Industry Environment Analysis for Coca-Cola INC in the UK - Case Study Example

Industry environment analysis for the Coca-Cola Inc in the UK (Name) (Institution) (Course) (Instructor) (Date of submission) Table of contents Back ground information ………………………………. 3 Demographic …………………………………………… 3 Economic ……………………………………………..….4 Unemployment ………………………………….. 5 Fall in consumer confidence …………………..…6 Wages ……………………………………….…... 6 Political/legal …………………………………………..…7 Strong regulatory framework and transparency…...8 Sociocultural …………………………………………..… 9 Technological ………………………………………..……9 Global position/attractiveness ……………………………. 10 EU membership …………………………………. 10 Five forces analysis Power of buyers ………………………………….. 11 Power of suppliers ……………………………….. 11 Threat of new entrants …………………………... 12 Threat of substitutes …………………………….. 12 Competitive rivalry ……………………………… 12 Conclusion ………………………………………………. 12 References Appendices Back ground information The Coca Cola Company, headquartered in Atlanta Georgia, was founded in 1986 as a producer of the cola drink Coke. Currently the company produces more than 230 brands which are sold in over 200 countries world wide. The products range from carbonated to non-carbonated drinks, juices and water. Some of the popular brands by the company are Coke, Coke diet, Fanta, Sprite, Minute Maid, Dasani etc. The company began its expansion program into foreign markets several years after its establishment with the first foreign bottling plant being set up in Canada in 1906. The company highly relies on independent bottling firms to whom it sells concentrates and syrups hence it is able to expand quickly into foreign markets. The UK is one of the countries that Coca-Cola has a wide presence. This paper thus assesses the suitability of the UK as a market for the company by analyzing the country’s demographic, economic, political/legal, sociocultural, technological environments and its global attractiveness. Demographic The UK, which comprises of four states, England, Wales, Scotland and Northern Ireland which in total have a population of around 61.4 million people by mid 2008 estimates. England has majority has majority of the population with 51.4 million (84%), followed by Scotland with 5 169, Wales with nearly 3000 and Northern Ireland with just over 1 700 (Office of national statistics). The annual population growth rate in 2008 was 0.68% which implies an increase in the market size for Coca-Cola. As shown by appendix B, the population pyramid in the country quite unbalanced. The majority of the population is around the ages of 23, 45 and 60 for both males and females. The youth around 23 years are easy to target as they are likely to identify with a lifestyle which is implied by one of Coca-Cola’s slogans, ‘The Coke side of life’. The youth, 16 years and below, account for 20% of the population and is boosted by high standards of healthcare and low child mortality rates, mark a very solid market for Coca-Cola products as at this age energy needs are high hence high calorie intake. This number equals that of adults in retirement. The population distribution along gender lines is fairly even below 70 years but above this age there is a relatively higher number of females (Office of National Statistics 2010). The UK is a highly urbanized country with majority of the population (80%) living in urban areas as of 2001 (Pointer 2005). This could be a case of uneven population distribution with large cities having dense population but low population densities in smaller towns. In realization of this, Hilderth (2006) explores the role of small and medium cities in spurring growth in the UK. The author noted that large cities in given states that play multiple roles such as London carry with them diverse markets and hence are most preferred by multinationals targeting an extensive market. He notes that such large cities act as cultural, government, fashion, entertainment and knowledge headquarters. Such cities are also favoured by many firms because they simplify distribution and logistics issues. Coca-Cola benefits through this high density population areas through installation of dispensers for some products. According to the company, the introduction of dispensers in strategic locations is one of the major reasons for increased sales in over the years (Coca-Cola 2010). Economic The Australian Department of Foreign Affairs and Trade- DFAT (2010) says that the UK is the 7th largest economy in the world with a fairly large population that provides labour and a market for goods and services produced within and without the country. Since the 1992, the UK has had a long period of economic prosperity. with the 1990’s decade recording an average of 4% in unemployment. Such a constant level in the unemployment rate is attributed to constant GDP growth i.e. demand side. Nonetheless, high GDP growth rate is also associated with high inflation rates