gas grilling, on the other hand, was preferred by those that were looking for convenience, greater control over cooking temperature, short cooking times, and ease of dean-up. CLOROX COMPANY HISTORY The Clorox Company (Clorox) was founded in 1913 as The Electro-Alkaline Co mpany. Its first product was industrial strength liquid bleach made from a combination of chlorine and sodium hydroxide. The bleach was originally made in Oakland, California, and sold in the Bay Area. In 1922, the company changed its name to the Clorox Chemical Company, and soon expanded its distribution to the rest of the United States. By 1957, Clorox was the leading producer of bleach in the United States and it changed its name to The Clorox Company. Procter Gamble( ) was attracted to Cloroxs category leadership and offered to buy the company in 1957. Although the sale was completed, the U. S. Federal Trade Commission challenged ( ) the acquisition on the grounds that the combined company could create a monopoly in household liquid bleach. Alter ten years of litigation, the U. S. Supreme Court forced PG to divest ( ) Clorox, and in 1969, Clorox became an autonomous company listed on the New York Stock Exchange. After obtaining its independence, Clorox pursued an aggressive growth strategy ( ) driven by acquisition and internal research and development. By 2000, the company had over 50 products that were marketed to consumers around the world. As of June 30, 2000, Clorox had annual sales of $4. 1 billion and net earnings of $394 million. For reporting purposes, the company split its results into three major categories: U. S. Household Products and Canada (40 percent of sales), U. S. Specialty Products (45 percent of sates) and International (15 percent of sales). (See Exhibit 1 for Clorox company financials. ) In addition to Clorox Bleach, household products included Glad, water filters (Brita), and cleaning products such as Formula 409, Pine Sot, Soft Scrub, liquid Plumr, Tilex, and Ready Mop. Specialty products consisted of cat litter (Fresh Step, Scoop Away); auto care (Armor All, STP); charcoal and lighter fluid (Kingsford, MatchLight); and dressings and sauces (Hidden Valley, ICC Masterpiece). Nearly all of Cloroxs products were among the leaders in their respective categories. Each product group was managed by a brand team that typically consisted of a brand manager and several associate brand managers. The brand organization was generally responsible for setting the business strategy understanding the consumer, developing advertising, creating short-term forecasts and helping with sales promotions. As a result, the brand team had to work closely with other functions, particularly sales, product supply and finance. Gordon explained, One of the key functions of the brand team is to understand the consumer and apply that learning. Clorox sold the majority of its products to grocery retailers and distributors, worldwide military installations, mass merchandisers, warehouse clubs and drug, discount, hardware, and variety stores. The company relied on its own sales force as well as a combination of brokers/distributors. Clorox also sold products to professional/institutional customers through a network of brokers and manufacturer reps. As of June 2000, Clorox had approximately 11,000 employees worldwide. KINGSFORD CHARCOAL Kingsford represented one of the largest product groups within Cloroxs portfolio. In 2000, charcoal represented approximately 9 percent of Cloroxs revenues, and a substantially higher percentage of its net income. The business was started in the 1920s when Henry Ford developed a process for turning wood scraps ( ) into charcoal briquettes ( ) that burned longer and hotter than regular wood. E. G. Kingsford, a lumberman ( ) and relative of Fords, helped build the first briquette plant and commercialized the business. The plant was later bought by an investment group and then purchased by Clorox in 1973. Product and Pricing Kingsford Charcoal was manufactured from wood, minerals, limestone, starch, borax, sodium nitrate, and sawdust ( , , , , , , ) in a two-part procedure. The process began with transforming waste wood (e. g. , scrap from furniture plants) into wood char ( ) in a $15-$20 million retort ( ) facility that heated wood in an oxygen-controlled atmosphere. The wood char was then combined with the other ingredients in a $20-$30 million facility that converted the materials into pillow shaped briquettes. As of June 2000, Kingsford had five plants in the U. S. each of which housed both parts of the operation. Some of the charcoal briquettes were packaged as-is in blue bags and sold as Kingsford Charcoal (regular or blue bag), while others were treated with Kingsford lighter fluid and sold as Kingsford Match light in red bags (â€Å"instant or red bad†). The bulk of the volume for both types was sold in three sizes: 10-pound, 20-pound and 48-pound bags) regular, and 8-pound, 