Economics of the the Coca-Cola Company - Essay Example

Economics of the the Coca-Cola Company 1.0. Product The Coca-Cola Company manufactures, distributes and sells non-alcoholic beverages. It has a portfolio of more than 3,500 products grouped into five categories: energy drinks, soft drinks, sports drinks, juices, tea and coffee, water and other drinks. Within each category there are several product lines for example under Juices there are concentrate, not-from-concentrate, frozen concentrate, pulp-free, fortified and flavoured juice blends. The flagship product bears the same name as the company. Coca-Cola is not only the most popular and biggest-selling soft drink in history but also the best-known brand in the world (“Coca-Cola - Brands - Brand Fact Sheets,” 2011). Coca-Cola has got products all across the beverage products’ life cycle. The company has at its disposal immense resources – finance, human capital, distribution channel, and brand – to support research and development to continuously come up with new products and to see them through the resource-draining phases of the product life cycle (the introduction and growth stages). Whereas on the other end of the product life cycle, Coca-Cola has also been able to sustain its flagship brand as a cash cow at the maturity stage. Coca-Cola has one of the most effective, if not the best, marketing mix strategies that includes: merchandising, product-placement, public relations, endorsements, sponsorships, exhibitions and most of all advertising. However, due to its continuous innovation Coca-Cola has had challenges when it comes to market cannibalization. This is manifested in different ways such as between two Coca-Cola brands or between the old retail distribution channels (shops, supermarkets) and vending machine. Even though the presence of numerous brands has stifled the growth of some of its products, the marginal benefits have been greater than the marginal loss for Coca-Cola in its multi-brand strategy. This strategy is referred to as a single-position strategy and it has worked for Coca-Cola because it is often easier and cheaper to introduce a new brand rather than change the positioning of an existing brand in the eyes of the consumer (Ries & Trout, 1986). 2.0. Market trends In a five-year forecast that uses 2009 as the base year, it is estimated that the global soft drinks market will experience a growth of 16.2% (Datamonitor, 2010). A large part of this growth will be as a result of the rapidly growing functional soft drinks (FSD) market that consists of sports drinks, energy drinks, enriched drinks, smoothies, ready-to-drink (RTD), iced tea and dairy drinks. Not to be left behind, Coca-Cola has actively been engaged in expanding its product offerings in this market. Sports and energy drinks are the two most recognisable and successfully established sub-categories within the overall FSD market. According to Lewis (2009) health, convenience and premiumisation are the three leading megatrends driving the global soft drink market forward. This implies that the soft drink market still has a lot of potential to innovate with truly unique products that offer genuine and proven health benefits across demographics and consumption occasions despite the global economic downturn. Consumer behavior is a function of the product, the consumer, his social environment, the competing products and the brand marketing strategy. Coca-Cola’s strength has been how it communicates its brands and how consumers perceive those brands relative to other competing brands in the marketplace. Some of the major tactics that Coca-Cola uses to better its product positioning are through packaging innovation, intense advertising, brand differentiation and flavor variety. The company also sponsors several recreation and sport activities, carries out nationwide competitions across all the regions / countries it operates in and largely employs a pull promotional strategy. Though it has been discussed above that Coca-Cola has largely benefited from its large brand portfolio, the substitutability of these brands has meant that Coca-Cola’s products have elastic demand. Coca-Cola therefore cannot afford to raise the prices of either of its brands without raising prices for its whole portfolio as well as similar raises from its major competitor. The paradox here is that whereas Coca-Cola products have elastic demand, the soft drinks industry as whole experiences inelastic demand. The inelastic demand is due to the fact that soft drink as a category of drinks is a consumer preference out of the other beverage categories. For example lowering soft drinks’ prices will not necessarily lead alcoholic-drink’s consumers to cross over and start buying more soft drinks. 