Marco’s Pizza Strategic Expansion

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Table of Contents

Introduction
Laws of Supply and Demand
Surplus and Shortage of Supply
Elasticity of Demand
Rational Self-Interest
Consumer Benefit
Marginal Utility
Benefits of Competitive Market Structure
References

Introduction

Headquartered in Toledo, Marco’s Pizza is a popular pizza restaurant chain that offers high-quality, authentic Italian pizza, salads, chicken wings, baked subs, and other products. Being one of the fastest-growing franchises in the United States, Marco’s Pizza planned to continue its growth to Iowa, in particular, the Des Moines area. Following its program for strategic expansion, the company aimed to introduce 15 new locations in Iowa in 2017, with 1 or 2 of them in Des Moines (“Marco’s Pizza,” 2017, para. 1). Within the next several years, the number of locations is expected to grow in accordance with the company’s aggressive scalable business model.

As of 2017, there were only 8 locations in Iowa, all of which partnered with Marco’s franchise Family Video (“Marco’s Pizza,” 2017, para. 3). The initiative to locate Marco’s Pizza in Des Moines was originally taken by Dan and Sherri Holmes, the residents of Des Moines who wanted to introduce quality products and customer-friendly service to the community. Under Holmes’ ownership, the first Marco’s location opened in Des Moines (“Marco’s Pizza,” 2017). Apart from Des Moines, targeted markets for growth include its suburbs, such as Norwalk, Norwoodville, and Avon Lake.

Laws of Supply and Demand

The strategic expansion of Marco’s Pizza to the Des Moines area will be subject to the law of supply and demand. In particular, when opening new locations, franchisees will have to decide on the price of the product and the quantity of that product. Rational estimation of these values will contribute to the cost-effective allocation of resources. In order to make these choices, a thorough analysis of the market has to be conducted.

It is important to understand the demand for the product to estimate how many products (raw materials) need to be bought to generate the required supply. Marco’s Pizza has become a beloved brand of many Americans because it makes pizza with fresh ingredients only (“Marco’s Pizza,” 2017). This means that dough never gets frozen and is baked every day, and the cheese blend is also never frozen. If the franchise owner sets too high prices for its products, customers may not be willing to buy them. If the prices are lowered, the demand for those products will increase. One could state that to increase the demand; prices may be lowered even more, though, in such a case, the revenue generated may not cover costs of operation (Cowell, 2018). Therefore, the prices should be set at the point when supply and demand reach equilibrium.

In the real world, the supply is also affected by production capacity, operation costs, and other competitors in the market. The demand is affected by the quality and cost of the product. If the price of Marco’s pizzas drops, the client base will increase. If the price of Marco’s pizzas increases, its customers may choose to buy pizza at Marco’s competitors. However, the law of supply and demand may be applied not only to prices but also to other activities. In particular, the wages of Marco’s employees will depend on the level of unemployment or, in other words, the supply of workers and the demand for work.

It has to be said that the demand for Marco’s products varies across states, and so does the price. If the price for Marco’s pizza and other products were the same for all the states, there would be no need to estimate the price for every position in the menu. However, it is a fact that prices differ slightly, and this depends on a number of factors, the primary of which is the cost of operations. One could assume that different Marco’s Pizza stores have different costs of operation, including labor, taxes, and local fees. Marco’s franchisees set their own prices with no one dictating the price-setting strategy. However, this does not mean that franchises may set too high prices to keep customers coming. At the same time, following anti-monopoly and anti-collusion laws, the prices of local franchises should be different.

Surplus and Shortage of Supply

The amount which producers may want to sell does not necessarily match the amount which the consumers want to buy. This may be especially the case for stores that have opened recently and cannot determine the effective amount of supply (Cowell, 2018). If Marco’s Pizza bakes more pizzas than demand, this situation is called excess supply or surplus. It should be mentioned that surplus is always fixed to a specific price of the product since when the price is lowered, it may be expected that most of the excess pizzas will be sold. The price will drop until there is no more surplus.

Conversely, if the quantity supplied is less than the quantity demanded, excess demand or shortage may be observed. If in some businesses it is feasible to increase prices, that will not work for the pizza industry that has a great number of competitors and thus high elasticity of demand. If Marco’s franchisees decide to increase the price, consumers may be unwilling to pay more and will choose Marco’s competitors. Taking into account that Marco’s Pizza is new to residents of Des Moines, the price increase strategy may not bring much profit. Therefore, when deciding on supply, the company should be guided by the rule of profit maximization and set marginal revenue equal to the marginal cost.

