Long Run Costs and Economies of Scale

If I had the resources to open a business, then I would choose to open an organic food store. Organic foods are becoming more popular day-by-day because the public is becoming more educated and knowledgeable about the benefits of eating a healthy diet. Due to increased awareness and market development, more organic food stores are opening up.

I will open a small business, possibly one store in the local community and then expand the business by opening more stores later on when business picks up. The expansion can be handled either by franchising or managing on my own from a central location. The size of the market is large. The main customer base will be families, single adults and couples who have a slightly higher income than the average consumer and are health conscious.

The short run costs are, also known as fixed costs, are costs which cannot be changed. The short run costs include building lease, employee wages, bank loans, utility expenses and business taxes. The long run costs will be merchandise which can be changed by bulk buying or changing the supplier.

As the business expands, the internal economies of scale should be exploited first. The products will be bought in bulk at discounted prices which will reduces the cost of factors of input. As the business grows, it will have a favourable rate of borrowing compared to smaller firms and raising capital becomes less challenging.

Calgary Co-op is a perfect example of a local food retailer. The Co-op web site (http://www.calgarycoop.com/about_us) states that “Calgary Co-op’s root’s run deep in the heart of the community as the only truly Calgarian food retailer”. The Calgary Co-operated Association bought the business from ACWA in 1956 for $58,000 (http://en.wikipedia.org/wiki/Calgary_Co-op). Now Calgary Co-op has over $288 million in assets with 23 food stores, 26 gas bars,17 liquor stores and 7 travel offices. The Co-op management team realized the potential of healthy options and created a small section for healthy choices. The main advantage the Co-op has as a business are the ability to buy products in bulk, diversified product selection with gas bars, travel shops and liquor stores; and providing yearly rebates to members based on the purchases to retain customers. Although they provide healthy options, the Co-op has failed to expoit the market for organic products, which I see as a weakness.

In the food industry, it is crucial to serve the customer with healthy products that taste good or provide value for money. As the people become more educated on health issues, they want to buy healthy food and are willing to pay a bit extra for it.