3.0. Production / Supply Process & Costs Coca-Cola’s operating structure is divided into the following segments which act as the basis for its internal financial reporting: Eurasia and Africa, Europe, Latin America, North America, Pacific, Bottling Investments and Corporate. The first six are referred to as operating groups (US SEC, 2011). The company markets, manufactures and sells beverage concentrates and syrups and finished sparkling and still beverages. The former part of the business is referred to as “concentrate business” while the latter is referred to as “finished products business”. Generally, finished products operations generate higher net operating revenues but lower gross profit margins than concentrate operations. The concentrate operations typically generate net operating revenues by selling concentrates and syrups to bottling partners all over the world. The bottlers either combine the concentrates with sweeteners, still water and/or sparkling water to produce finished beverages which are packaged in authorized containers bearing Coca-Cola trademarks and are then sold to wholesalers or retailers directly. Most of the bottling partners are independently owned and managed. In essence bottlers are independent contractors and not Coca-Cola’s agents. In North America Coca-Cola has slowly been acquiring bottlers. On October 2, 2010, the company acquired the North American business of Coca-Cola Enterprises Inc. that produces, sells and distributes Coca-Cola beverages in the United States, Canada, the British Virgin Islands, the United States Virgin Islands and the Cayman Islands. This move is believed to have made the company’s North American become more aligned and agile with distinct capabilities, responsibilities and strengths to face the stiff competition in North America. Coca-Cola’s net operating revenues and net income increased in 2010 as compared to 2009. This is despite similar increases in selling, general and administrative expenses and income taxes. This could imply that the company has an effective marketing strategy. Figure 1: The Coca-Cola Company consolidated financial statement for the year ended December 31, 2010 (US SEC, 2011) 4.0. Structure of the industry and business strategies According to Porter (2008) any industry’s profitability is affected by the following five factors: established competitors, customers, suppliers, aspiring entrants and substitute offerings. The soft drinks industry is essentially a duopoly with Coca-Cola and Pepsi commanding over 70% of the revenues in this market (Esterl, 2011). However, the rivalry between these two firms is often too intense that it results in the Prisoner’s Dilemma – that is the two companies find it difficult to co-operate even where cooperating will result in both of them getting better results. Buyer power varies by region and by distribution channel. Their regions where Coca-Cola and Pepsi exceedingly dominate the market space and there are regions where other soft drink companies offer customers an alternative choice. Where customers are offered more substitutes their buyer power is slightly increased. On the other hand, the greater contributor to buyer power is the per distribution channel. The five principal distribution channels for soft drinks are supermarkets, mass merchandisers, fast food chains, convenience stores and gas stations, and vending machines. In spite of being the largest buyers of soft drinks, supermarkets do not have much bargaining power for two major reasons: (1) they are in a highly fragmented industry and (2) they need soft drinks to build consumer traffic thus they cannot afford not to have them. On the contrary, mass merchandisers such as Wal-Mart have a greater bargaining power due to the magnitude and scale of their purchases. Surprisingly, despite the duopolistic nature of the soft drinks market, fast food chains such as McDonalds offer the least returns and the greatest bargaining power over the soft drinks manufacturers. Soft drinks companies need the fast food outlets in their quest to build brand recognition and loyalty at the expense of providing equipment, cups and other items needed to serve their products at these outlets. One would expect convenience stores and gas station to have strong influence over the soft drinks companies based on the strength of their franchise mother companies. However, the modus operandi in this market space is such that the soft drinks companies negotiate directly with the individual convenience stores and gas station owners rather than the strong franchiser. This lowers the bargaining power of each individual convenience store and gas station buyer. Finally, vending machines are owned by the soft drinks makers and as such this is the most profitable distribution channel for Coca-Cola. Suppliers in this industry have low bargaining power because the number of suppliers exceeds the number of large contracts available. The two major inputs in this industry are sugar and packaging materials. Sugar can be procured from numerous sources in the open market and where its prices go too high, Coca-Cola could easily switch to corn syrup as they did in the early 1980s. Similarly, there are a wide