Economics Project

A Project on
Pencil
By: Group 06
 Outline
Sr. No. Content Slide No.
1 History of Pencil 4
2 Dominant Brands 7
3 Marketing Strategy 10
4 Collected Data 13
6 Economic Theories 23
7 Data Analysis and Customer Expectations 33
8 SWOT Analysis 46
9 Market Analysis 52
10 Our Journey 57
 Indian History of Pencils
• The manufacture of pencils in India goes back to the Swadeshi Movement as far
back as 1905. Since then, the industry had to face very hard competition from
countries such as the UK, Germany, Japan, USA, etc., and the progress of the
industry has been a chequered one.
• Even before WWI, India had to meet her requirements of pencils from imports, the
bulk of which came from the UK, Japan, Czechoslovakia and Germany. The
average imports in the pre-war period were of the order of 50,00,000 dozens per
annum.
• In 1958, Hindustan Pencil Pvt Ltd. was established in India which is now the largest
pencil manufacturer in India. Besides having the household name in India, their
brands “Apsara” and “Nataraj” are exported to over 50 countries.
The total imports of pencils during the nine months period ended
December 1950 was 86,527 dozens valued at Rs. 91,118.

Year Cost per Pencil (Rs.)

1950 0.08
2017 5

The rise in price is a whopping 6250%

 Dominant Brands
• Hindustan Pencils Ltd. follows a dual brand strategy – it covers the market using 2
brands: Apsara Pencils and Nataraj Pencils. Both brands are independent, so there
are no issues of positioning conflicts.
• This strategy covers the different segments of consumers. Both have similar range
of products, though Apsara has a better range of professional/drawing pencils.
• The disadvantage of this strategy is that there is cannibalization & costs increase in
servicing both brands.
• Since the last 2-3 years, the popularity of DOMS pencil brand has been increasing
and as a result demand of some international brands like Camlin, Faber-Castell,
Cello, Reynolds and Maped has been declining drastically.
 Product MRP (Per Pack of 10 pencils)
Platinum 50
Platinum RT 50
POP 50
Beauty 40
JOI 60

Apsara Triangle Metallics

Gold
50
40

Pencils Triga
Absolute
50
70
Steno 50
Drawing Artist 40
Drawing Engineer 60
Glass Marking 50
Colour Copying 120
 DOMS Pencils

Product MRP (Per Pack of 10 pencils)

Neon Rubber tipped pencil 50
Zoom Triangle 50
Zoom 50
Groove Slim Triangle 55
Y1 40
Apsara Pencils TV Advertisement
Nataraj Pencils TV Advertisement
DOMS Pencil Advertisement
Collected Data
 Sneha
Traders,
CEPT
Raj
Stationers, Ajmera
Stationery
Ambawadi

Data
Sources
College
S. S. Book
Depot,
Stall
Visnagar

Balaji
Dealers,
Rajkot
 Balaji Dealers of Hindustan Pencils, Rajkot
Monthly Purchases 50,000+ each contains 10 pencils
Before 10 years/now Demand No change in %
Reason Only 2 dealers in the city
Profit Margin 3%
Monthly Selling All sold out
Before 10 years / now price Last change in 2009 – Rs. 10 per packet
Best Selling Apsara, Nataraj
Tax No tax applicable
Demand in term start Apsara, Natraj
Sharpener & Eraser Demand Effect They don’t sell
Most Demanded Apsara
Brand in stock Nataraj, Apsara
Factors affecting Demand Vacation
Brand Price Rs. 50
 Sneha Traders, CEPT, Ahmedabad
Monthly Purchases 3,000 pieces
Before 10 years/now Demand No change in %
Reason CEPT students need drawing pencils
Profit Margin 20-25%
Monthly Selling All sold out
Before 10 years / now price Mostly price hikes by Rs. 2/3 each year
Best Selling Branded, Imported pencil
Tax Because of drawing pencil – Rs.2
Demand in term start Rise of 50-60%
Sharpener & Eraser Demand Effect Demand is not decreased
Most Demanded[Advertisement Affect] Drawing Pencils
Brand in stock Faber Castell, Camlin etc.
Factors affecting Demand Vacation
Pencil Price Rs. 30 per pencil
 College Depot, Visnagar
Monthly Purchases
Before 10 years/now Demand
Reason
Profit Margin
Monthly Selling
Before 10 years / now price
Best Selling
Tax
Demand in term start
Sharpener & Eraser Demand Effect
Advertisement Affect
Brand in stock
Factors affecting Demand
Brand Price
200-300 Boxes
Very less change
Area, Big Shop, Wholesale
20-25%
All sold out
Rs. 30; Now Rs. 40 (Effect of Deforestation)
DOMS(neon)
No tax on Pencil and 5% on lead pencil
700/800 – Hike of 200/300 packets
Not affected
YES, Apsara and DOMS
DOMS, Apsara, Nataraj, Navneet
Vacation, Less number of retailers
Rs. 50
 Impact on Sales of Complimentary Goods
(Eraser and Sharpener)

