About The Coca-Cola Company

The Coca-Cola Company is a beverage multinational based in the United States. It has branches in a variety of businesses around the world. It offers a wide range of soft drinks, including Fanta, Coke, and Sprite. Which makes use of a franchise delivery scheme. It has purchased many businesses over the years in order to strengthen its business share. The company is dealing with shifting market conditions in the industry. Variations in the amount of purchases and income mean that it should use market-appropriate tactics. It should adjust its output levels in response to market demand. It has a flexible market. It exists under an oligopoly, with Pepsi as the chief rival. The Coca-Cola Company operates in the Beverages industry and produces many products. It is an American multinational corporation with operations and clients in many countries worldwide. It continues to provide popular beverages for its customers globally. It uses secret formula to manufacture its products. Therefore, the unique formula has been crucial for the firm to maintain a leadership position since many other companies are not able to duplicate its products. Some of the primary merchandise that it uses to manufacture its products is sugar in the form of fructose corn syrup, phosphoric acid, and caffeine. It has marketed its products aggressively throughout the world and therefore has established its brand name.

Many microeconomic factors conditions in its operating environment have an impact on various aspects of the company. Specifically, the analysis of the demand and supply of its products, price elasticity of demand, and costs of production is critical to examine the company’s current market position and its future sustainability and earning potential. It also has competitors that are all striving to gain the market share of the beverages industry and therefore it is essential for the company to continue its growth strategies to maintain the position of its market share.

History

The global headquarters of the company is in Atlanta, Georgia in the United States of America. Its incorporation is in Wilmington, Delaware. It is one of the most successful and oldest American multinational companies with global operations and clients in many countries. John Pemberton founded the company in 1886 in Columbus, Georgia (worldofcoca-cola.com, 2017). Its Incorporation was in 1892. It has employed the use of a franchised distribution system since 1889 that has been hugely responsible for its growth over the years. The firm produces syrup concentrate. It then sells it to the variety of bottlers throughout the world who have exclusive territories (worldofcoca-cola.com, 2017).

One of the reasons for the growth of the company is its history of acquisitions in a bid to consolidate its market position. In 1960, it acquired the Minute Maid. In 1993, it purchased Thums Up, which was an Indian Cola brand. It did the same two years later when it acquired Barq’s. Another was the Odwalla, which was a fruit juices brand whose acquisition cost it $181 million in 2001. The Coca-Cola produces a variety of products that have made it dominate the soft drinks industry globally. They include products that were in its initial product line and others because of the many acquisitions that it has had.

Supply and Demand Conditions

Coca-Cola products continue to have changing demand patterns in many parts of the world. An analysis of the trend of the market demand for its products can give the company the necessary information that it can use to make the decisions regarding its future growth and profitability. Specifically, analyzing the trend of income, the taste preference of customers, the number of units sold, the population and demographics in its various markets can provide insight on demand for the company products and therefore assist it in making informed decisions (Priem, 2012). Since some products still have some potential for growth in different markets, it is essential for the company to employ the marketing strategies to explore and influence the demand in those markets. However, due to health concerns over the high sugar content of some of its products, the company has lost a considerable number of its customers who are wary of the adverse health effects of the regular consumption of the Coca-Cola products (Gertner, 2017).

The following table presents the data on the financial performance of Coca-Cola from 2012 to 2016. It highlights the revenue, operating income, and net income that it has generated over the period in its global operations (morningstar.com, 2017).

Year

2011

2012

2013

2014

2015

2016

Revenue(millions)

46542

48017

46854

45998

44294

41863

Operating Income

(millions)

10173

10779

10228

9708

8728

8626

Net Income

(millions)

8584

9019

8584

7098

7351

6527

Figure 1: Adapted from the morningstar.com.

The data above shows that the company has had fluctuations in its revenue, operating income, and net income over the years. The company got a 3.17% growth in revenue in 2012. However, the revenues dropped by 2.42% in 2013 indicating that it performed poorly that year relative to the previous year. This further reduced by 1.83% in 2014. In the subsequent years of 2015 and 2016, it continues to experience a drop in its revenue. It indicates that the company is facing a declining demand and it should take measures to avert a further decline in the future. Possible reasons for the drop in demand may be stiff competition due to the emergence of other companies offering soft drinks. Another reason is the overall reduction in the general population due to the increased awareness of health risks such as obesity and diabetes by drinking soft and sugary drinks among the general population (Gertner, 2017). It means that the company may need to evaluate its position in the market and increasing the range of products that are healthier. It can also market its products aggressively and explore the markets that it has a small presence to bolster its revenue in the long term.

The same trend also reflects in the operating income figures over the years. The company only had an increase in its operating revenue in 2012, but the figures declined from 2013 to 2016 and therefore signaling dwindling fortunes for the enterprise. It means that it has had relatively constant variable costs over the years. The net income has also dropped apart from 2012 and 2015. The increase in net income in 2015 is due to lower fixed costs in that year.