15-pound, and 30-pound (two 1 5 pound bags) for instant. The largest size was typically available only in club stores such as Costco and Sams Club, while food stores (e. . , supermarkets), mass merchandisers (e. g. , Target, K-Mart), and drugstores (e. g. , Walgreens), and Wal-Mart carried a mix of the other size. In 2000, food stores accounted for 66 percent of total charcoal sales; mass merchandisers and Wal-Mart for just over 15 percent; drug stores for 2 percent; and club stores and other non-tracked channels accounted for the remaining 16 percent. Regular charcoal represented approximately 75 percent of total shipments, with the 20-pound size of sales comprising approximately 60 percent of sales. Pricing varied based on the product and the size. In January2001, the average price to consumers for the regular 10-pound bag was $4. 25 and the regular 20-pound bag was $6. 78. The average consumer prices for the instant bags were $5. 20 for the 8-pound and $8. 07 for the 1 5-pound bag. In most channels, Kingsford competed with Royal Oak and private label brands. The private label brands typically sold at a 25-30 percent discount to Kingsford with Royal Oak being typically priced between the two. Virtually all of the private label products were manufactured and distributed by Royal Oak. Key Success Drivers Kingsfords business was seasonal, with nearly 60 percent of consumer purchases occurring between May 1 and September 1. (See Exhibit 2 on page 674 for 2000 sales by week. ) The Memorial Day and July 4th holiday weekends represented 35 percent of Kingsfords annual sales, fueled in large part by store-based promotions organized by the Kingsford team. Smile Boyle explained, Our sales team makes a big impact with retailers to ensure that there always are at least 7,500 pounds on the floor during the primary grilling months. Summer holidays are particularly important and Kingsford often contributes trade money to help reduce prices for our products during those key weekends. The Clorox sales team had years of experience in working with key accounts and many of the senior sales executives at the company such as Grant LaMontagne, Vice- President of Sales, had sold charcoal earlier in their careers. LaMontagne believed that Clorox really understood the category. He explained: Our success in the charcoal category is discipline†. This has led to a constancy of marketing and sales actions over time, and a consistency in the message communicated within our own sales and marketing organization, to the channel, and to the end consumer. I have found that successful brands can get derailed over time when the firm begins to tinker with the brand. In their effort to grow the business, it is common for marketers to change the brand image as they go after new market segments. Over time, such actions create enormous confusion within the firm and in the marketplace. The net result is that the various sales and marketing efforts begin to operate at odds with one another. When Warren took over the brand manager position in July 2000, she recalled hearing from the sales team at least five times in her first week: With Kingsford, the key is â€Å"display†Ã¢â‚¬â€you need to pile it high and watch it fly- Display drives sales since over a third of charcoal purchases are impulse purchases. When the weather is good, shoppers bump into charcoal displays in the store and think, Today would be a great day to barbeque? Our job is to make the charcoal visible and let the weather do the work. In terms of product quality, Kingsfords lab tests showed that its product was superior to Royal Oak and the private label brands. Consumer studies also showed that Kingsford was perceived as a better product with approximately 60 percent of surveyed consumers indicating that Kingsford is a high quality brand, relative to 13 percent for private label. KINGSFORD BUSINESS IN 1999—2000 When Smith Boyle and Warren started with the group, Gordon had warned the two brand managers that it would be difficult to achieve the forecasts created earlier in the year, as business was starting off at a slower pace. Warren recalled: Derek said to me on my first day with the brand, Welcome to Kingsford. Based on how July 4th is shaping up, you are already in the hole and there is no additional money to spend. Kingsford didnt do as well as we had hoped in fiscal 2000 [ending June 30], and we are concerned that fiscal 2001 doesnt look much better. Were hoping you and Marcille can figure out what to do. Smith Boyle added, We felt the pressure right away. Kingsford is such an important part of Coloroxs overall performance that when Kingsford misses its number, there is a good chance that Clorox will miss. Smith Boyle and Warren started with an in-depth analysis as to why the category appeared softer than it had in previous years. The charcoal category had slowed from 4 percent growth from 1998 to 1999 to 2 percent growth from the first half of 1999 to the first half of 2000. The forecasted growth for the second half of 2000 looked even worse, and by the end of 2000 the entire category was down relat ive to 1999. The declines were most pronounced in the food channel, with a 5. 