• Companies like Apsara and DOMS sell pencils in either packs of 10 or as single
pencils only.
• We found that most consumers prefer to buy single pencils instead of in packs of
10, even though the companies provide an eraser and a pencil sharpener free with
the pack of 10 pencils.
• So if a customer buys pencils as single items, then they will have to buy the eraser
and sharpener individually as well. This means the sale of erasers and sharpeners
has not been affected much either.
 Ajmera Stationery, Navrangpura, Ahmedabad
Monthly Purchases 50,000 boxes
Before 10 years/now Demand Decreased till some extend
Reason School tie-ups
Profit Margin 5%
Monthly Selling Generally sold out
Before 10 years / now price Rs. 30; Now Rs. 40 (Effect of Deforestation)
Best Selling Branded, Imported pencils
Tax Rs. 2
Demand in term start Cartoon characters and colorful
Sharpener & Eraser Demand Effect No effect
Most Demanded All Pencils – Most of customer buys pens
instead of pencil since they’re cheaper
Brand in stock Nataraj, Apsara, Oras
Factors affecting Demand Vacation, Term starting
Brand Price Rs. 35
 One interesting find...
• Demand of wood-based pencils is still increasing, despite the digital era.
• But the demand varies from area to area. Also, we found that certain companies are
tied up with certain schools and thus they become suppliers for those schools. The
school orders certain stationery in the name of the school to be used by the
students studying at that school and prohibits the use of other brands. Hence, the
student is left with no option but to buy from that retailer.
• This way, the profit of the companies as well as the school increases.
• But this leads to a decrease in customers at other retail shops which are not tied
with any school, which in turn leads to a lesser demand at those retail shops.
 SS Stationery, Panjrapol, Ahmedabad
Monthly Purchases 5000 pieces
Before 10 years/now Demand No change (they also have a book shop)
Reason Area; Famous shop; also provides wholesale
stock
Profit Margin 15%
Monthly Selling Mostly sold out
Before 10 years / now price 30 Rs. Now 40 Rs. Effect of Forest cutting
Best Selling DOMS, Apsara
Tax 5% tax on lead pencils
Demand in term start Apsara, Nataraj
Sharpener & Eraser Demand Effect No effect
Most Demanded Cartoon character, comfortable
Brand in stock Nataraj, Apsara, DOMS, Classmate
Factors affecting Demand Vacation period, school starting period
Brand Price Rs. 40/50
 Effect of Online Sales on local Retail Shops
• Online shopping giants like Amazon and Flipkart have a huge share in the
Indian market, but stationery items like wooden pencils do not sell much
online. People still prefer to buy such trivial things like pencils from local
retail shops, so there is not really any impact of online sales of pencils on the
local retailers.
• Amazon directly buys the stock in bulks from Apsara and DOMS with a
profit of approx. Rs. 8, and sells the stock at a discount of Rs. 5 then of
MRP. So the profit earned is Rs. 3 per box, and customers also gain profit
but since it takes generally 2-3 days for the order to be delivered at the
customer’s place, the customer does not prefer to order pencils online.
Economic Theories
 Elasticity

• Elasticity is a measure of a variable's sensitivity to a change in another variable.

• Measure of the responsiveness of demand and supply of a good or service to an
increase or decrease in its price.

% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
Elasticity =
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
Types of Elasticity Elasticity

Income Price Cross

Demand Demand Supply Supply

Perfectly Perfectly
Supply Elastic Inelastic Demand

Relatively Relatively
Elastic Inelastic
Unitary
Elastic
 Price Elasticity

• Types of Price Elasticity

• Price Elasticity of Supply
• Price Elasticity of Demand

• Price Elasticity of Demand is a measure of the relationship between a change in the

quantity demanded of a particular good and a change in its price.
Price Elasticity of Pencil

We can see that from years the

price of pencil is increasing but
demand remains constant which
shows that it follows Perfect
Inelasticity.
 Factors affecting constant Demand

• Population is always increasing, so the demand of pencils should also increase but
it’s not reality,
• Because:
• Cheaper substitutes are available
• Students use pencils till 5th grade now, which was earlier up to 7th
• Due to direct tie-ups of schools with the pencil manufacturer, demand from the
retailers has decreased
 Period-wise Demand
S 700
O
L
600
D 500
400
B
O 300
X 200
E
S 100
0
Jan-March April-May June-July August-Oct Nov-Dec
MONTH

There is a spike in demand in the period of June-August & Nov-Dec because school semesters start in this
period and so consumers buy more pencils during this period.
Change in elasticity with time

There exists a period of approx.

2 months twice a year where
price of a box of pencils
remains constant, but demand
increases (near the school
opening period) so, this follows
the law of Perfect Elasticity!
 Some important Economics laws
• The law of demand is a microeconomic law that states, all other factors being
equal, as the price of a good or service increases, consumer demand for the good
or service will decrease, and vice versa.
• But in this case there is violation of law of demand because as price increases still
demand remains constant.
• The law of supply is a microeconomic law that states, all other factors being equal,
as the price of a good or service increases, supply for the good or service will also
increases, and vice versa.
• But in this case there is violation of law of supply because as price increases still
supply remains constant because demand is also constant.
Data Analysis
 Customer review
• The willingness of a customer to pay decides the demand for a product. The
willingness to pay is determined by what customer wants.
• What does the customer value?
• Factors affecting the choice of customers for buying a pencil are price, looks,
variety, quantity, quality, comfort and marketing strategy.
• The price of pencil does not affect the choice because the price is less.
• The quantity as well as quality of different brands has considerable difference hence
quality and quantity are important factors.
 Apsara vs Nataraj
90% 85%
Apsara
80%
80% 77% DOMS
75%
70%
70%
60% 60%
60% 55%

50% 45%
40%
40% 35%
30%
30%

20%

10%

0%
Price Quality Looks Variety Comfort Marketing
 Apsara vs DOMS
90%
80% 80% 80%
80% 75%
70% 70%
70%
60%
60% 55%

50%
40% 40%
40%
30% 30%
30%
20%
10%
0%
Price Quality Looks Variety Comfort Marketing

Apsara DOMS
Apsara vs Nataraj: Demand Comparison

(Comparison period:
Before 2009)
40%
Nataraj
60%
Apsara
Thus, year after year,
Apsara is still more in
demand than Nataraj.
Apsara vs DOMS: Demand Comparison

(Comparison period: After 2009)

After DOMS was introduced to the

Apsara market, Apsara’s demand started
DOMS 45% declining.
55%

Apsara DOMS
 Apsara Pencil Price vs Quantity

60
50
50 45
40
40 35 35
30
30

20
12 12 10 10 10 10
10

0
2003 2005 2007 2009 2012 2016

Price Quantity (per box)

 Price v/s Demand: Apsara Pencil

P
R
I
C
E

DEMAND
 Profit Margin

22%
Company
47% Dealer
Wholesaler
20%
Retailer

21%
 Factors involved in determining Variable Cost
• In the last 10 years, the price of petrol and diesel have been ever-increasing, which
means that the cost of transporting the raw material and the finished product have
also increased.
• Hindustan Pencils Ltd. makes pencils made from wood and hence the raw material is
wood. But the problem of deforestation is huge in India and the govt. has taken
certain measures to keep this problem in check (like introducing taxes), which has led
to an increase in the cost of raw material.
• The demand of wooden pencils is still increasing today, but there exist cheaper
alternatives and consumers prefer those cheaper alternatives.
• The manufacturer also has to pay salaries to the employees.
• In 2009, all of these factors led to an overall increase in price of about ₹ 5-10 .
 Four-Firm Concentration Ratio
• Percentage of total industry sales accounted for by the four largest firms of an
industry.
• The four largest firms in the Pencil industry account for 94% of all industries.
Hence, the four-firm concentration ratio for the Pencil industry is 94.
• The four largest pencil industries in India are:
• DOMS – 37%
• Apsara – 30%
• Nataraj – 15%
• Camlin – 12%
 Herfindahl-Hirschman Index (HHI)
• Measures the extent to which a market is dominated by a few firms.

