ECO 201 - Final on Coca-Cola PDF

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The essay is about the microeconomics of the company Coca-Cola...

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ECO 201 Final: Coca-Cola Southern New Hampshire University

Coca-Cola Coca-Cola is a multi-billion-dollar corporation. They have successfully expanded their business to most parts of the world. To ensure the continuation of the success, this paper will provide analyzed criteria of the company. This includes maximizing utility with supply and demand, examining the costs of production and exploring the overall market competitors. The world and the taste of consumers are constantly changing. Coca-Cola are constantly adapting in order to stay on top as one of the leading companies in the beverage industry. History of the Company To adapt with the new prohibition laws, John Stith Pemberton created a new nonalcoholic beverage that was a mixture of sweet syrup and carbonated water. He later sold the formula to Asa Candler. Candler trademarked “Coca-Cola” and continued to grow the business through belligerent advertising and thousands of free samples. In 1894, the company began to sell the beverage in the now iconic Coca-Cola glass bottle. The company’s new president, Robert Woodruff, was determined to make Coca-Cola into a quality beverage that will be distributed worldwide. The Coca-Cola Export Corporation began in 1930. The company began expansions to France, Cuba, Panama, Canada, Puerto Rico, the Philippines, and Guam. In 1928, Woodruff introduced the 6-bottle carrier which allowed consumers to bring Coca-Cola home. When WWII began, Woodruff made sure every soldier could have access to Coca-Cola no matter where they were. 64 bottling plants were built near warzones in North Africa, the Pacific, and Europe. In 1955, Coca-Cola began putting their beverage in cans. It was not fully accepted by consumers until 1960. Minute Maid was acquired by Coca-Cola in 1960. That was the first step towards becoming a total beverage company. By 1977, customers had to options of purchasing their

Coca-Cola beverage in 10-, 12-, 26- ounce bottles and the 2-liter plastic bottle. In 1982, CocaCola launched Diet Coke, their first extension to the Coca-Cola trademark. Coca-Cola’s vision has always been for the people. It was created improve health and wellbeing, and now they aim to refresh the body and spirit of their consumers. One hundred and eighty-two years later, CocaCola is now a global business that works with every community where they do business. CocaCola Company markets, manufactures, and sells all sorts of beverages. They sell syrups and concentrates to restaurants, fast food chains, and other business that sell their fountain drinks. They also sell finished beverages like soda, water, sports drinks, juice, dairy, tea, and coffee. The services that Coca-Cola offer is bottling services for other brands. The company has a bottling operation called BIG, or Bottling Investments Group. Under Coca-Cola, BIG is constantly looking for different places to grow their business in a resourceful manner.

Supply and Demand Conditions

Before jumping into the marketing strategies of the Coca-Cola Company we must first understand the basics of economics. The backbone of economics is supply and demand. Demand of a product is when consumers have the desire and the power to purchase the good or service. Supply is the total number of goods or services a company can produce. First let us look at the determinants of market demand. The Law of Demand, as stated by Hubbard and O’Brien in Pearson textbook of Microeconomics, is the inverse relationship between the price of a product and the quantity of the product demanded.

As shown in the figure above (Hubbard and O’Brien, 2010) when the price of a product drops, the demand for the product increases. Though the graph from the textbook show’s cellphones, this could also work for Coca-Cola as well. Price however is not the only factor of how well the product will do in a market. There are also other determinants that will cause the demand curve to shift left or right. The other determinants are income, price of related goods, tastes, populations and demographics, and expected future prices. The next figure shows how each determinant affects the demand curve (Hubbard and O’Brien, 2010). When a consumer has more spending income, they are more likely to purchase a Coca-Cola product. Coca-Cola is considered a treat for most people, so when income rises then so does the demand for CocaCola products. It also works the verse way where if a consumer’s income lowers, so will the demand for Coca-Cola. There are numerous other substitutes in the market for soft drinks. One of Coca-Cola’s biggest competitor’s is Pepsi Cola. If the price of the substitute good, in this case Pepsi, increases then consumers will decide to purchase Coca-Cola products instead. This will shift the demand curve to the right. Complementary goods for Coca-Cola are typically fast food like McDonald’s and snack foods like movie theater popcorn. If the price for the complementary good increases, then this will affect Coca-Cola as well because consumers are buying less of the other good. For example,

