Coca Cola Company Microeconomic Analysis

About the Firm

Coca Cola Company is an America-based company, a global leader in the beverage industry and indeed, a multinational beverage company. Besides that, the company also concentrates on the production and marketing of non-alcoholic beverage syrups as well as concentrates. The main brand that distinctively sells the company’s product is the Coca Cola product, which was invented in the 1886. However, since the inception the brand, Coca Cola has continued to diversify the production of other products to the current status, which stands at 500 differentiated products distributed across more than 200 countries. In essence, the company operates a franchised system of distribution dating back to 1889. The company therefore produces syrup concentrate, which is then sold to globally placed bottlers who occupy an exclusive territorial coverage. However, the company also owns a major anchor bottler based in North America. This paper focuses on the Coke brand, which is the most popular brand of Coca Cola among other brands (Kalapos 45).

 

The Coca Cola Company has been in the market for a long time and continues to dominate the beverage market industry, despite the stiff competition that has been wavering from its main competitors such as Pepsi. However, the company has been experiencing various barriers with respect to integrated marketing communications, which are an essential of consumer oriented businesses like Coca Cola. This forms an important stronghold for the business in terms of its consistent updates regarding the business and the products therein. Indeed, Coca Cola has been a subject of the breakdown in the integrated marketing communication. This aspect helps the company to reach prospective clients located in various segments of the market. However, much as the integrated marketing communications accrues some benefits, it contains various impediments that make business campaigns less effective both in the short run and in the long run (Kalapos 47).

Coca Cola has experienced a significant drop in the sales of soda due to low consumption of carbonated drinks within the United States among other developed states worldwide. Despite the company’s extensive marketing effort, the consumption of beverages has been constantly declining in North America for a number of factors. The main aspect entails health concerns. In this regard, majority of Americans are restraining themselves from consuming sweet beverages. For instance, Americans are consuming 40 percent less of such beverages relative to ten years ago. This substantially has impact on the Coca Cola Company more than its main competitor Pepsi since it generates most of its revenues from North American clients via Coke and dietary Coke sales. Beverage digest report also indicates that Coca Cola remains the most popular leader of carbonated drinks with a market share of approximately 42 percent followed by its close competitor Pepsi at 28.1 percent. As a result of its market leadership, the company becomes highly susceptible to relentless drop in the sale of sodas and therefore is likely to lose a higher proportion of revenue through weakened sales volumes (McWilliams, 34).

Industry

Coca Cola Company operates in a competitive soft drink industry. Essentially, the industry is highly influenced by numerous macro-economic factors, which lead to changes in business performances. For instance, the entry and exit of big firms in the industry is highly influential to the business performance of firms within the industry. In particular, amalgamations and consolidation are rampant in the soft drink market, under which Coca Cola falls. Essentially, the latter has the effect of forcing some firms out of the industry. Indeed, Coca Cola is one of the main players in the industry with a current market share approaching 50%. Ideally, this company among other major players such as Pepsi has been craving to dominate by virtue of revenue growth besides improving the market share through advancement in economies of scale accruing from mergers as well as acquisitions (Hays 67).

For instance, recently, Pepsi has bought Quaker Oats after buying Gatorades. This move will enable PepsiCo to expand its operations and the market share in particular. On the other hand, this implies that the market share of the company will constrain the market share of Coca Cola, if Coca Cola does not reciprocate the effort by enhancing its business operations in the energy drink sector too. Indeed, following the acquisition of Quakers by PepsiCo, competition within the industry has increased due to the diversification prospects of PepsiCo. Furthermore, the soft drink industry has also been influenced more pronouncedly by the effects of globalization. Due to the advancement in technology, majority of people have been increasingly using electronic technologies and internet in particular. Consequently, global communication is increasing rapidly (Hays 34).

Consequently, globalization by virtue of advanced communication technologies has led to heating competition in the soft drink industry both in the local precincts and further expansion into the global market. Consequently, these changes have driven a high level of competition as the majority of companies compete to become first-movers. In particular, the world soft drink markets have a Compound Annual Growth Rate with approximated rise of 3.6% between 2004 and 2009. Consequently, due to the changing global parameters of economic growth, the Coca Cola market share has been declining, though in absolute terms, the company is performing relatively well (McWilliams, 50).

