Market Supermarket Cafe

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Market Supermarket Cafe

How Pause Café, a cake and coffee shop, is competing to survive in a market having a big producer, Ébène WAY?

Chapter 1 - Introduction

  • About the issue.

Ébène Commercial Centre opened end of the year 2003. It includes ten shops, one restaurant and one supermarket, which inaugurated early 2004. Ébène is situated in the centre of Mauritius and the construction of the city began in November 2001, with the city being promoted as a new information technology hub for Mauritius and as a link between African and Asian markets -- as a result is referred to as " Ébène Cyber City." Ébène is strategically positioned at the vicinity of the big cities; Quatre Bornes, Beau Basin and Rose Hill. Therefore a large number of people go shop at Ébène WAY supermarket on their way back home from the capital city, Port Louis.

I, myself go to Ébène very often to socialize with my friends and to shop and we often have lunch in the food court of the Commercial centre. During the summer vacations, I had a summer job in a cake shop named Pause Café to fulfill some of the requirements of the IB CAS program. I was involved in serving the clients and in taking orders to pass it to the kitchen. This summer job was also to me a working experience. I noticed that the Pause Café had some regular consumers as well as instant buyers. For consumers, price is a very important factor in making decision about where to buy their products. Therefore I wanted to find out how far a change in price of the products sold by Pause Café will influence the consumers’ choice. Information about the Price Elasticity Demand of the different products sold by Pause Café will help the owner to maximize his revenue. However Ébène WAY supermarket also sells cakes and pastry and at a much lower price since it benefits from economies of scale. Therefore how can Pause Café compete with the supermarket?

Internal economies of scale relate to the lower unit costs a single firm can obtain by growing in size itself. There are five main types of internal economies of scale; Managerial, Technical, risk – bearing, Financial and Marketing economies.

The main issue is to find out how Pause Café, despite being in the same premises as Ébène WAY supermarket can compete with it to attract consumers.

  • Significance of the Issue.

The aim of all private sector firms is to maximize profits. However, it can do abnormal profits only in the market structures where the barriers to entry and exit are high.

Normal profits

It occurs when a firm is making as much profits as it will get in its next best alternative. Since costs in economics refer to opportunity cost, the revenue of a firm making normal profits should be equal to the total costs.

TC = TR à AC = AR

Subnormal profits It occurs when firms in an industry are making less accounting profits than they will get in their next best alternative. Economic costs will be higher that the total revenue.

TC > TR à AC > AR

There will be a tendency for firms to leave the industry in the long run.

Abnormal profits

It occurs when firms in an industry makes more accounting profits than they will get in their next best alternative. Total revenue will be greater than economic costs.

TR > TC à AR > AC

There will be a tendency for more firms to join the industry in the long run.

Pause Café faces intense competition with Ébène WAY but has high barriers to entry against other firms. I intend to study how the two firms, one being big and the other one being small, operate profitably in the same region. I am more interested in the pricing strategies and product differentiation used by Pause Café to attract consumers. If the firm cannot attract consumers to break even, then it will surely close in the future. Hence to remain in the market, it must continue making at least normal profits.

I have identified five highly sold products by Pause Café and I will investigate the type of competition involved. Price and product differentiation can play a vital role in attracting consumers especially when firms are located in the same premise as in this situation.

  • The Research question

My research question is then formulated as: How Pause Café, a cake and coffee shop, is competing to survive in a market having a big producer, Ébène WAY?

  • The aims of this study is to
  • Carry out a questionnaire to understand why consumers buy at Pause Café and what they consume the most
  • Collect prices from both Pause Café and Ébène WAY
  • Compare the prices of the selected products and identify Pause Café ‘s pricing strategies
  • Elaborate on the price elasticity of those products and how it affects consumer’s choice
  • Identify the market structures in which Pause Café and Ébène WAY subsist together using the economics concepts studied in class
  • Apply those concepts to see how they manage their costs and are able to make normal profits

Assumptions and limitations

  • Due to limited amount of resources, the survey has been limited to 20 clients. A bigger scale of survey would have given more appropriate results.
  • It is assumed that the barriers to entry and exit will remain high in the future with the growing ICT sector. There is a strong inertia for more ancillary firms including restaurants and coffee shops to settle in the region. However, I have neglected the existence of such threat.

Chapter 2 – Methodology

There are two ways of collecting data; Desk research (secondary research) and Field research (primary research).

  • Desk research is research using secondary data. This is data that has already been found by someone and published.
  • Primary research is research that collects primary data. This is data or information that does not already exist. It can be collected through:
  • Surveys
  • Sampling
  • Observation
  • Customer interviews

However, results do have to be treated with caution where the sample cannot be controlled, as the sample may not be representative of the population you are trying to reach.

