Introduction
This
research paper explores the core microeconomic principles that apply to the Coca-Cola
Company, how these economic canons are influencing the sustainability of this multinational
company, the impact on business decisions made by the company executives. More
the paper investigates the market structure and segments that Coca-Cola Company targets in order to evaluate
the viability of these market in the future for the firm.
Coca-Cola
is a multinational nonalcoholic beverage company based in Atlanta, Georgia. Coca-Cola gained popularity upon the launch of her
most striking product by a pharmacist known as John Stith in 1886. However, Asa
Griggs Candler bought the company three years later and incorporated it in
Wilmington, Delaware. Coca-Cola Company
produces over 3600 products having a long history of acquisitions of huge
brands of various products. For instance, she acquired the Minute Maid Company
in 1960 and many other companies. The products produced by coca cola range from tea, coffee, energy drinks, juices
among others.
The
Coca is the leading world producer and supplier of these beverages and syrup
concentrates. However, Coca-cola
collaborates with other bottlers to enhance logistics of its products. The
company has its central bottling center in North America known as Coca-Cola Refreshments (Greenfield, 2016).
The
company is listed on the NYSE stock
exchange market and constitutes part of DJIA and S&P indices. Moreover, Coca-Cola Company comprises of the Rusell 1000
index and the Rusell 1000 Growth Stock index. Muhtar Kent is the current chairperson
of this company, with James Quincey as the president and the C.E.O.
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Supply and Demand Conditions of the
Company
Coca-Cola Company dominates the beverage
market offering over 500 carbonated and still drinks to over 200 nations. Her
brand portfolio recorded only 17 brands early in 2014 that accounted for over
one billion dollars annual retail sales. In the same year, the company’s
sparkling drinks comprised of the Diet Coke,
Coca-Cola, Fanta, Coca-Cola Zero, Sprite, and Schweppes, all attributing to
about six billion-dollar brands.
Out
of the 11 still drinks brands, Coca-Cola
Company was able to create an annual retail revenue of over a billion dollars
in 2014. In the same year, the company expanded her still beverage brands by
three more brands namely Gold Peak Tea, Fuze Tea, and I LOHAS mineral water.
The expansion illustrated a rise in demand for drinks free of carbon and readily
drinks.
On
average, the company sells out over 1.8 billion bottles of Coke on a daily
basis across the world comparing to the only 25 bottles that were sold in the first year into beverage industry. The company
has extensively reached many parts of the world with about 275 bottling
companies globally. Statistics show that Coke Company has over 50 consecutive
years recording an increment on the dividends, which implies an increasing
supply of the 3500 products over the years.
In 2016, the company made a retail sales revenue of $41.28 billion
dollars. There has been a general increase in the overall demand for
ready-to-drink beverages, and Coca-Cola
Company has used this opportunity to expand her products, a phenomenon that
explains the overly hiked single share value for the company’s shares. Lately,
a single Coca-Cola share that was bought
in 1919 is worth more than $0.092 million dollars.
The graph below shows the
cumulative total shareowner return from 2007 to 2011.
The graph illustrates the
rise in shareowner return over a period of 5 years after the expansion of Coca-Cola Company to more bottling companies.
The implication of adding more bottling companies and affiliates lines the
logistics and distributions of the company’s products across the world, making
it easier for the company to concentrate on the production of the syrup.
Otherwise, through the extension of the bottling channels, the company achieves
her goal to reach market segments in remote areas.
Similarly,
the demand of some of coca cola products is declining in the United States with
the medical critics warning the consumers of sodium benzoate used as a primary
ingredient in the manufacture of soda. According to Lennerz (2015, p.73-79),
sodium benzoate used in the manufacture of soda damages the yeast cells of
children and may also generate hyperactivity behaviors in human beings. Other critics such as Evans et al. (2015), argue
that cocaine extract in the soda can be harmful to the health of human beings and aims at creating an addiction for competitive advantage, which is
an unethical strategic approach for achieving a competitive advantage. However,
Coca-Cola Enterprises
has initiated plans to seek for substitute ingredients for the Diet Coke.