According to the proposition of Lee, Coca Cola and PepsiCo are the two main players in the soft drink industry. Consequently, it is an ideal proposition that Coca Cola operates in an oligopoly market structure with its counterpart, PepsiCo. In an oligopoly market, there are virtually few operating firms in the market. Consequently, in order to maximize profits, the market players in oligopoly settings have to cooperate similarly to duopolistic settings but may not put restrictions to output levels to the limits of monopoly quantities, in which case price level appears above the marginal costs in the prospects of profit maximization level of output. Consequently, there are several minor players, thus, the companies operate in a competitive oligopoly. Due to the extensive market commands of the two companies, Coca Cola and Pepsi companies have bought other small enterprises hence raising their scope and potential in the market (Lee 56-58).

Additionally, there has been increasing societal concerns and lifestyle pressures regarding lifestyle diseases such as obesity among others. For instance, in both the US and Europe, the sensitivity to health has been increasing over time. Indeed, health problems such as obesity and dormant lifestyles pose serious challenge for the soft drink industry particularly for the carbonated drinks segment. As a result, the overall effect is a change in the Coca Cola business environment due to resultant differentiation of products by most firms with a view of raising their sales within the stagnant market, leading to a long-term growth rate in the industry. However, the industry has been attributed to relatively low growth in recent years. For instance, the soft drink industry has recorded a CAGR of approximately 1.6% between 2000 and 2009 and the trend continues (Lee 29-31).

Low growth rate influences the business prospects of the companies within the soft drink industry. Consequently, this has led to the development of strategic initiatives towards combating low rates. Indeed, there has been a growing preference among buyers of differentiated products. Indeed, soft drinks have been in the market for a long time. As a result, buyers have been craving to buy products with innovative production techniques. Indeed, the contemporary market does not uphold plain products within the globalized community. Beverage companies’ main market strategy is product differentiation. However, consumer awareness has also been a vibrant mechanism of increasing market performance of the companies in the soft drink industry. In particular, Coca Cola has been investing heavily in consumer awareness programs with a view on crowding out competitive forces from its competitors. On aggregate, product innovation is a major tool of combating the consumers’ demand towards on the multiple tastes in the market. Indeed, Coca Cola owns a segment of the McDonald’s industry (Senker 61).

Coca Cola Demand and Elasticity

Essentially, the demand of Coke products from Coca Cola Company is subject to a number of forces that influence its relative demand. Ideally, these factors dictate the market performance of the brand. In particular, Coke brand is influenced by the price of relative products including substitutes and complementary goods. As a matter of fact, the Coke brand has numerous substitutes such as Miranda, Pepsi and Limea contributing to the competitive pressure on the Coke brand. Ideally, an increase in price of Coke leads to a proportional decline in the demand for its products though the competitive brand name also plays a significant role in maintaining the brand’s sales but within the competitive phenomena.

The demand for the Coke product is price elastic as shown above. This implies that Coke brand responds to the price change in an inverse proportion. In this regard, increase in the Coke brand prices leads to a proportional decrease in the quantity demanded due to the presence of relative products amidst severe competition in both the local and international markets. However, the Coca Cola’s popular brand, Coke is a major strength of the company with respect to market retention capacity. The brand therefore comprises of an elastic demand.

Coca Cola Pricing Strategy

Essentially, the Coca Cola is a renowned company in the soft drink industry. However, due to the ranging competition arising from mergers and consolidations, the company has to engage infrequent making of pricing decisions. However, the general framework in the pricing strategy of the company is that the company sets its prices around the levels of its competitors but the company’s Coke brand helps in creating a distinct perception by consumers relative to its competitors. The Coke brand is, however, retained at an affordable level for its prospective consumers. In particular, the company ensures that it has an unswerving and fluent pricing strategy over the years. On account of the past business experiences, the company has had numerous competitors who have comprised the driving force of the company’s operations towards being better, smarter and faster in general business performance (Lee 45).

Despite establishing numerous pricing strategies, the Coca Cola Company has an ultimate goal of maximizing the shareholders’ values. Its competitors such as Pepsi often lower price values with a view to grab certain markets. On the contrary, Coca Cola slightly reduces prices for selected products such as certain packages of Coke over the same market. This strategy helps the company to retain a significant market share, where a slight drop in the Coke prices leads to a relatively large change in the Coke demand hence retaining the market share. For instance, Coca Cola has focused on reducing prices of 200 milliliter bottles in both India and Pakistan markets. This move is focused on increasing market share in the market besides fighting against competition with new entrants (Kalapos 51).