7 percent decline during the second half of 2000. (See Exhibit 3 for volume growth by channel. With the help of two associate brand managers, the team ran numbers on all of the different factors that could have led to a softening in the category. The analysis revealed some interesting trends. The team was surprised to find a narrowing of the price gap across the various charcoal brands as a result of a series of private label price increases that the channel had passed along to consumers. By the end of 2000, the prices of private label bags were nearly 10 percent higher than they were in 1999 across all channels, the biggest price jump in years. See Exhibit 4 on page 676 for pricing trends. ) Smith Boyle explained, In prior years, prices rarely moved more than 5 percent over the course of the year. We found that stores had recently increased the price of their private label brands. We also found that Royal Oak had increased prices during this period. Finally, although we had kept the Kingsford prices constant, several of our channel partners had chosen to increase Kingsford prices as well to consumers during this period. The Kingsford team believed that gas grilling could have captured some of the consumers that had negatively reacted to the charcoal price increases. In 2000, gas grill shipments grew 8 percent relative to 1999 with 9. 3 million new gas grills being shipped, while charcoal grill shipments dropped 3 percent year over year with just under 6 million new charcoal grills shipped (see Exhibit 5 for grill shipments from 1996 to 2000). Overall, charcoal grill penetration had trended down since 1997, while gas grill penetration had trended up. In 2000, approximately 54 percent of U. S. households owned a gas grill, relative to 49 percent that owned a charcoal grill, and approximately 20 percent of U. S. households owned both grill types (see Exhibit 6 for grill penetration trends). Smith Boyle and Warren also believed that Kingsfords absence of media advertising further contributed to the category weakness. Neither Royal Oak nor the private label brands did any advertising, so when Kingsford did not advertise, there was no charcoal message on the air. This was compounded by the fact that while Kingsford had reduced its media spending from over $6 million in 1998 to a little over $1 million in 2000, gas grilling had increased its media spending during the same time period from less than $4 million in 1998 to over $10 million in 2000. Warren explained, The charcoal category was now paying the price for several years of reduced advertising. This trend was further exacerbated by a reduction in promotional activity across the category. In past years, Royal Oak had contributed substantial funds towards merchandising opportunities at retailers such as temporary price reductions, features and displays. However, these efforts were pulled back during 2000. In addition, the Kingsford team speculated that retailers might have been inclined to do fewer major promotions for Royal Oak after the price increases. The private label brands had fewer feature and display promotions during 2000, but stores did continue with temporary price reductions (see Exhibit 7 for category merchandising in 2000). Kingsfords merchandising in 2000 was consistent with that in 1999. A final factor that contributed to category softening was traced to weather patterns in 2000. Precipitation and temperature comparisons with 1999 showed a slight increase in rainfall in October through December 2000, coupled with a major drop in temperatures. Average U. S. temperatures in November and December 2000 were nearly 10 degrees lower than temperatures during the same period in 1999. Fall and winter grilling were positively correlated with mild temperatures, so the cold weather reduced opportunities for grilling occasions. Although the overall category sales volume dropped in 2000, Kingsfords volume rose slightly and its market share had increased. For the first half of 2000, Kingsford had a 56. 1 percent market share, relative to 7. 7 percent for Royal Oak and 34. 9 percent for private label. For the second half of 2000, Kingsford rose to a 59. 5 percent market share while Royal Oak dropped to 6. 4 percent and private label shifted to 32. 