For my study I’ll be using Primary data in the form of a survey, specially designed is such a way to identify

  • Why consumers stop at Ébène Commercial Centre
  • what they are most likely to consume at Pause Café
  • And whether a change in price will affect their consumption

I am then going to collect prices of goods sold by both Pause Café and Ébène WAY.

And as Secondary data, I will be using sales figures from competitors, together with pricing and product information, perhaps from their promotional information. I am also going to use the internet and economics books for more precise economics definitions and theories. Where references will be made, they will be duly acknowledged.

Chapter 3 – Presentation, interpretation and Analysis of data

3.1 Choice of products

In order to conduct my research, I grouped the products sold by Pause Café in 5 categories;

  • Small cakes
  • Big cakes
  • Soft drinks
  • Hot drinks
  • Pastry

These products have been chosen for the simple reason that they contribute a high percentage of the daily revenue. A change in price of these products will have more significant impact on sales hence on total revenue.

However the prices of each product differ. So to be able to compare Pause Café’s prices together with Ébène Way’s, I have selected the common products sold by both firms.

3.2 Comparison of prices


Pause Café

Ébène WAY

Small cakes

Tarte aux fruits

Rs 25

Rs 14

Tarte Banane

Rs 25

Rs 17

Tarte au chocolat

Rs 30

Rs 17

Genoise aux fruits

Rs 25

Rs 22

Big cakes

Big Genoise for 10 pax

Rs 300

Rs 180

Big Genoise for 15 pax

Rs 450

Rs 295

Big Ganache for 10 pax

Rs 375

Rs 180

Big Ganache for 15 pax

Rs 550

Rs 295

Soft drinks

Coke/ Sprite 0.5 L

Rs 22

Rs 15.50


Rs 22

Rs 17

Hot drinks


Rs 20



Pain au chocolat

Rs 20

Rs 11.75


Rs 20

Rs 10

Feuillete a la crème

Rs 20

Rs 18

Oreillete peche

Rs 20

Rs 20

(Date 05/05/08)

Small cakes

In the market of small cakes, I have noticed that Ébène WAY does not offer a wide variety compared to Pause Café. The only product which was available when I visited (Date 12.05.08) were “Tarte aux fruits”, “Genoise aux fruits”, “Tarte au chocolat” and “Tarte banana”. The prices at Pause Café vary from Rs 25 to Rs 30 whereas at Ébène WAY, the price ranges from Rs14 to Rs 22.

Big cakes

In the market for big cakes, we can see that there is a big difference in price for Pause Café and Ébène WAY. Cakes sold by Ébène WAY are relatively cheaper than cakes sold by Pause Café. This may be due to internal economies of scale for Ébène WAY or for some other reasons.

Soft drinks Ébène WAY, being a supermarket sells a wide range of products including soft drinks; hence Ébène WAY buys in bulk and benefits from bulk buying discounts from the soft drink company. Therefore its prices for soft drinks will be relatively lower compared to Pause Café. This price difference was expected.

Hot drinks

Here, Pause Café has an advantage compared to Ébène WAY supermarket as there are no hot drinks available at Ébène WAY as it needs to be prepared on the spot.


Pastries together with hot drinks are complementary goods. Those two goods are often jointly demanded. They are complements and will have a negative cross elasticity of demand. Pause Café’s prices for pastries are slightly higher than Ébène WAY’s or sometimes even more. For example the croissant sold at Pause Café is twice the price it’s sold by Ébène WAY. This is because at Pause Café, the croissants (including all the other pastries) are freshly baked every morning whereas at Ébène WAY, the pastries are packed and sold in family packs.

The Pause Café offers a wider variety as shown in the table below.

Small cakes

Big cakes

Soft drinks

Hot drinks


Apple Crumble


Coca cola

Long coffee

Croissant fromage

Tarte Banane


Diet Coke

Short coffee

Tri. d’Amande




Long coffee with milk

Pain Chocolat



Sprite Zero

Short coffee with milk

Pain Saucisse

Puit d’Amour


Fanta Orange


Pate Poulet



Fanta Passion


Feuillete a la crème

Cupcake Vanille


Fanta Citrus

Hot chocolate


Cupcake Chocolat




Oreilliete peche

Baba au Rhum

Mousse Fruits

Tarte Coco





Paris Brest

Genoise Fruits



Mille Feuilles







Red cherry

Moelleux Orange

Tarte aux fruits

Blue Berry muffin

Choclate mudcake

(date 05/05/08)

While comparing the products commonly sold by both firms, it is clear that Ébène WAY offers a lower price.