if movie theaters increased their ticket prices, people will be less likely to go to the movies and buy snacks causing the demand curve the shift to the left. It is a given that consumer’s tastes change constantly. Coca-Cola has been able to keep up with the change and even be the influence of change of the market’s taste. Many people have grown up with Coca-Cola and are now loyal consumers. No matter if the price for Coca-Cola product increases or decreases, they will keep purchasing. This will have a positive affect on the demand curve. The population and the demographics of a location affects the demand curve in a positive way as well for Coca-Cola. They are able to create products that cater to the want and needs of the demographic. The larger a population is, the more products Coca-Cola will sell. When and where Coca-Cola products are sold will affect the demand curve. The seasons affect the prices of the products. For example, during the summer, people attend festivals and theme parks where the price of Coca-Cola products are increased. The weather and the location increase the typical amount of sales. According to macrotrends.net, Coca-Cola revenue kept on rising, except for during the period of the 2008 recession. Their biggest revenue was $45,998 billon US dollars. When the world was getting more health conscious, Coca-Cola was able to keep up with the market and offer other alternatives. They sold diet sodas with zero calories so consumers can enjoy their products worry free.

This figure from macrotrends.net shows the chart graph of the quarter and annual revenue of Coca-Cola from 2006-2020. As the figure shows, Coca-Cola was still making billions of dollars, but they were doing worse every year. That was until the end of 2018. During that time Coca-Cola had rebranded the Diet Coke line by introducing new flavors to the zero-calorie sparkling beverage. Before the innovation, Coca-Cola had a huge decline in revenue. They had made $41,863 billion USD in 2016 but dropped 13.5% to $36,212 billion USD in 2017. The figure shown (Macrotrends, 2020) is the revenue of Coca-Cola from the last 5 years. There was a slow gradual growth within the last 2 years. Currently in 2020, because of Covid19 and the loss of income for majority of consumers all around the world, Coca-Cola’s revenue has dropped. In just half a year the company has declined a whopping 28.48%. On Coca-Cola’s company website, their income statement shows on June 28, 2019, the revenue earned was $18,691 million USD. On June 28, 2020, revenue has dropped to $9,997 million USD. That is a tremendous decrease.

Next is the supply side of Coca-Cola. The Law of Supply states that if the price of a product increases, the quantity of supplies will also increase. Suppliers are more willing to produce more in order to increase profits. As the figure shows (Hubbard and O’Brien, 2010) when there is an increase in supplies, the supply curve shifts to the right. When there is a decrease in supplies, the curve shifts to the left. CocaCola factories are able to sell their products at an incredibly afford price for consumers because they can keep their production cost low by producing a lot at the same time. The determinants of supply are input costs, technological improvement, prices of substitutes, number of firms in the market, and expected future prices. Coca-Cola has many of their own factories for mass production, but there are certain lines of Coca-Cola that have a higher production cost. Their Coca-Cola Life has a mixture of both real cane sugar and stevia sweetener. The use of real sugar increased the price and decreased the production. Technology on the other hand has helped Coca-Cola increase their supplies. In 2009, Coca-Cola found a way to make greener bottles. Their new way of packaging inspired other companies to also switch to earth friendly methods. During late 2010, Coca-Cola introduced the freestyle dispenser. Instead of having many different cans and bottles, they created a dispenser that allowed consumers to create their own beverage by giving them over 100 drink

combinations in just one machine. The cost of producing the products decrease and shifts the supply curve to the right. Pepsi is not the only substitute for Coca-Cola. Keurig Green Mountain Group competes with Coca-Cola with their beverages that include Schweppes, RC Cola, Hires Root Beer, and Nehi. For the consumers who do not have a preference of Coca-Cola, if Keurig has a huge sale because their production price was reduced, then it will lower the supply production of CocaCola. Coca-Cola is a global business that has 225 bottling partners all over the world. Their operations reach over 200+ countries and in 5 different regions. Because of the additional firms, it increased the supply quantity which shifts the supply curve to the right. According to Sharleen Dsouza from Bloomberg, the future plans for Coca-Cola is to make India it’s 3rd largest market. It is currently the 5th largest. But because of everything happening to the current world, the timeline is unknown to when production will begin. This means less goods are offered and shifts the supply curve to the left.