7 percent (see Exhibit 8 for market share trends). According to Smith Boyle, The price increases drove more consumers to Kingsford, so we benefited to a large degree. But given our large market share, our success is tied in to the overall success of the category, so we couldnt be complacent? In addition to the data on market trends, Smith-Boyle and Warren had access to a detailed internal segmentation study of over 300 heavy Kingsford users (that grilled at least 6 times a month) that uncovered three heavy charcoal user segments: Regular Exclusive users that grilled exclusively with regular charcoal; Instant Exclusive users that used only instant charcoal; Instant Acceptors that were comfortable and committed to both charcoal types. The three segments accounted for roughly 30,10, and 60 percent of all heavy Kingsford users, and 28, 11, and 62 percent of the total volume consumed by these users respectively Exhibit 9 on page 680 summarizes the findings of the segmentation study 2001 BUSINESS DECISIONS With all the analysis and consumer segmentation information in hand, Smith Boyle and Warren started to think about an action plan to present at their business review meeting with senior Clorox executives. They knew profitability was critical, and they believed continued growth was important as well. After a series of meetings with Gordon and others at the company, they focused on four areas: pricing, advertising, promotion, and production. Pricing The price increases by both private label and Royal Oak raised a number of key questions: Should Kingsford increase prices as well? if so, how big a price increase should they consider? Should they raise prices for both regular and instant and for all channels? If they did raise prices, would retailers pull back on the merchandising support (e. g. , features and special displays) they have been giving to Kingsford over the last several years? Would a price increase drive consumers to purchase other brands? Or worse yet, to gas grills? In order to help answer these questions, the brand team did price elasticity studies for several different scenarios to estimate the volume and profitability impact from potential price increases. The scenarios included: (1) a moderate price increase (-4. 0 percent) only for dub stores, (2) a small (-2. 5 percent) blue bag price increase across all channels, (3) a moderate (-5. 0 percent) blue bag increase across all channels, and (4) increasing both blue bad and red bad by 5 percent across all channels. For each scenario, the Kingsford team estimated the impact on volume, sales, and profit, while also accounting for potential withdrawal of merchandising support (see Exhibit 10 for information from the elasticity studies). Gordon believed that raising prices was a great way to increase short-term profits and would provide some money that could be reinvested in Kingsford and other businesses in Cloroxs specialty division. In addition, it ensured that Kingsford would stay within the targeted 25-30 percent price gap relative to private label. There were, however, some potential drawbacks. Sales director Nick Vlahos believed that Kingsford had gained a great deal of goodwill with Cloroxs channel partners over the last year that could translate into increased opportunities for Clorox. He explained: We’ve been working with our retail partners over the last several years to increase promotion of Kingsford, particularly at the expense of Royal Oak. If we hold off on any price increases for another year, we might be able to convince more chains to focus distribution and merchandising support on Kingsford and private label. Weve been advocating this two-brand strategy for some time, and this could be our year to see it happen. If we do raise prices, we may lose all the merchandising momentum we have gained. In fact, a price increase might cause us to lose some big accounts altogether, particularly because we dont have a clear justification for the higher price point. Smith Boyle and Warren agreed with Viahoss assessment, but Smith Boyle explained that: Taking price increases is particularly challenging for sales people: retailers inevitably resist, and we all knew that the sales team was being compensated based on volume. In reality, there is never a good time for a price increase; its a matter of finding the best of the bad times. The retailers almost certainly wouldnt be surprised with a price increase given what our competitors have done over the last year. As for the consumers that buy Kingsford, charcoal is considered a happy product—its associated with family and fun—so that sometimes gives us more leeway with pricing changes. Advertising Smith Boyle and Warren believed that anticipated volume losses from a potential price increase could be restored through increased advertising. Kingsford had gradually decreased its advertising since 1996, as more money was spent on sales promotions, reduced revenue spending, and dropping to profit. As of February 2001, the forecasted advertising spending for Kingsford was under $1 million. (See Exhibit 11 for Kingsford marketing spending from FY 97 through forecasted FY 01. ) According to Warren, The prevalent belief around the company was that Kingsford was a sales-driven business and that advertising would be a waste of money. The brand team disagreed and looked for ways to build their case. They