especially when aggregate demand increases at a higher rate than aggregate supply which is often termed as unsustainable growth. Sustainable growth, as witnessed in 2000 to around 2005, requires that AD and AS grow at an equal pace to avoid inflation. In this period, the UK GDP growth rate averaged 2.75% while inflation averaged 2%. However, there are other factors on the supply side of labour that have contributed to the constant level in unemployment. These are frictional unemployment, structural unemployment and real wage unemployment (Office of National Statistics 2010). Unemployment Unemployment is the number of persons in the labour force who are not participants of active employment due to number of reasons expressed as a percentage. Labour in this context pertains to persons who are above the legally recognized adult age and are not hospitalized and have not yet reached the retirement age. Following the global economic recession, the UK registered high unemployment levels with the first three months of 2010 recording 8.0% percent. The number of full time employees has reduced where many of them have resulted in part time jobs. The number of permanent/full time employees fell by 103,000 between December 2008 and March 2010. Consequently, part time employees increased by 27,000. Those in part-time employment due to lack of a permanent job placement increased by 25 000 to reach 1.07 million people the highest since 1992 (Office of National Statistics 2010). Such a trend implies a fall in disposable income hence an expected cut in expenditure among them Coca-Cola products. Fall in consumer confidence In the beginning of 2008, the UK consumer confidence level hit its lowest in 13 years triggered by the Northern Rock crisis and the crush of the housing market that preceded the recession. Apart from these two factors, higher inflation rates also contributed to the pessimism towards the economy (Conway 2008; Pricewaterhouse Cooppers 2010). Towards the end of 2009, consumer confidence was restored as households believed that the stimulus package enacted by the government would salvage the economy from the recession which had seen GDP growth fall by 4.8%. Fast forward into 2010, consumer confidence has faltered. Monoghan (2010) says that this fall is a result of the halting of some of the economic stimulus programs enacted by the government following optimism in the performance of the economy. Consumers are uncertain that about the ability of the economy to surge forward without financial stimulus. Wages Technology has played its role in the production field where robots and efficient methods of production have reduced the cost in production, time used, processes required and amount of labour. Although technology may be viewed to reduce the amount of labour demanded and somehow force labour wages down (Paliwoda & Ryans 2008), this has not been reported in the UK. Despite the 2008/2009 global recession, weekly wages for full time employees grew by 2.0% in April 2009 to stand at £489. Median weekly male wages were relatively higher at £531 while for females was £426 over the same period. Only 10% of full time employees earned more than £971 and a similar percentage earned less than £271 weekly. The 40 to 49-year-olds reported the highest earnings averaging £551 weekly. Median weekly earnings for fulltime employees in London averaged £627 which was higher than in other areas which ranged from £436 in the North East to £514 in the South East. Fulltime employees in the healthcare sector reported better weekly pay with a median of £1,031, followed by managers in corporations at £745 with salespersons reporting the lowest at 278 a week (Direcgov 2010). Political/legal, Taxation and the relatively huge difference in earnings present a huge discrepancy in budget constraints and amount of disposable income. Retired households pay less in taxes than they receive in benefits hence a net gain while non retired households single adult with children also gain. However, non-retired households pay more in taxes than they receive in benefits though those with children perform better than those without children (Office of National Statistics 2010). A number of cash benefits such as Incapacity Benefit, Pension Credit, Income Support and the State Retirement Pension are very effective in reducing income inequality which mostly benefits the low income earning households. In fact these cash benefits account for 58% of gross income for the poorest fifth of households. The national budget except for Northern Ireland is arranged in progressive order such that the higher a household earns, the more is paid in taxes. The allocation of this income to expenditure varies mostly by family size, geographic location and lifestyle (Office of National Statistics 2010). Strong regulatory framework and transparency One of the many industries that almost capture all firms and which requires stringent