In the case of tarte aux fruits, it is 44% cheaper. However, Ébène WAY does not sell in individual pieces. For example, it sells in pack of 2 or 4. Consumers will therefore prefer to buy the products in large amounts. Ébène WAY seeks to be targeting families rather than individual consumers. They offer less variety but cheaper prices.

Ébène WAY benefits from internal economies of scale. These cost savings arising form large scale production. They do not have to change ingredients as they change the type of cake. The fact that they use the same ingredient, they can buy large quantities in bulk. The bulk buying and production of some cakes on a weekly basis allows to lower costs. It can hence charge lower prices.

In cake production, the ingredients represent a big percentage of total cost. These ingredients costs are classified as variable costs.

Variable costs:

Variable costs are costs associated with variable factors pf production. These costs change with the level of output. The buying in bulk of raw materials enables them to reduce the most important costs. The Pause Café although it charges higher prices for small cakes, it produces a wider variety. The consumers have a trade off between variety and price.

Barriers to entry:

They measure the ease with which firms can enter or leave a market. In this case, barriers are very high. There are only two firms in the present location selling these products, namely Pause Café and Ébène WAY. Although there are other firms in the food court, they are selling food products such as bread and curry, noodles, fried rice and so on. No other firm operates in this market of cakes and pastries; there is a duopoly in this market.

In addition, Pause Café offers place where people can sit and eat in family or socialize. Note that people who shop at Ébène WAY can come and sit in the food court with their food bought from the Ébène WAY. However, very few people do that. In the market providing the unique service of cakes, hot drinks, soft drinks and a convenient place, Pause Café seems to be a monopoly.

Analysis of survey questionnaire

It is important to find out how and why consumers prefer Pause Café despite its high prices. More precisely how Pause Café attracts the consumers to it by its high priced products. There are two ways in which the Pause Café can get higher revenue despite high prices. These two situations are depicted in the diagrams below.




Q3 Q2

Revenue gained due to rise in price

Revenue loss due to fall in quantity

Qty per week



Figure 1


Figure 2

Qty per week







In figure 1, the firm can make demand for its product become price inelastic and charge higher prices. This occurs when the consumers do not have enough choice or when the firm promotes its brand excessively. Here, there seems to be no promotion except through word of mouth. It is also important to consider the type of consumers who come to Pause Café. If they are people with low income, then they will compare prices. That is the product will take big percentage of their income, demand will be price elastic.

The result of the survey questionnaire from questions 4 and 6 show that very few consumers compare the prices of the products.

Q6. Do you compare the prices of Pause Café with those of Ébène WAY?

The pie chart shows the response of the people surveyed.

Only 10% of the consumers of Pause Café surveyed compare prices. While 20% are selective, they consider only some prices. 70% do not really compare prices. This confirms the fact that people either do not have time to consider prices or they are high income earners who can afford to pay marginally higher prices, making demand for their product have price inelastic demand.

Q2. How do you find prices at Pause Café compared to other competitors?

All the consumers find the prices reasonable. This can be in comparison to prices in other shopping complex food courts or compared to other food courts outlets in the same complex. The fact that Pause Café sells relatively cheaper food products like cakes, people can consume these quickly and are cheaper than noodles, rice or other more expensive food products.

Q6. Why do you buy at Pause Café?

Clearly most people value quality, personalized service and rapid service as a major factor. Only 7% considered the price. This confirms the fact that price is not a major determinant of demand for Pause Café’s products. Instead, people on their way to Ébène City, value service and quality more. Pause Café seems to have a competitive advantage here compared to other firms.

It has ready made cakes available to people who are busy. A rapid service can be provided. Unlike in other food outlets, people have to pass orders and wait, For example, fried rice or noodles have to be prepared instantly and this takes more time.

Compared to Ébène WAY, it has an advantage as it offers a convenient place to eat. This factor is valued by 22% of the consumers surveyed. The consumers surveyed value both the quality of the products and that of the service highly. This has been revealed in question 3 and question 4.

100% of the consumers rank the quality of products as being more than good. No one considered the products to be of poor quality.

For the quality of the service however, 30% classed it as fair, but 20% as good and 50% as excellent.

The firm has been bale to create a good impression on clients by the quality of its service and that of its products. The fact that Pause Café is operating with price inelastic demand curve, it can afford to become a price maker. Although, there is competition to some extent, the types of clients it targets, do not really consider Ébène WAY as a potential competitor. Furthermore, it has differentiated its products from that of Ébène WAY, adding a wide variety and better quality. It can therefore be said to be a local monopoly in the type of products it sells and service it provides. The diagram below shows how a monopoly is expected to operate.