started by hiring a third Marketing Management Analytics (MMA), to analyze the effects of advertising on Kingsford sales in past years. MMAs analysis of 1998 spending indicated that TV advertising drove a 7 percent incremental volume increase in targeted markets in 1998, and the benefits accrued in 1999 as well with an estimated 3-4 percent volume increase from the residual impact of advertising. Based on the data provided by MMAs marketing mix analysis, Smith Boyle and Warren believed that Kingsford should be spending at least $7 million on advertising during the peak grilling season of April-September. They knew it would be difficult to get those funds, but they believed that base volume would continue to rode if Kingsford didnt start advertising again. Gordon offered to help them apply for $5-7 million of mid-year funds from a corporate kitty; but he wanted the team to first think through their intended advertising message. In past years, the brand team had worked with agencies to develop separate messages for regular charcoal and instant. From 1991 through 1998, the message for regular was based around product q uality relative to other charcoal: lights twice as fast as other coals and Lights faster, burns longer. Nearly all of the MMA effectiveness studies were based on these advertising campaigns. Match light advertising was based on a different message targeting higher end customers seeking convenience. In 1996-1998, Match Light advertising centered on a Ready in 15 minutes message and in 1999 the team had reverted to a 1991 spot need just one match. Smith Boyle and Warren wondered if they should go back to the 1998 advertising that had proven results, or if should they try a different message. In past years, Kingsford had viewed other charcoal brands as its biggest competition; it now appeared that gas grills might be the product to beat. They debated if they should be advertising to grow the number of grilling occasions overall, to focus on growing the charcoal category or to focus on growing Kingsfords share within the charcoal category They thought about incorporating data from a blind taste test performed with 796 men and women ages 18-54 in Sacramento, Dallas, Tampa, and Chicago in June 2000 that had asked consumers to compare chicken, steak, or hamburgers cooked over Kingsford Charcoal to those same foods cooked over gas. Across all meat types, 2-to-1 participants preferred the taste of charcoal-grilled food to gas. Tasters commented that meat grilled over charcoal has a real barbecue flavor, has a smoky flavor, and tastes like it was grilled over a real wood fire. The brand team wondered if there were specific advertising executions that could leverage this data in a meaningful way. Promotion As the brand team focused on pricing and advertising, the sales group took the lead on thinking through Kingsfords promotional strategy. Clorox worked to optimize four sales levers at each distribution outlet: Merchandising, Assortment, Pricing and (MAPS). Within merchandising, the Kingsford sales team worked with stores to feature the product in circulars that were mailed to local consumers and to get Kingsford displayed on prominent end of aisle displays (end-caps). Assortment reflected the different Kingsford stock keeping units (SKUs) that were carried by each store. Here, the team focused on making sure that the individual stores were stocking the appropriate mix of SKUs that maximized sales volume. The Kingsford marketing team used scanner data to develop detailed quantitative models for each local market that the sales team used to educate the management of the individual stores on these issues. Pricing represented the various everyday prices of each SKU and the target numbers for temporary price reductions. The Kingsford sales team helped the channel partners plan the frequency and depth of price reductions since the volume spikes from price promotions were very significant. Shelving related to where Kingsford products were located, both in terms of aisles and exactly on which shelf each SKU was located. It was important that Kingsford products were treated consistently across stores members of the sales team spent a great deal of time visiting store managers and working on the execution details. Kingsford also worked with customers to capitalize on big holidays with targeted Memorial Day, 4th of July and Labor Day promotions. According to LaMontagne: On a sunny July 4th weekend a Wal-Mart store could sell 5,000 pounds of charcoal in one thy. It is critical that each store keep enough product on the floor in a central location. This not only serves a reminder but generates the impulse to purchase. Ideally we want each person who walks into a store to see pallets of Kingsford charcoal and we push to get our charcoal in two different locations. When the displays are combined with featured pricing and inclusion in store circulars, Kingsford does particularly