Price of Elasticity of Demand

The price elasticity of demand is calculated to find out how much the quantity of a product falls after a price increase. To get the answer, the percentage change in quantity demanded is divided by the percentage change in price. When it comes to Coca-Cola, the value of elasticity is greater than 1 when there is a change in price. The cause of price change caused a larger change in demand. This means that Coca-Cola is an elastic demand.

When there is an increase of price for Coca-Cola products, consumers often will purchase a substitute like Pepsi, Red Bull, Dr Pepper Snapple, and Nestle. The demand of Coca-Cola will then fall. Even though Coca-Cola has many loyal customers, there is still a certain price point where consumers are willing to pay. Companies like Pepsi have products outside of beverages, which means if all consumers decided to stop drinking sodas, they would not suffer. Coca-Cola on the other hand only produces beverages. They added a new competitor, Red Bull, when they began the production of a Coca-Cola Energy Drink line. The problem that arises is that the demand for Coca-Cola Energy Drinks are low, which will affect the demand curve in a negative way. Currently, Coca-Cola is one of the top beverage companies in the world. Over time, there will be even more competitors. To keep up with the changes, Coca-Cola tries to keep their price as low as possible. Because they are an elastic demand, if the price increased, it would take some time for consumers to consider purchasing it again. To stay at the top, Coca-Cola has to accommodate to consumer’s taste and never stop finding new ways to lower production cost without sacrificing quality. Goods that are elastic demand are typically luxuries. Coca-Cola is considered a luxury product because their beverages are not considered necessities. For example, if a person was extremely thirsty, their demand for water is a lot higher than their need for a Coca-Cola. Water is a necessity to keep a human healthy where people debate whether Coca-Cola is even healthy to consume. Narrowly defined markets have more of an elastic demand than broadly defined markets. As the market name describes, it narrows down a broad market. Food is a broadly defined market, but soda is a narrowly defined market. It is easier to find a substitute for Coca-Cola

because there are beverages that have similar taste, like Pepsi or RC Cola. A broadly defined market is an inelastic demand because there is no substitute for it. For example, we could find a replacement for Coca-Cola Energy Drinks by substituting it with Red Bull but there is no way to replace gasoline with a different type of oil. Coca-Cola takes only a small fraction of a consumer’s budget and makes it a less elastic demand. People are willing to pay $2 for the occasional soda. Large fractions include big purchases such as houses, cars, and furniture. In this case, the larger the share the good gets from a consumer’s income, the more elastic it becomes. Coca-Cola products are a luxury and is inexpensive for the average consumer. By knowing the price elasticity of demand, it allows companies like Coca-Cola to adjust their price without disrupting the total revenue. Total revenue is calculated by multiplying the price per unit by the number of units sold. Being an elastic demand product, Coca-Cola’s price and total revenue move inversely. This means if the company raises the price of a bottle of CocaCola from $1.50 per bottle to $2.00 per bottle, then the total revenue would decrease. Vice versa when the price is decreased, the total revenue would increase. To have a more stable total revenue, Coca-Cola partners with fast food franchises, restaurants, and movie theaters to have a more stable profit. The price of a Coca-Cola at the movie theaters would not change as much as the Coca-Cola in a grocery story. It is different for restaurants to carry Coca-Cola than it is for a supermarket. McDonald’s, for example, is Coca-Cola’s largest restaurant consumer. They’ve had a tight relationship since 1955 according to the New York Times. Coca-Cola even delivers their syrup in stainless steel tanks rather than plastic bags to keep the freshness. Many times, CocaCola would have contracts with restaurants where if they are going to serve their product, they are not allowed to serve any other company’s product, thus lowering the competition and

increasing their total revenue. To take account of the price of competitors, Coca-Cola has to make sure their price is not too high or too low compared to others. They also need to keep track of the product demand of the public. With advertising, Coca-Cola could also encourage the market’s taste to their product. It is hard not to get a Coca-Cola beverage after seeing their ad on every billboard and all-over social media feeds.