However, as an essential pricing strategy, Coca Cola uses low price levels as a tool to assist to penetrate fresh markets particularly where the demand is price sensitive. In this regard, the company is able to face out competition besides popularizing the brand in the new market. After the establishment of the brand, the company brands seek to reposition themselves as ‘premium’ products relative to their competitive brands. Ideally, Coke has an impression of creating intangible returns to lifestyle, happiness as well as group affiliation. However, the overall marketing strategy focuses towards creating affordable enjoyment of social lives among its clients. At the retail levels, Coca Cola conducts customary on-pack promotions with a view to enhance the company’s objectives besides attracting clients to raise their consumption. These promotions also enable the company to raise its sales and overall market share (McWilliams 43).

Coca Cola’s Main Cost Categories

Ideally, Coca Cola Company is operating in a competitive duopolistic market. As a matter of facts, there has been a gradual decline in the global demand for carbonated non-alcoholic drinks. This condition is attributable to numerous factors such as extensive health campaigns against carbonated drinks. Consequently, this situation has led to the inflation of the company’s operational costs on the current assets due to extensive and public awareness campaigns. Furthermore, the decline in demand for carbonate drinks also lead to the shrinking of the company’s overall revenue, while the costs of production remain the same particularly due to the existing huge capital outlay. On overall, gradual decline in the demand for Coke has led to a negative change in the company’s cost structure over time. In 2010, Coca Cola Company was indicated to have spent about 2.9 billion dollars for advertisements alone (McWilliams 43).

In business operations of Coca Cola, such resources as water form a major costs category for acquisition. In this regard, the average costs of production of Coca Cola fall with increase in quantity produced. The company labor cost is regulated at minimum as the company operates with such subsidiary companies as bottlers and distribution agents.

Profit Maximization Strategy

Ideally, Coca Cola has been employing price discrimination as a formula of increasing profit. In this regard, the company is able to charge different prices in different markets while holding the production costs constant. This method enables the company to take advantage of consumer abilities and information gaps existing between one consumer segment and another. Through this model, the company is able to determine the discriminatory price it should charge and the respective output levels. Indeed, the two market segments lead to the emergence of an overall kinked demand curve, which further generates the most suitable profit maximizing level of output. The profit maximizing level of output appears at the point where marginal costs are equal to the marginal revenue (McWilliams 49).

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The ideal position of the output and revenue relative to costs appears as will be denoted below. Essentially, in the market with consumer base in need of great utility, the demand is less elastic while the prices are relatively high. On the other hand, there is certain market segment where the company sets prices lower leading to a situation of relatively high elasticity of demand.

From the above, MR1 and MR2 represent the marginal revenues for market one and market two as attributable to the price discrimination in the two markets respectively. On the other hand, Q, 3 is the profit maximizing level of output in the case of Coca Cola Company.

Recommendations to Coca Cola Management

Ideally, the Coca Cola Company has extensive market coverage for the Coke product. Consequently, for it to maintain a consistent supply, it must seek to improve its investors’ relations with a view to maintaining long-term growth particularly during the periods of economic downturn. For instance, the company experienced dangerous economic environment in 2009 due to economic challenges and negative publicity such as accusation of relentless contribution to the obesity challenge in America. This was also followed by a decline in consumers’ confidence. Through the improvement of customers’ and investors’ confidence, the company can boost its possibility to future dominance in the soft drink industry besides improving their business success.

Company’s Stock

Basically, Coca Cola is a public company with an extensive stock outlay. Most of the company’s revenues are attributable to the refined coke brand with a high level of popularity. In this regard, Coca Cola sells shares in the US. Indeed, it is a worthy investment center. According to historical facts of Coca Cola Company, as in 1919, the company’s stock stood at $25 million under private ownership of Robert Woodruff. However, the company went public via the sale of shares through New York Stock Exchange as Delaware Corporation. In this regard, the company share by virtue of common stock cost 40 dollars while the preferred stock was sold at 100 dollars for each share. Over time, the company, however, has expanded with the approximate number of common shares standing at 2,294,316,831 in 2011. Over the years, the company has retained its position of high rate marketing campaign with the effect of maintaining high performance of capital investments amidst various economic crises. Consequently, the company is a worth investment point for prospective private investors (Hays 31).

Finally, for Coca Cola Company to retain its market dominance, it must ensure that it conducts extensive market forces from the intensive market dynamics due to the influence of globalization as well as extensive health sensitizing campaigns across the globe. Furthermore, it must always keep vigilant of the Pepsi strategic production and marketing strategies with a view to gathering the requisite competitive advantage over its main competitor.

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