Market supply factors that have had an impact on the performance of Coca-Cola include the availability of substitute products, the costs of inputs, and stiff competition. First, substitute products exist that are produced by other competitors such as Pepsi. Therefore, it cannot increase the supply of its products beyond a certain level because others can easily purchase its competitors’ products (Priem, 2012). For instance, consumers can buy Pepsi Cola products. In addition, stiff competition from companies such as Pepsi means that although the company enjoys a larger market share in the beverages industry, it has to limit the supply of its products to avoid wastage. The flooding of the market with many drinks has led to a reduction in dominance by the company in its various regions of operations. The expected future prices are not likely to improve because of the availability of many aerated drinks in the market.

Price Elasticity of Demand

Price elasticity of demand entails measuring how the variation in demand correlates with the price. An elastic demand indicates that a slight increase in the price may lead to a drop in revenue as consumers switch their consumption to substitutes. Inelastic markets respond less to variations in price as there is no big change in the demand for the goods (Baillargeon, 2000). For Coca-Cola Company, the demand is elastic, and therefore the company cannot increase prices to increase its revenue. Its elasticity for demand is greater than one and therefore increasing the prices of its products may cause a significant drop in the quantity of its products that its customers purchase. From the revenue and sales data that has been declining over the past few years, it is reasonable to argue that any increase in price will not lead to a rise in profits but may have an opposite effect of a drop in profits. It is because consumers can easily switch to other substitute products of the competitors in the beverages industry ((Baillargeon, 2000).

Among the factors that influence the price elasticity of demand are the availability of substitute products, luxury or necessity, the share of the budget, income levels, the composition of the consumers, and time factor (Baillargeon, 2000). For Coca-Cola, many substitutes exist in the market, and therefore consumers will quickly switch their preferences to the products of other companies like Pepsi and Mirinda, among others. For instance, if it increases the price of its soda brands slightly, many of its customers will start consuming other cheaper options offered by the competitors because they are readily available. The price elasticity of demand also depends on whether a company produces necessity or luxury product. Necessity products tend to have an inelastic demand. Luxury products tend to have an elastic demand as consumers can easily forgo them or reduce the consumption levels with an increase in price. The products that Coca-Cola produces are luxury products as consumers can do without them. Any price increases can lead to a significant drop in demand for its products. The price elasticity of demand is also dependent on time. In the short run, it may be relatively inelastic. In the long run, however, it is elastic as consumers will have had enough time to change their preferences. For instance, a price increase of Coca-Cola products will make their customers have a great reduction in demand for its products. Income levels also determine the price elasticity of demand. It varies in various income segments. The price will be elastic for those in the middle income and lower levels. Price increases will result in these income groups consuming less of the products because of limited money. However, the price elasticity for high-income group may be inelastic because they do not consider the price increases as substantial to warrant a change in their consumption habits. The composition of consumers is also a factor since the consumption of Coca-Cola products is mainly by the young people and not distributed equally across age groups. In the long run, most of those who currently consume the products will cease to do so because of many factors such as health. Therefore it has prices are elastic in the long run.

Any company must take into account the price elasticity of demand when pricing its products. Products that have an elastic demand will have a significant drop in revenues if prices increase. Therefore, a company will decide the best price for its products to have an optimal profit margin. Since the products of Coca-Cola have an elastic demand, the prices should approach the equilibrium levels since any deviation from this may result in significant changes in demand and therefore impact on the revenue. It will not increase its prices beyond a certain range as that will make people switch to other substitute products and therefore cause a drop in revenue.

Costs of Production

The costs that a firm incurs in its operations affect its profitability and growth. High costs relative to the revenue might affect the performance negatively by reducing the profits. Therefore, companies must ensure that they control their costs to ensure that they operate profitably and they guarantee their future growth. It is essential to control variable costs and ensure that there are no funds wasted. They can do it by analyzing all the components of the costs and making a determination of the optimum levels such that it does not have an adverse impact on the revenue.

Coca-Cola incurs several costs for manufacturing its drinks. Since it uses corn and sugar to make most of its products, any change in the costs of the ingredients of the sweeteners may affect its profitability. The costs incurred in its packaging its drinks also constitute a significant variable cost component. In addition, it has operating expenses like rent and salaries of its employees.

The following is a table showing the trend of the costs of revenue and the costs of operations of Coca-Cola Company.

Year

2012

2013

2014

2015

2016

Costs of revenue(in millions)

19053

18421

17889

17482

16465

Total operating expenses(in millions)

18185

18205

18401

18084

16772

Figure 2: Adapted from morningstar.com

The figures above shows that the costs of goods sold have been declining from 2012 to 2016 (morningstar.com, 2017). The company initiated measures to reduce its cost of revenue because of dwindling revenues. Part of the reasons for the reduction is the declining costs of sweeteners like corn that it uses in the manufacture of its drinks. In addition, it has pursued a strategy that reduces the costs of packaging. The operating expenses remained relatively constant from 2012 to 2015 but decreased significantly in 2016 because of job reductions and other cost-cutting measures.