Costs of Production

Coca-Cola has a fairly noticeable decrease in revenue through the years of 2015 to 2019. The figure above shows Coca-Cola’s annual income statement for over the last 5 years. Over the last 5 years, Coca-Cola’s costs of goods went down from $17,482 million in 2015 to $14,619 million in 2019. According for Forbes.com, the reason for the loss is not because of decline in sales. It is because the company is transitioning by refranchising their bottling operations. CocaCola had begun to transition over to making most of their profits by selling their bottling franchises. Now companies like Heinz Ketchup and Dasani Water have switched to using CocaCola’s plant-based bottles to help save the earth. Comparing the Cost of Goods Sold and the Operating Expenses, these two data shows that it is both decreasing every year. The Total NonOperating Income/Expense stated relatively the same amount. Proof that sales were still doing well is shown through Coca-Cola’s Income After Taxes. There was a big drop from $6,550 million in 2016 to $1,248 million, but then a huge jump back up to $6,476 million in 2018. This

jump was caused by the launch of their new flavored Diet Cokes. People all around the globe are more aware of the sugar intake when it comes to traditional soda. When Coca-Cola launched a whole new line of people’s favorite soda, consumers all over loved it. There is one major input that affects Coca-Cola, and that is water. The earth is running low on water, and it takes a lot of water to make one bottle of Coca-Cola. Back in 2004, it took 2.7L of water in 1L of the Coca-Cola soda. Throughout the years, modern technology helped the company to process, clean, and then returned to the communities. In 2015, Coca-Cola was able to lower the amount of water needed to make their product to 1.98L per 1L of Coca-Cola. Over the last 13 years, Coca-Cola has partnered up with over 300 communities and 71 countries to focus on rainwater harvesting, safe water access, and watershed protection. Together they replenish the water resources used. The partnerships worked so well that Coca-Cola has a campaign slogan “For every drop we use, we give one back”. The fixed costs that Coca-Cola has are rent expenses for their bottling plants, employee salaries, and plant maintenance. Another fixed costs would actually include advertising. Despite any output changes, Coca-Cola has to advertise. Whether they use billboards or celebrity endorsements, the costs of advertising do not change. As we know, Coca-Cola is transitioning their business to plant bottles which shows in their Operating Expenses. The COGS in 2017 was $36,212 million, $34,300 million in 2018 and in 2019, COGS was $37,266 million. The variable costs of making the new bottles and also the costs of water vary due to climate change. This caused a dip in 2018 and rise back in 2019. The fixed costs shown in the Operating Expenses show the same trend. The Operating Expenses was $28,457 million in 2017, $25,148 million in 2018, and $27,180 million in 2019. Comparing the numbers, the COGS was a lower amount in 2017 than in 2019, but the Operating Expense was a higher amount for 2017 than in 2019. This

is because Coca-Cola had opened a lot more bottling plants and also invested in land to be able to produce more plant bottles.

Overall Market

Coca-Cola is a non-alcoholic beverage focused company. Even though the world has become more health conscious, Coca-Cola has kept up with consumer’s taste by branching off into different types of beverages. The figure on the side shows the top companies for soft drinks in 2015. CocaCola had almost 50% of the consumer market while PepsiCo had 20.5% and the others shared a 30.8%. Coca-Cola was dominating the soda market. Now the trends in 2019 are a little different. The figure on the side shows the dollar amount to the millions of each company’s annual income in 2019. Calculating to find its percentage we are able to find that Coca-Cola’s market share was 47%, PepsiCo was 39%, and in this case Keurig Dr Pepper was at 14%. Coca-Cola was able to keep their share of the market close to 50% even after five years. PepsiCo increased their market share. This could be because they sell more than just soda.

There are new competitors that enter the market of soft drinks every year. In order for Coca-Cola to maintain their share of the market, they would have to uphold their brand image. Advertisements like the iconic holiday season commercials with polar bears and Santa Claus reminds customers why they love Coca-Cola. They connect the happiness and warmth they feel to a Coca-Cola beverage. Maintaining their brand image will reduce threats from new competitors. Rivalry is another issue Coca-Cola has to face in their market. PepsiCo and CocaCola have been in a rivalry for as long as anyone could remember. Trying to avoid the competition when they are almost equal in size of power to you is a challenge on its own. CocaCola reduces that rivalry by focusing on their unique product. They differentiate their sodas by their pr...