control is advertising. Advertising in the UK is regulated by the Committee of Advertising Practice which creates, reviews and enforces various broadcast and non broadcast advertising together with the Office of Fair Trading which protects and promotes consumer interests ad also ensuring fair competition amongst players. New firms seeking to ply the UK market have to seek authorization and approval from the Companies House. For companies wishing or considering being listed to the London Stock Exchange, they are liable to follow the laws and regulations spelt out in the ‘Rules and Regulations’ section of the LSE. Coca-cola as one of the world’s highest spending organizations is marketing is subject to such laws. The labour market also poses a challenge to many economies in enacting regulations over the standard wage ceiling and floor if necessary. Most economies such as the UK concentrate on protecting low income earners from exploitation by employers by setting up minimum wages. The national minimum wage in the UK has been rising gradually over the years and is set to hit £5.93 an hour for workers aged above 21 years, £4.92 an hour for workers aged 18 to 20 and £3.64 an hour for workers aged 16 to 17 starting from October this year. Persons on apprenticeship have also been covered and have a minimum wage of £2.50 per hour for all ages though those above 19 years and have completed their first year of apprenticeship are set to receive more. An increase in minimum wages implies added cost for majority of firms. While Coco-cola may be paying wages way above the minimum wage requirement, a rise in minimum wage requirement may result in general increase in wages. Sociocultural Immigration has been heavily linked with increase in population as the immigration figures grow. Statisticians project that 70% of the population increment in the UK in the next 20 years will be from immigration. There were an estimated 230 000 immigrants in 2008 alone. This has forced some government sections to call for stricter regulation to protect local workers and the local culture (Johnston 2007). Increased health awareness is one the greatest threats to Coca-Cola in the UK. Scientists have linked sugar loaded carbonated drinks with obesity in children. Consequently, the society is shying away from carbonated drinks hence fall in sales. However, in response, the company has introduced healthier products such as Coke-Diet and also ventured into non-carbonated drinks such as Minute Maid. Technological, The UK boasts of a superior infrastructure network that allows efficient distribution channels. Most notable is the growth in popularity of e-commerce as facilitated by increased computer usage, increased internet availability and high internet speeds. This implies that firms considering operations in the UK have the opportunity to explore opportunities presented by such high technology growth. According to the Office of National Statistics, 18.3 million (70%) households in the UK had access to the internet as of 2009 which was an 11% increase over the previous year figures with increased access to broadband (see Appendix A). Sixty four per cent of all adults who had accessed the internet over the past three months prior to the survey reported that they had made online purchases within the year while 83% of them had made purchases within the previous three months. On the general terms, internet accessibility and usage for commercial purposes by households is growing (Office of National Statistics 2010). A 2003 survey on e-commerce also indicates that firms are conducting B2B businesses too over the internet. A survey carried out in 2003 showed that 29% of businesses bought goods and services over the internet which was a 13% increase from the previous year. The report also shows that the large firms were traditionally equipped with internet though it is the small businesses (with less than 50 employees) that accounted for majority of the growth. The report also shows that internet usage and accessibility was highest in urban centre and more so in London where early half the country’s population lives (Office of National Statistics 2010). Global position/attractiveness The UK is recognised as a global economic leader and a representation of Europe as a whole. This is best exemplified by the popularity of the English language around the world and the English culture also popularised by the Commonwealth. EU membership Membership to the European Union implies a wider market for firms operating in the UK and Europe in general. For firms exploring the new markets within the EU, they are posed to enjoy greater benefits as they have fewer regulatory procedures to go through given that that member states have harmonized regulations to a certain degree. A larger market provided by the EU translates to stiffer competition. Pelkmans (2006) says when competition is healthy through adequate regulation, it