Whereas
Price Elasticity of the demand for Coca-Cola Products
Price
elasticity of the demand for coca cola products is quite elastic, however, based on a number of determinants of
price elasticity. A number of factors affect the quantity demanded the
company’s products along the prices attached to the products. The existence of strong substitute companies in
the beverage industries such as Pepsi, Mirinda, and NESTLE inc, significantly
influence the price elasticity of demand for coca cola products. For instance,
if coca cola raises the price of each commodity by $5 the price will shoot
downwards and reduce the sales to a
significantly high figure. This phenomenon would not necessarily be out of
unaffordability of the product but due to the prevalence
of cheaper substitutes.
Currently,
the price elasticity of demand for some of her products is quite inelastic due
to quality and time factor. What happens is that Coca-Cola Company uses high-quality
commodities and sophisticated technology to manufacture distinguishably unique
commodities that can still sell off better at higher prices in the market. A
good example is the Diet Coke soda. It sells at a higher price than substitutes yet generates very high incomes for
the company. Time factor aids Coca-Cola
Company greatly when setting prices for various products. According to Forbes (2017),
time factor causes price inelasticity to most of Coca-cola products in that, it takes time for loyal customers to
shift from a particular product experiencing a price fluctuation to opt a
substitute. During this time before the customers adjust their tastes and
preferences, the company is able to learn the most responsive price for a
particular commodity. Other factors such as increase and decrease in consumer’s
income affect the price elasticity of demand for products majorly consumed by
the middle-class customer segment. To
adjust for such market hiccups, Coca-Cola
offers differentiated products of a similar kind
in terms of packing and packaging. For instance, the company offers juices in
bottles of different capacities. Therefore, small-scale users are able to
access small quantities for little amounts of money. There is the inadequacy of close substitute in remote areas due to
unavailability of bottling companies for substitute products in remote areas.
Cost of Production for Coca-Cola Company
The
giant beverage company faces both variable and fixed cost of huge magnitude
while running her manufacturing operations. By 2016, the company had an
estimate of 100, 300 skilled workers excluding casual laborers and the
associates in the bottling companies. A huge percentage of her revenue is
greatly cut by recurrent expenditure, which involves paying the huge number of
employees every month. Another significant cost driver for Coca-Cola Company is the increasingly high
marketing and advertising cost. The beverage
industry has gigantic companies capable of using the money to manipulate the markets in terms of
marketing and pricing.
In
order to cope in such a competitive environment, Coca-Cola Company highly invests in marketing and aggressive
marketing maintain her market share. According to Muhtar Kent, the company
C.E.O they spent more than one billion dollars in media and building by the end
of 2016. He adds that the company uses over half a billion dollars for
marketing purpose in the United States alone, and over 3.3 billion dollars for
worldwide marketing in the same year.
Lately, criticism on the ingredients used in the
manufacture of Diet Coke has brought in
some financial hiccups, increasing costs in the research and development
department, which embarked on the endeavor to find alternative ingredients to
substitute the previous sodium benzoate. Nevertheless, the department has not
established a concrete solution to solve this problem, an element that is
retarding manufacturing and distribution processes of soda. According to Muhtar
(2016), the company spent about $138 million in a period of 5 years from 2010
to 2016 on scientific research to counter the health concerns that associates
soda with obesity. Being a multinational
company Coca-Cola has a tax obligation in
over 200 countries across the world. These taxes culminates from the import of
ingredients and export of finished and intermediate syrups to the diverse
bottling companies.
Muhtar
(2017) confirms that the company has no intentions to retreat or cut down the
volumes it intends to produce in the future but rather aims at completing the franchising strategy that commenced in 2015 to
create a stronger base in North America. This implies that both the fixed and
variable cost drivers have little to no impact on the corporate output
decisions by the coca cola company.