Price/ Cost





Since a monopoly is the only firm in the industry, the firm and the industry is the same. The demand curve of a monopolist such as Pause Café will be sloping downward as it is able to control either price or output but not both. Hence because of the downward sloping demand curve, to sell an extra unit, we must reduce price not only for an extra unit, but for all previous units. This means that Marginal Revenue (MR) is always less than Average Revenue (AR). Note that the demand and the average revenue will be the same, hence represented as AR.

Considering that Pause Café operates as a local monopoly, it will produce an output 0Q*. This is where marginal revenue is equal to marginal cost (MC=MR). Profits are maximized at the point A, where MC = MR. Because the firm is in equilibrium at this point, the industry will also be in equilibrium. Pause Café will be achieving abnormal profits at C*P*ZY. Compared to perfect competition, a monopoly has no freedom to entry; therefore abnormal profits will persist in the long run.


The figure 2 on page 8 shows that it is possible to have high prices and growing sales in an expanding market. For Pause Café being strategically located in the Cyber City, it is now receiving increasing number of clients.

The ICT sector is becoming a major pillar of the economy. There are increasingly more firms and employees working in the Cyber Tower. The table below shows how the ICT sector is gaining importance in the Mauritian Economy.





Value added in the ICT sector

Rs Bn





Value added / GDP






No. of large* companies operational






Employment in large enterprises






- as a % of total employment






Investment in ITES/ BPO

Rs Bn





* Large companies that is employing 10 or more persons

Value added in the ICT sector increased by Rs 1.8 Billion in 2006, almost twice as much than in 2005. Its contribution to GDP had an increased by 0.3 % from 2005 to 2006. Compared to 2005, 116 large companies are operational in 2006, employing 8, 180 people . Employment in the ICT sector to the total employment remained the same with a percentage of 1.5 in 2005 and 2006. As for the Bank of Investement, total investement in ITES/BPO sector rose form Rs 0.7 Billion to Rs 1 billion from 2005 to 2006.

The growing number of visitors to Cyber tower has lead to a rise in demand for products of Pause Café. The survey data revealed that most of its customers are regular.

Q1. How often do you come to Pause Café?

40% of its clients surveyed visits the Pause Café daily. These are people working in the cyber Tower and who wants to have a coffee break. All of them seem to be the regular visitor of the Pause Café. The coffee shop seems to have repetitive and regular consumers and the number of these consumers is growing.

This will definitely allow the firm to sell more despite the increase in prices. Furthermore the firm seems to have created a loyalty which allows it to get repeat consumers. Brand loyalty which allows a firm to make its demand curve more price inelastic.


The data collected and economic information generated clearly indicates that Pause Café has a price inelastic demand curve for its product, primarily because it is the only one providing a place to consume pastries and cakes.

Ébène WAY

Pause Café

Other food courts

Pause Café offers both pastries and cakes and place to consume. Furthermore there is a rapid service compared to other food such as rice, noodles, pizza etc… Also pastries and cakes takes smaller percentage of income compared to other food products. This makes the demand curve of Pause Café price inelastic and brings repeat consumers due to brand loyalty.

Secondly Pause Café can be said to be operating as a local monopoly in its market of pastries and cakes with a place to consume. Clearly there are no other competitors; this gives it the opportunity to increase prices. However consumers also get a better quality and variety of products in return for a high price. The price comparison with Ébène WAY has clearly shown this price differentiation. Barrier to entry is very high; this shows that there is no place for a second operator.

Thirdly the market of Pause Café has been expanding. The demand curve has been shifting outward due to the expansion of the industry. This had lead to an extension along the supply curve, causing the price and quantity to increase from P1 to P2 and Q1 to Q2.





Q1 Q2





Pause Café is clearly heading towards making abnormal profits but it has to be careful. If other firms see that there are a lot of abnormal profits to be made, then they can convert some of the food outlets into cakes and pastries. However up to now this is not the case because Pause Café is not seen to be charging excessively high prices.









Price/ Cost


Pause Café does not seem to be a consumer exploiting monopolist. They are giving wider variety and good service in return for high prices.


. I will be grateful if you can fill in this questionnaire.

  • How often do you come to Pause Café ?


Once a week

Twice a week

Thrice a week

Others specify …………………………………………………………………….

  • How do you find prices at Pause Café compared to other competitors?

Very expensive

Reasonable Cheap

Very Cheap

  • How do you rank the quality of the products of Pause Cafe?
  • Very good Good More than good Poor quality

4 . What about the quality of the service? Excellent Good



  • Do you compare the prices of Pause Café with those of Ébène Way? Yes No On certain products If you have answered “On certain products”, please specify____________________________________________________________
  • Why do you buy at Pause Café? Quality personalized service rapid service competitive price convenient to eat