inspires innovation and product differentiation which are necessary for organizational growth. Baldwin and Brunetti (2001) explore extensively the benefits gained by the UK as a result of its membership to the EU. They develop complex models to explain how the mobility of factors of production, stability gained from a ‘diversified’ economy and a larger market factor in to influence economic growth. They argue that the benefits of creating and maintaining a common market supersede the cost of developing the regulatory infrastructure to guide such a body. This ways they appreciate that the presence of the EU presents some challenges but are not comparable to the benefits. Five forces analysis Power of buyers Coca-Cola has a wide range of products numbering over 230. This has been effective in reducing buyers bargaining power as they have a wide variety of goods to choose from. A narrow range of products allows buyers to wield power against firms as they demand more specifications from products. Coca-Cola has already done this by segmenting the market and developing products to suit specific markets. Bottlers own manufacturing equipments and sales and distribution networks in UK in perpetuity and operate in infinite contracts with Coca Cola that cannot be terminated by either party unless the bottler defaults the terms of the contract. Therefore, bottlers have relative power over the firm in that Coca-Cola cannot change its bottling partner at will. Buyers in bulk such as supermarkets and convenience stores wield considerable power against coca-cola in terms of display space on the shelves. Supermarkets such as Cost Cutter and Tesco determine and award the shelf space available for the company to display its products. This is realization of the fact other products, competing ones included compete for the same space. Coca-Cola is thus forced to adhere to the display policies of the stores in displaying their products as a marketing effort (Cola Wars Continue: Coke and Pepsi in the Twenty-First Century). Power of suppliers Bottlers are major partners for Coca Cola who wield relatively high power against the firm. In response, Coca-Cola has made efforts to reduce these powers by binding bottlers through contracts so that they do not engage in business with competing firms. The Franchised Coca Cola Bottling plant in Wakefield is restricted though contract agreement from handling Pepsi products or those from Cadbury Schweppes (Coca-Cola). On another note, Coca-Cola buys supplies from the metal and can manufacturing industry. In the UK, the company packages 60% of the sub brand Coke in metal containers with other products being largely packaged in plastic bottlers. As a large buyer in volume, the suppliers have little bargaining power as the company can switch to other suppliers at will with minimal cost of switching (Cola Wars Continue: Coke and Pepsi in the Twenty-First Century n.d.). Coca Cola owns the rights of setting prices which is explicitly stated in their contracts with their bottlers. As such, the company is best positioned to determine competitive pricing strategies regardless of bottlers’ views in response to competition as spelt out in the game theory. Threat of new entrants Contracts with bottlers and the high cost of starting new production lines keeps of new entrants. Again, the strong brand name and the financial ability of the firm imply that new entrants cannot compete on a level ground with the firm. For instance, new firms using a pricing strategy to enter the market may not succeed because Coca-Cola has the financial capacity to compete of the price level (Anderson 2006). Given that Coca-Cola awards contracts in perpetuity to franchised bottlers implies that such bottlers are unavailable to new players. The cost of establishing new bottling lines is very high such that very few beverage manufacturers own bottling lines. Threat of substitutes Coca Cola as a firm deals with beverages. Other substitute drinks such as Pepsi, tea, milk and tap water all combine to reduce the company’s market share. On the other hand, the company competes for allocation of disposable income by households who have to cater for other needs. As such, the budget is a constraint to the products and encourages substitution of the products. Health awareness by relevant bodies has increased the potential of substitutes such as water, milkshakes, tea and yoghurt. To counter this threat, the Company has introduced a wider range of product to include water, herbal teas and a variety of juices and energy drinks (Pendergrast 2003). Competitive rivalry Market reviewers have often called Coke and Pepsi cola as perfect substitutes. This has encouraged competition among these two companies and the result has been product differentiation. Coke has diversified its product offering in beverages while Pepsico has diversified to include the processed foods market (Pendergrast 2003). The