Generally,
the total effect of all these and many other hidden cost drivers would be a
significant decrease in the quarterly gross revenue. However, Coca-Cola Company has a small-packaging
strategy such as cans that greatly helps her generate more sales for the fast-moving beverage products. Muhtar says that
in 2016 the company annual income surpassed the estimated profit by $1.1
billion. He attributes the small can
packaging to this achievement and affirms that the strategy aids in generating
more returns on sale subsidizing the impact of costs, divestitures and other
income leakages. Otherwise, there was a
slight decline in profits between 2014 and 2015 due to an increase in the cost
drivers facing the company.
Overall
Market share for Coca-Cola Company
The
pie chart below illustrates how different beverage companies divide the global
market.
.
Apparently,
Coca-cola dominates in the non-alcoholic
drink production across the world covering about 42% of the total market share.
However, Pepsi follows closely in market domination and accounts for about 27%
of the worldwide market. Other competitors span a small market share and these
include the National Beverage, Dr. Pepper, and Monster in the United States.
These hold about 31 percent of the global market, which is slightly higher than
what Pepsi Inc., spans. Perhaps Coca-Cola
dominates the market due to her capital investment in acquisitions, marketing, and
brand building.
The
company is popular for acquiring big brands such as Dasani mineral water,
Minute Maid, and many other over 20 billion worth companies each. This and
other high capital strategies inhibits potential new entrants in the beverage
industry thus helping Coca-Cola maintain
her domination in the global market. In case other companies get adequate financial and administrative
authority to expand their operations or invent
a new technology of using ingredients with less health side effects, then Coca-Cola, who hardly spans half of the global
market might experience a great hassle trying to position herself again in the
market.
Coca-cola is market structure best defines an
oligopoly market, where there a few firms competing to sell generic products. This
is because two giants, Coca-Cola and
Pepsi, dominate the whole market. The other small firms have quite an insignificant effect on the market. This gives Coca-Cola a closer to monopoly effect in the
beverage market allowing the company to forge many alliances, manipulate the
prices and acquire other big brands (Lingyu, 2015).
Recommendations
Coca-Cola is in an oligopolistic market and
thus it would be better to focus on quality products
as well as mass production in the future to reach and create more customers
that are loyal. High-quality products do not only attract but also help embed the
brand in a customer’s mind. Being an oligopolistic market is an opportunity to
acquire as much as possible market share before new threatening firms enter the
beverage market. Talking of quality, Coca-cola
should reduce the focus on the creation of new marketing strategies and focus
more on the production of user-friendly
commodities that will face little criticism, an element that negates all
marketing efforts rendering marketing expenses to loss.
References
Coca-Cola
History │ World of Coca-Cola. (2017). World
of Coca-Cola. Retrieved 15 December 2017, from
https://www.worldofcoca-cola.com/about-us/coca-cola-history/
Evans,
R., Nguyen, T., Blair, I., Blair, O., & Newman, M. (2015). The Effects of
Soda on the Human Body.
Forbes
Welcome. (2017). Forbes.com. Retrieved 15
December 2017, from https://www.forbes.com/sites/laurengensler/2016/02/09/coca-cola-fourth-quarter-earnings/#3ad611dc2171
Greenfield,
S. (2016). Giving the Global High Sign: Coca-Cola Advertising of the “American
Way” in Life Magazine, 1941-1947.
Lennerz,
B. S., Vafai, S. B., Delaney, N. F., Clish, C. B., Deik, A. A., Pierce, K. A.,
... & Mootha, V. K. (2015). Effects of sodium benzoate, a widely used food
preservative, on glucose homeostasis and metabolic profiles in humans. Molecular
genetics and metabolism, 114(1), 73-79.
Ma,
L. (2015). Examination of the influences of the industrial attributes on the
entry mode selection: case studies of the Coca-Cola Company from US entering
the Chinese beverage industry and the BT Group plc from the UK entering the Chinese telecommunication
industry.
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