Enterprise and Innovation of Coca Cola - Case Study Example

Enterprise and Innovation UK Demographics and new product launch Demographic profile of UK shows that 67% of the population falls in the age group of 15-64 years (indexmundi.com). Looking at the consumer statistics we have the following data (businessballs.com): Category % of UK population Wealthy Achievers 26.6 Urban Prosperity 10.7 Comfortably off 26.6 Moderate Means 14.5 The above table shows that the around 78% of the population lies between the categories of wealthy achievers and moderate means. This is the population which has sufficient disposable income to spend on products they desire and not just what they need. This will broadly be our population target. As the products offered by Coca-Cola do not come under very high priced items, we will also include moderate means population in our target list. Next we need to look at the age structure of the population. As the median age of 67% of the population is around 40 years we need to look at products which will appeal to this category of target population. We can categorize age structure as per preferences of the population in a particular age group. Thus we can have the various sub-groups as – 15 to 19, 20 to 29, 30 to 49 and 50 and above. We can safely assume that people falling in these sub-categories of age groups will have more or less similar preferences and hence we can target our products as per these 5 segments. An important point to note is that the population in the segments 15 to 19 and 50 and above will have more leisure time as compared to the other two which fall in working age group. These segments will have more time during the week-ends. Looking at the timings of the games, we have 3 week-ends between 27th July and 12th August 2012 (the period scheduled for the games). Thus, we can introduce products as per following plan: Target audience Product 15 to 19 years Carbonated soft drink in flavors of butter-scotch, strawberry, chocolate and pineapple with spicy snacks in different flavors like mint, coriander, capsicum and crème. 50 years and above Drink which is soft on the tongue and digestive – mixture of digestive spices based drink with a sweet and sour taste. 20 to 29 years Fruit based carbonated drink – new flavors like pomegranate and melons which will be very appealing in the summer heat. 30 to 49 years Non-carbonated drinks – fresh fruit based and digestive spices based sweet and sour drink. Based on the tastes of the various age group segments different flavors have been introduced. People in the age group of 15 to 19 would prefer the flavors mentioned above. People above 50 years tend to get digestive problems and hence the products mentioned for their category will appeal to them. 20 to 29 years age people are more experimental and nor very money conscious. Hence, new flavors not introduced so far will appeal to them. And finally people in the age group of 30 to 49 are generally more health conscious and hence would prefer fruit based drinks which do not have the ills of carbonated drinks and at the same time will also be healthy. Factors impacting Price Elasticity of Demand for Coca-Cola in Olympics The Price elasticity of Demand (PeD) determines how sensitive the demand for a product is to changes in prices. We will look at the general factors impacting all products as well as factors that are specifically impacting Coca-Cola at Olympics. 1. Substitute availability: Coca-Cola has direct competition with its substitute – Pepsi. Both are similar in taste and thus have very high PeD. Moreover in UK Coke has a direct rival Robins. This brand offers various fruit-based juices and squashes and is a very popular British drink (Britvic.com). This shows the preference of the British population for fruit based drinks. Thus, the two brands Pepsi and Robins which are its substitutes, one in taste and the other in product range, definitely make Coke’s PeD very elastic. 2. Brand loyalty: It has been observed that brand loyalty decreases the price elasticity of the product. Coke is seen to be associated with Olympics since 1928. Thus it is seen as an official brand for the event. However, its major British competitor, Robinsons, also associates itself with the sports events like Wimbledon Thus the rival has similar brand association with sports events as Coca Cola and can impact brand loyalty at Olympics. Thus, if the brand loyalty were to shift Robinsons, this could make Coke’s PeD more elastic. (fao.org) 3. Necessity: In major events like Olympics, people prefer to enjoy the tournaments with a drink and something to munch along with it. It increases their perception of pleasure. Thus, in a way such beverages are a necessity during these events and hence even if there are small increases in price the spectators will still prefer to buy them and enjoy the experience. Hence we can safely say that Coca Cola is relatively less elastic to price during the Olympics events period. 