number of suppliers for both aluminium cans and plastic bottles for packaging soft drinks. Coca-Cola leverages the magnitude and scale of its contracts to lower supplier power. The threat of entry in an industry is depends on the height of entry barriers that are present and on the reactions entrants can expect from incumbents (Porter, 2008). For starters, a new entrant will have to overcome the huge marketing power of two dominant players in this industry. Secondly, the soft drinks industry is a slow growth industry thus the new entrant will have to wrest market share from the incumbents, something that neither of the incumbents would allow to happen. This means that the new entrant will face strong retaliatory tactics. Thirdly, profitability in this industry requires volume that is attained through having elaborate distribution channels. Due to the strength of Coca-Cola and the other few major players, a new entrant may be forced to start its own distribution channel. This would involve huge capital investments, which would be another entry barrier. The threat of substitutes is low because Coca-Cola has over time expanded its offerings through internal product innovation, acquisitions and entering into alliances. The company as at now has over 3,500 products ranging from bottled water to sports and energy drinks, smoothies, tea and so on. This means that Coca-Cola is able to offer customers the alternative beverages that they would have sought from its competitors. Coca-Cola’s success has largely been due to its unique system that allows it to operate globally but with a local focus. The company manufactures and sells beverage concentrates to over 300 local bottling plants. Under this arrangement Coca-Cola owns the brand and is responsible for marketing initiatives. This has enabled it to deliver to its consumers a consistent message across the globe. The bottler’s role is to manufacture, package and distribute the final beverage to its local consumers. However, in 2010 Coca-Cola changed its strategy in North America where it acquired the operations of its top bottler, Coca-Cola Enterprises in order to cut costs and improve its flexibility in distributing its beverages (Geller, 2010). 5.0. Government role Governments across the world are increasingly taking note of three key areas that will have an impact on the operations and profitability of Coca-Cola. These areas are the environment, social and governance. With regards to environment, reducing carbon footprint and water footprint are receiving most of the attention currently. For the soft drink industry, reducing carbon footprint is not in the light of a production challenge but rather as a packaging challenge. This is especially true in the Western markets where consumers and governments are pushing for less use of non-recyclable plastics. With increased consumer push, governments may just get themselves involved in the near future. On the other hand, the issue of water footprint becomes a concern for Coca-Cola’s growth in the emerging markets in Asia and Africa. These markets have limited sources of water, a commodity that beverage companies use in copious volumes. According to Dixon (n.d.) water pollution and treatment is already a focus of Asian listed companies and with the growing emphasis on regulation and enforcement this looks set to increase. Coca-Cola will therefore need to measure its water footprint and look to how it can best manage water resources through enhanced processes and infrastructure. This will definitely require versatility and local management support. With regards to social issues, the case for creating healthier soft drink products has never been greater than now. In the United States and Europe there has been a lot of lobbying going on with regards to whether the governments should tax sugary soft drinks. Some countries such as France and Hungary already have the soda tax in place (Gulyas, 2011; Taylor, 2011). Another area that Coca-Cola should anticipate government regulations to be focussing on in the near future is in relation to soft drink companies’ marketing approaches directed towards children (Dixon, n.d.). Coca-Cola and its peers in the non-alcoholic beverage industry should be proactive and institute their own measures to control their children marketing strategies before the government jumps in. Governance issues are more of a challenge in the emerging markets than in the established markets of Northern America and Europe. Multinational corporations such as Coca-Cola are known for having double-standards when operating in less developed economies. Multinational corporations are more transparent and accountable in their undertakings at home than abroad. This may be an area that governments may collaborate on in order to strengthen business ethics across the globe. 