HHI = s12 + s22 + s32 + ... + sn2

• where s12 is the square of the share of firm 1, and there are n firms.
• The HHI can be close to zero if there are many, very small firms in an industry.
• For a monopolized industry,
HHI = s12 = 100 2 = 10,000.
 Justice Department Concentration Categories
• A market is considered un concentrated if HHI is below 1500.
• A market is considered moderately concentrated if HHI is between 1500 and 2500.
• A market is considered highly concentrated if HHI is above 2500.
• Consider again our Four Firm market.
(Shares(%): 37 30 15 12 )

• Then the HHI would be

HHI = 372 + 302 + 152 + 122 = 2638
• Since this is grater than 2500, Pencil Market is highly concentrated.
SWOT Analysis
 SWOT Analysis of Pencil Market
• S.W.O.T analysis stands for Strength, Weaknesses, Opportunities and
Threats analysis of a Company.
• Strengths: Characteristics of the business or project that give it an advantage over
others.
• Weaknesses: Characteristics of the business that place the business or project at a
disadvantage relative to others.
• Opportunities: Elements in the environment that the business or project could
exploit to its advantage.
• Threats: Elements in the environment that could cause trouble for the business or
project.
 Strengths
• Size Advantages :- The larger a pencil company gets, the more resources they have
to pursue new markets and defend themselves against rivals.
• Cost Advantages :- Lower costs lead to higher profits for the company. A low cost
leader can undercut rivals on price.
• Customer Loyalty :- When given a choice, customers are loyal to the company.
Instead of targeting all customers, the company only needs to target new customers
in order to grow their business.
• Wide variety of products
• Products being available at all price ranges, there are luxury products targeting the
upper class as well.
 Weaknesses
• Lack of Scale :- A lack of scale means pencil’s cost per unit of output is very high.
Increasing volume, while maintaining quality, would help reduce those costs.
• Cost Structure :- A weak cost structure means pencil’s costs are high in comparison
to their competitors.
• Since products are available at all price ranges, it is difficult to identify it as premium
or non-premium.
• There is heavy investment in Research and Development of new products.
 Opportunities
• Innovation :- Greater innovation can help pencil to produce identical products and
services that meet the customer’s needs.
• More innovative products, in terms of design color and packaging
• Enter into new categories and exploit its current brand value
• Hindustan Pencils being a large company has capabilities to increase the range of
products manufactured.
 Threats
• Mature Markets :- Mature markets are competitive. In order for the company to grow in a mature
market, it has to increase market share, which is difficult and expensive.
• Intense Competition :- Intense completion can lower the company’s profits, because competitors can
entice consumers away with superior products.
• Substitutes :- The availability of substitutes hurts company’s ability to raise prices, because customers
can easily switch to another product or service. Many substitutes (pens) are available at lower price.
• Deforestation.
• Technology is easily replicable and duplicate products can affect business.
• Difficult to create brand awareness/recall products since it is not a differentiated product
• Increase in Labor Cost.
• Many schools forced to use Pens from 5th grade.
Market Analysis
 Market analysis
• There are very few companies which manufacture pencils.
• The pencils that all these companies manufacture are mainly homogeneous or have
only some minor differentiating factor.
• These companies compete with each other and at some point in time, their
popularity decreases/remains stagnant and hence they start making only nominal
profit.
• The reason there are few companies is because of high market risk and high cost of
establishment of business.
• Hence, we can conclude that the market that pencils fall under is Oligopoly
market.
 Market Analysis
• In the oligopoly market because of very few companies, there is a fairly large share
of each company.
• There are less number of competitors and because of that every company has eyes
on other companies and their demand and marketing strategies.
• So each company has a similar schemes and price of their products.
• Because of this behaviour we can see the demand curved to be kinked at a point in
time.
 Sweezy’s kinked demand curve
model of oligopoly
• If a company raises prices, other
companies won’t follow and the
company loses a lot of business. So
demand is very responsive or elastic to
price increases.
• If a company lowers prices, other
companies follow and the company
doesn’t gain much business. So demand
is fairly unresponsive or inelastic to price
decreases.
 Profit and Loss in Oligopoly market
• MR and MC curves decide the output.
When MC curve cuts MR from the
bottom, the intersection point is the
point where we get the output; and
Profit/Loss is determined by the
intersection of these curves with the AC
curve.
• In the short run, the company get
supernormal profit. But in the long run,
it is output as nominal profit.