4. Duration: Most of the goods become sensitive to price over a period of time. This means that when the price is raised initially, people tend to carry on with the product as they do not have any alternative. However, with time they focus on finding alternative cheaper products and hence switch over to it. To understand the PeD for Coca Cola specifically during the duration of Olympics, we need to consider the time duration of the events. Since the events will be held only for three weeks, the PeD for Coke during the events is inelastic as people will not have much time to look for cheaper alternatives. Moreover, the availability of alternative drinks in and around the area of events is another hampering factor for switching to other brands. 5. Amount of money spent on a product as a proportion of the total household income: In general smaller the proportion of money, of the total income, spent on a particular good, lower will be its price elasticity. Our product does not categorize as a very expensive commodity and its proportion in the household spend would amount to only a miniscule value. Moreover, the duration of Olympic events is only 3 weeks. This is not such a long time that the consumers will feel the pinch of increase in price that they will stop buying coke. Hence, looking at our target population, we can see that PeD for coke with respect to household income is inelastic. (Erdem and Keane 2006) 6. Weather conditions: As Olympics is slated to be held in summers, all drinks irrespective of brand will have greater demand. This makes Coca Cola’s PeD more inelastic as people would prefer to drink beverages to quench their thirst. Even if there is a slight increase in price, it will not deter them to buy the product as spectators will need something to drink to beat the heat of the summer Olympics. Effects of advertising Coca Cola Advertising can help in building brand loyalty as well as increase sales. What advertising basically does is to decrease the price sensitivity of consumers and hence decrease the price elasticity. All advertisements are aimed at doing this – increase demand and brand loyalty. Let us look at the following diagrams and see the effect of advertising on the PeD and average cost for Coca Cola (Carbaugh 2006). Diagram (a) shows the effect of advertising on price elasticity of demand. The demand line A before advertising is more horizontal before advertising. After advertising the line shifts towards the right and becomes more vertical as seen by the position of the line B. A perfectly vertical line would mean that the product is perfectly inelastic. The demand curve Do shows that prior to advertising the company was selling 6 million cases at a price of $5. The impact of persuasive advertisement has been the demand curve D1 where the company is now selling 10 million cases at the same price. The rightward shift also shows that the demand curve D1 is less elastic than Do. If we extrapolate the point A vertically upwards to touch the demand curve D1 we can see that on the new demand curve, a higher price still keeps the quantity sold at 6 million pieces. This can be achieved through persuasive advertisement where the company tries to persuade the consumers that there is no other brand as good as Coke. This result in brand loyalty and the consumers remain loyal to the brand irrespective of the change in price. Another noteworthy feature of advertising is decrease in total average cost for Coke. This is denoted by the figure (b) above. ATCo shows the average total cost curve before advertising. After advertising, the curve shifts to the right as denoted by ATC1. The point A denotes that earlier cost of production per case for 6 million cases was $3 which rose to $5 (as denoted by point C) on account of advertising expenses. But since there is an increase in demand due to reduced price elasticity, the firm can use the economies of scale to produce extra units at a lower average cost. This can be seen from the point B on the ATC1 curve. The firm now has the ability to produce 10 million cases at an average cost of $2. Some critics of advertising say that the result of advertising is increased unit cost as denoted by the point C in Fig (b) which is not a very consumer friendly phenomenon and results in wastage. References Britvic.com, Our Brands – Robinsons, viewed on April 14, 2010 http://www.britvic.com/Brand.aspx?id=55&WT.svl=SideBar businessballs.com, Acorn the Smarter Consumer Classification, viewed on April 14, 2010 http://www.businessballs.com/freespecialresources/acorn%20 demographics%202005.pdf Carbough, RJ 2006, Contemporary economics: an applications approach, 4th ed., Cengage Learning. Erdem, T and Keane, M 2006, The Impact of Advertising on Consumer Price Sensitivity in Experience Goods Market, Quantitative Marketing and Economics, vol.6, no.2. fao.org, Chapter 8:Pricing Decisions, viewed on April 14, 2010 http://www.fao.org/docrep/004/W3240E/W3240E08.htm indexmundi.com 2008, United Kingdom Demographics Profile, viewed on April 14, 2010 http://www.indexmundi.com/united_kingdom/demographics_profile.html Read More