well—which is good for us and good for the store overall. Our research has shown that consumers who buy Kingsford charcoal tend to spend 30 percent more during their store visit than consumers who do not buy charcoal. We do our best to show these data to stores so that they can see the benefits of promoting Kingsford. The Kingsford team was also working on plans to extend the grilling season outside of the peak summer months by creating NASCAR promotions for March, April, September and October as well as by encouraging fall tailgating events. Dawn Willoughby, sales merchandising manager, explained, We have put together a 12-month plan to increase charcoal consumption. The goal is to increase grilling occasions and we want stores to help reinforce this objective? The sales team pursued co-marketing opportunities with other brands such as Pepsi and Budweiser to help pay for increased promotions throughout the year. As the sales team worked with stores on the various promotions, they also continued to push the stores to focus primary support on two brands—Kingsford and private label. LaMontagne explained: We see ourselves as custodians of the charcoal category. Our research shows that supporting too many brands of charcoal hurts the channels revenues and profits. For example, with too many SKUs to manage, the channel would routinely face stock-outs of the popular products that could lead to lost sales, or even worse, lost customers if the consumers switched stores altogether. Armed with compelling evidence on lost revenues and margins, we are going to the channel with a message of less is more? We are telling them that brands in the middle such as Royal Oak are driving consumers away from the premium brand that was sought out by brand-loyal consumers or away from the stores profitable private label brand. Product and Capacity The Kingsford team hoped to increase growth through a combination of advertising and promotion and therefore was working with the Clorox product supply group to ensure adequate supply. Based on the numbers run by the product supply team, it looked as if the plants were currently running at approximately 80 percent of total capacity. As a result, there would only be supply issues if volume grew more than 5 percent for several years in a row. It was difficult and expensive to build additional capacity Bill Lynch, Vice-President of Product Supply explained: A new plant can cost $30-$50 million to build and it could take at least five years once Clorox started the permitting process. It could take two to three years just to acquire all of the necessary regulatory approvals. If we want to expand one of our current plants, we still need to go through a two-year permitting process. In addition, some of our plants are not expandable—often for environmental reasons. If Kingsford did run out of capacity; there were not many alternative sources for charcoal production. The business could try approaching a competitor in the United States or looking at several offshore options. if those turned out to be prohibitively expensive, the Kingsford team ran the risk of running out of product towards the end of the summer season. 3 A shortfall in supply would mean that Kingsford would have to pacify its customers by moving pallets around the country to wherever demand was greatest, a very expensive proposition. CONCLUSION Smith Boyle and Warren were interested in getting Gordons perspective on how Kingsfords growth objectives fit into the broader context of the overall company growth targets. Cloroxs stock price in December 2000 was at a three-year low when Cloro x had warned Wall Street that its sales growth would not be as high as it had predicted earlier in the year. On January 31 2001, Clorox had announced its second quarter earnings, which included a 6 percent decline in sales for the company. Clorox Chairman and CEO Craig Sullivan said, While these results are in line with the estimates we announced on December 14, we are obviously disappointed with our performance this quarter. Over the past 45 days we have heightened our focus on those activities that are most critical to securing a solid foundation for future growth. We are taking action, first and foremost, to regain momentum on our core businesses in the United States. Smith Boyle and Warren felt Clorox was relying on Kingsford to improve sales and profits, and they didnt want to let the company down. They knew their recommendations about pricing, advertising, promotion, and capacity could make a big difference for both Kingsford and Clorox as a whole. Armed with all the research data, they were eager to develop a strategy for taking the Kingsford brand to a new level of growth and profitability. With this in mind, Smith Boyle and Warren walked out of the building on Wednesday evening, planning to talk more the following week. They waved goodbye with their usual parting message, See you next Wednesday! †