company handles competition in the UK market well as seen through the attempted acquisition of Cadbury Schweppes operations in the UK. Exiting the market is highly expensive for bottlers but relatively lower for concentrate manufacturers such as Coca-Cola. This makes it easier for the company to exit the UK market more easily more than small players who rely of fountains and also ones that own bottling and packaging lines (Pendergrast 2003). Conclusion The close relationship between the UK and the US has seen many US based firms launching in the UK market more easily than in other markets. This is the case with Coca-Cola which has performed well in this market since the two countries share a lot in culture. However, economic and political factors have been very influential in determining changes in the performance of Coca-Cola in this particular market. The management of the company admits that competition with Pepsi in the cola market is what has fuelled innovation and creativity in the company. This has been supported by adequate and up-to-date market research that has resulted in formulation relevant strategies among them vigorous advertising that has helped the company dominate the UK market. References Anderson (2006). Economics. London: Pearson Education Balsdwin, R. & Brunetti, A. (2001). Economic impact of EU membership on entrants: new methods and issues. London: Springer Coca-Cola (2010). http://www.coca-cola.com/ Conway, C. (2008). “UK consumer confidence hits 13-year low” Daily Telegraph DFAT (2010). United Kingdom country brief. Direcgov (2010). New £5.93 minimum wage rate from October. Ford, R. (2010). “Record number of migrants become UK citizens, figures show” Times Online Feb 25th Hildreth, P. A. Roles and Economic Potential of English Medium-Sized Cities: A Discussion Paper Johnston, P. (2007). Record immigration sees UK population soar. Daily Telegraph. < http://www.telegraph.co.uk/news/uknews/1567068/Record-immigration-sees-UK-population-soar.html> Monoghan, A. (2010). UK consumer confidence falters in face of 2010 uncertainty. Daily Telegraph. Office of national statistics (2010). Paliwoda, S. & Ryans, J. (2008). International Marketing. London: Edward Elgar Publishing Pelkmans, J. (2006). European integration: methods and economic analysis. London: Prentice Hall Pendergrast (2003). For God Country and Coca-Cola. New York: A & C Black Pointer, G. (2005). People and migration: UK’s major urban areas. Pricewaterhouse Cooppers (2010). The squeeze on household spending power. Cola Wars Continue: Coke and Pepsi in the Twenty-First Century Appendices Appendix A. Internet availability Appendix B. http://www.statistics.gov.uk/cci/nugget.asp?id=6 Appendix C. Table 1.2: Outlook for UK household income and spending growth Variable Average nominal growth rate (% pa) 2004-07 2008-09* Employment Average wages 0.9% 4.1% Earned income 5.0% Investments Social Security Pensions - - - Gross household income 5.2% Direct taxes - Taxes on income - Employee NICs - Council tax 7.2% 7.6% 7.2% 5.8% Household disposable income 4.7% Non-discretionary household spend - electricity and gas - water supply - food - rental payments - debt services 5.8% 13.1% 8.9% 4.7% 7.7% 10.2% Discretionary disposable income 3.1% Total household savings -2.6% Total household credit - secured credit - unsecured credit 11.5% 11.8% 9.8% Total household spending 4.7% Discretionary spending 4.5% Memo item: PRI inflation 3.1% * accelerating growth;  decelerating growth;  stable growth. Appendix D. 5 forces model Strength Impact on strategy Bargaining power of supplier Very high Inability of Coca-Cola to supply bottlers with concentrates may result in short term actions by bottlers that maybe detrimental to the firm in the long term Bargaining power of buyers Mild Buyers have the health aspect to use as leverage. Buyers have the option of choosing competing products Wide product variety and healthier products reduces their bargaining power. Threats of substitutes Very high Aggressive marketing by competitors such as Pepsi. Rivalry among competing firms Higher competition Risk of substitution. Dominates the global cola market hence price setter. Threat of new entrants New entrants Introduction of health beverages by other competitors who use health as a marketing platform. Segment Trend Impact on strategy Demographic Increase in life expectancy Population growth New Economic Low consumer confidence Higher unemployment rates Fall in sales and profits Increase on advertising expenditure Change of marketing g strategy Low sales as a result of decreased disposable income Political/legal Stringent regulation VAT hike Increased costs Fall in sales Sociocultural Healthy living Change of marketing strategy Invention of newer healthier brands Technological Growth Change in business processes Increased efficiency Global Market integration Growth in sales Growth in brand recognition and loyalty Read More