6.0. Business Environment Coca-Cola depends on international sales for nearly 80% of its operating income (“Stock:Coca-Cola Company (KO),” 2011). This means that the firm is bound to be adversely affected by the present currency fluctuations and weak global economy especially in the key markets of Europe. The strengthening of the dollar against other currencies as the US economy slowly recovers implies that the foreign currency will be worth less money in the US. However, the company’s global presence will enable its poor performance in weaker economies to be supported by good performance in the emerging markets such as Brazil and China. China and Brazil are Coca-Cola’s third-largest and fourth-largest markets behind the United States and Mexico (Einhorn, 2009). The company though has experienced barriers to its growth strategy in China. Coca-Cola’s initial growth strategy of merging with Huiyuan Juice Group (China's leading fruit juice company) was thwarted by the Chinese government (Chang, 2009). This has meant that Coca-Cola will have to resort to the traditional organic growth strategy in this potentially lucrative market. Also the world has not yet fully recovered from the global economic crisis that began during the second half of 2008. This stretched period of slow growth continues to cause uncertainty and a wide-ranging lack of liquidity in the credit markets. Thus consumer confidence and spending continues to remain low. 7.0. Firm / industry location Coca-Cola operates in a unique system divided into two parts: concentrate producers and bottlers. The company makes and sells concentrates and beverage bases to bottlers. The company retains ownership of the brands and is responsible for marketing. The bottlers on the other hand manufacture, package, merchandise and distribute the final branded beverages to retailers or directly to consumers (“The Coca-Cola System,” 2011). Under this system therefore the entire business can be looked at in two parts. Concentrate producers are in the United States whereas bottlers are located all over the six continents (Africa, Asia, Europe, South America, North America and Australia). Having the concentrate producers centralised at Atlanta is advantageous for research and development, products improvement, and quality control of the concentrates and beverage bases. Centralising concentrate production also allows Coca-Cola to retain its century-old trade secret. On the other hand, having bottlers located near their markets immensely lowers operation costs, distribution costs, and logistics. Secondly, it also allows locals to take part in the Coca-Cola system thus increasing the image of the company within the community. Bottlers are also able to carry out localized marketing plans in partnership with Coca-Cola. 8.0. Entrepreneurial ability of managers Coca-Cola’s executive level has had its fair share of debacles, miscalculations and upheavals. Between 1998 and 2004, the company had hired three different CEOs, it was sued by its staff for racial discrimination and settled the case for $192.5 million in November 2000, and only one out of its 13 senior officers had lasted those five tumultuous years (Morris, 2004). However, the company seems to have learnt from its mistakes and put in place measures to ensure effective succession planning for the future. According to Peacock (2008) the company’s approach of tailoring career development to suit high-potential employees substantially increased internal promotions and cost savings from huge recruitment costs. After Muhtar Kent took the helm of Coca-Cola, he brought the top 400 people in the company from across the world to strategize on the way forward. This was a break from the past when all decisions for the multinational were made only by the senior executives at the US headquarters. The new CEO, Kent, also began working more closely with bottlers. Such interaction allowed cross pollination of ideas that have led the current Coca-Cola CEO to develop ideas for creating new opportunities. Finally, Coca-Cola has got clear sustainability goals that it has set out to do in the true spirit of triple bottom line. The company has set out goals in seven categories: beverage benefits, active healthy living, community, energy efficiency and climate protection, sustainable packaging, water stewardship, and workplace. According to Kanter (2011) Coca-Cola’s sustainability goals are frameworks that use societal value and human values as decision-making criteria and thus enable the company easily fit within the enviable category of great companies. References Chang, G. G. (2009, March 25). Coke Isn’t It For China. Forbes.com. 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Retrieved October 29, 2011, from http://articles.businessinsider.com/2011-09-08/europe/30127064_1_coca-cola-fight-obesity-soda The Coca-Cola System. (2011, October 28).Coca-Cola Company. Corporate website, . Retrieved October 29, 2011, from http://www.thecoca-colacompany.com/citizenship/the_coca-cola_system.html US SEC. (2011). Coca-Cola Company, Form 10-K for the Fiscal Year Ended December 31, 2010. SEC.  Read More