It is important to analyze costs so that a company may make best output decisions. Variable costs vary most with change with the level of production and therefore it is vital for any company to determine its output level that will optimize its profit. Fixed costs do not vary with the level of production. For Coca-Cola, it will examine all the factors that contribute to its variable costs such as packaging costs and use bottles that will be cost efficient. If it can predict the demand for its products, it is crucial that it makes the necessary changes to its output level to align it to the demand so that it incurs optimal variable costs and therefore reduce wastage.

Overall Market

Coca-Cola Company operates in the Beverages industry. Although it is still the most dominant player globally, it faces stiff competition from other companies in the same industry.

The following is the comparison of trends in revenues for Coca-Cola and its main competitor in the global soft drinks industry, Pepsi Company.

Year

2012

2013

2014

2015

2016

Coca-Cola Revenues(millions)

48017

46854

45998

44294

41863

Percentage change in revenues

-

-2.42%

-1.83%

-3.70%

-5.49%

Pepsi Revenues(millions)

65492

66415

66683

63056

62799

Percentage change in revenues

-

1.41%

0.40%

-5.44%

-0.41%

Figure 3: Source: morningstar.com

From the above, the revenues for Coca-Cola have been declining from 2012 to 2016, and hence it indicates that the company is performing poorly when compared to Pepsi. Pepsi Company increased for two years before decreasing in 2015 and 2016 (morngstar.com, 2017). It shows that if the trend continues, Coca-Cola will continue to lose its market share because of competition from other companies in the beverages industry. The drop may also indicate that the entire soft drink industry is on a decline globally.

The barriers to entry are significant in the Beverages industry because of the high costs of establishing plants. Therefore, new firms that want to enter the industry do not enjoy competitive advantages because they have to build their brand name (Jensen, 2006). While they can enter the beverage industry in small scale, it may not be easy for them to gain significant market share and get a global recognition (Bloch, 2014). It is because for long, a few firms have dominated the beverage industry and many people associate soft drinks with those brands. The big companies like Coca-Cola and Pepsi can also drive them out of the market by offering discounts.

The competitive environments in which firms operate determine their market structure. Coca-Cola operates in an oligopolistic market structure (Bloch, 2014). It is because there are only a few dominant firms in the soft drinks industry. Coca-Cola and Pepsi are the main dominant firms in the industry and together have the largest market share. Although there are other players in the industry, they do control a small market share. Therefore, both companies can easily drive new players by employing strategies such as price-cutting.

Recommendation

The firm may use several strategies to increase its competitiveness and market share in the industry. Since the variable costs form a significant portion of the total expenses of the company, it should strive to produce its drinks at the optimum cost. It should contact suppliers and buy raw materials at a low cost to increase its profitability. Since costs undermine overall profitability and growth potential, it can also strive to reduce operational expenses using efficient cost-reduction strategies.

Since Coca-Cola is a dominant firm in the industry, it can use its market position and brand name to mount aggressive marketing strategies that align with its growth. In particular, the company may use customer loyalty programs with the aim of reaching a wider client base and grow the volume of its sales (Jensen, 2006). By offering discounts to clients who buy its products in bulk, it can increase the volume of sales. It can also continue with the strategy of acquisitions of smaller companies to establish its position in the market. It may pursue a growth strategy by exploiting more markets and expanding their global operations.

Since Coca-Cola operates in an industry that is elastic, it can use its demand to determine the price that it should charge its customers. It can use its past sales record to forecast future demand and therefore align its production level with the market demand. Due to the increased awareness of the dangers of consuming sugary drinks, the company should expand its product line by including drinks that have a low sugar and calorie content (Gertner, 2017). It may do it by conducting market research. It is likely to ensure that it gains customers that are more health conscious.

References

Baillargeon, J. (2000). Market & Society. Winnipeg, Manitoba: Fernwood Publishing.

Bloch, H. (2014). A Dynamic Model of Oligopolistic Market Structure, Featuring Positioning

Investments. International Journal of the Economics of Business, 21(3), 379-411.

Gertner, D. (2017). Coca-Cola and the Fight against the Global Obesity Epidemic. Thunderbird

International Business Review, 3(6).

Jensen, P. (2006). Trade, Entry Barriers, and Home Market Effects. Review of International

Economics, 14(1), 104-118.

morningstar.com. (2017). Coca-Cola Financials. Retrieved from

http://financials.morningstar.com/ratios/r.html?t=KO

Priem, R. (2012). A Demand-side Perspective on Supply Chain Management. Journal of Supply

Chain Management, 48(2), 7-13.

Worldofcoca-cola.com, (2017). Coca-Cola History. Retrieved from

http://www.worldofcoca-cola.com/about-us/coca-cola-history/