Elasticity of Demand

The elasticity of demand defines the extent to which the demand is impacted by a change in the price of a product. The demand may be elastic and inelastic, depending on its responsiveness (Kreps, 2019). Since Marco’s Pizza has competitors in the Des Moines area (Fong’s Pizza, Blaze Pizza, Gusto Pizza, and others), the demand for pizza is elastic. In other words, if the price of the product changes, the demand will change significantly. This, in turn, will lead to a change in revenue. The greater the number of Marco’s competitors, the more elastic the demand for its products will be. This is because competitors act as substitutes to which consumers will possibly turn if the price of Marco’s pizza increases.

Rational Self-Interest

In a free market, it is assumed that both consumers and producers are guided by rational self-interest in their decision-making. The idea of rational self-interest may be applied to the concept of the invisible hand that is used to describe the egoistic intentions of an individual that are beneficial to society. It is not only franchisees who benefit from opening new pizza stores in Des Moines but also consumers who are given an opportunity to buy high-quality pizza. The market is thus built on voluntary exchanges between producers and consumers. Owners of Marco’s Pizza franchise were willing to sign the agreement to buy the franchise and produce pizzas to sell them and generate profit. Consumers who are pizza lovers want to pay money for Marco’s pizza. Both parties are governed solely by their rational self-interest, and that is how equilibrium is set.

Consumer Benefit

Consumer benefit is the value that a consumer gets when interacting with a company. Considering that the value may be real or perceived, Marco’s Pizza has to pay significant attention to identify in what way it can create value for consumers. The more reasons the customer has to come to a pizza store, the more profit the franchise will generate. Types of consumer benefits include but are not limited to consumer needs, preferences, experience, perceptions, quality, and pricing (Kreps, 2019). Consumers of Marco’s Pizza may be attracted by reasonable and straightforward pricing, the perceived quality of the pizza, customer-friendly service, and a wide range of pizza toppings.

Marginal Utility

Marginal utility is considered to be the additional benefit that a customer obtains from buying an additional unit of goods. This concept helps determine how many items consumers are eager to buy. It is generally assumed that, all else being equal, as the number of items purchased grows, the marginal utility declines (Seaman & Young, 2018). When a customer comes to Marco’s restaurant, she feels hungry and decides to buy six slices of pizza. Marginal utility is the highest for the first slice, which is eaten with the greatest satisfaction. Upon consuming the second, the third, and the fourth slices of pizza, the marginal utility of the product is gradually decreasing as the customer becomes full. If the customer does not want the fifth and the sixth slices of pizza, their marginal utility is negative.

Benefits of Competitive Market Structure

In the given case, the competitiveness of the market structure is represented by the number of other pizza stores that are future competitors of Marco’s restaurants in Des Moines. At the same time, there are many buyers, and there is no single seller or buyer who could influence the market price. The greater the number of competitors, the more competitive the market will be. In a competitive market, it is mostly customers who enjoy benefits. Firstly, the chances that customers will be exploited by producers are low since companies do not have a pricing monopoly (Mandy, 2016). This means that if Marco’s restaurant increases the prices of its products, customers will be able to choose other cheaper alternatives. Thus, in perfect competition, companies would find it disadvantageous to raise prices. Secondly, firms compete to attract a consumer to buy their product. A competitive market structure implies that the market is customer-oriented, and sellers aim to satisfy customers, so they do not shift to another seller.

Marco’s Pizza has a long history, during which it has become one of America’s favorite pizza companies (“Marco’s Pizza,” 2017, para. 1). However, considering that there are several pizza restaurants in Des Moines, Marco’s Pizza will have to have some advantages over its competitors. These advantages may include the brand name, high-quality products made with the best available ingredients, never-frozen cheese blend and dough, and customer-friendly service. Therefore, customers will benefit from opening Marco’s Pizza in Des Moines as they will get one more option to choose from, and the franchise will do its best to attract new buyers in multiple ways.

References

Cowell, F. A. (2018). Microeconomics: Principles and analysis (2nd ed.). Oxford, England: Oxford University Press.

Kreps, D. M. (2019). Microeconomics for managers (2nd ed.). Princeton, NJ: Princeton University Press.

Mandy, D. M. (2016). Producers, consumers, and partial equilibrium. Amsterdam, Netherlands: Academic Press.

Marco’s Pizza announces strategic expansion in Des Moines. (2017). Web.

Seaman, B. A., & Young, D. R. (Eds.). (2018). Handbook of research on nonprofit economics and management (2nd ed.). Northampton, MA: Edward Elgar Publishing.

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