An Economic Analysis of Coca-Cola Company - Case Study Example

Running header: The Coca-Cola Company-An economic analysis Student’s name: Instructor’s name: Subject code: Date of submission: Table of Contents Table of Contents 2 The Coca-Cola Company-introduction 3 The business and the competitive environment 4 Products 5 Main customers 7 Coca-Cola’s main competitors and market share 8 Coca-Cola competitive environment 10 Coca-Cola substitutes 11 Coca-Cola products and Customer average income 12 Elasticity of demand 12 Production and costs 13 Coca-Cola’s macroeconomic environment 14 Political environment 14 Economic environment 14 The effects of exchange rates 15 The future outlook of Coca-Cola 15 Conclusion 17 References: 18 Appendix 19 The Coca-Cola Company-introduction Established in 1886, the Coca-Cola Company is a global leading producer, marketer and distributor of non alcoholic beverages as well as syrups. The company is listed in the New York’s stock exchange and is based in Atlanta Georgia. The company has operations in over 200 countries and deals with more than 400 brands which are packaged in more than 3000 different products which include its famous sprite and Coca-Cola brands. However, Coca-Cola remains its most favorite beverage globally and is enjoyed/consumed over 700 million times every day (Melissa, 2005). The company today employs more than 146,000 people globally. The company's success strategy is based on local marketing and local manufacturing and hence is able to meet its customer needs at a local level. Furthermore, the company has been able to build a brand that customers are proud to be associated with. The company's mission is maximizing share owners' value all the time. As such, the company creates value to the shareowners' through its comprehensive business strategy based on six key beliefs which include belief that consumer demand drives all their operations, that coca cola brand is the core of their business, providing customers with a wide range of non alcoholic beverages they want to drink throughout the day, being the best marketers in the world, thinking and acting locally and leading as a model corporate citizen. Based on this strategy, Coca-Cola has grown into what it is today. This report analysis the Coca-Cola company in a bid to understand its nature of business and the market in which it operates ;and how this affects the decision it faces about production, its market activity and the macroeconomic environment in which Coca-Cola operates. The business and the competitive environment Type of business The Coca-Cola Company is a leading provider of bottled non alcoholic beverage drinks to the global market which it manufactures, markets and distributes through its various operations across the world. Coca-Cola Company sources for its raw materials from various suppliers across the world with which it uses to manufactures its more than 400 brands of products. The company has various operations across the world which it uses for manufacturing and marketing its products. This is based on its strategy of local manufacturing and local marketing in order to adequately meet specific consumer needs. The company has operations in over 200 countries globally which are divided into a number of operating groups including Eurasia and Africa group, Europe group, Latin America group, North America group as well as the pacific group. The company operates in a highly competitive environment that composed of companies as big in size as Coca-Cola as well as small companies which only have local existence. Some of these competitors deal with multiple products just like Coca-Cola while others may deal with just a single product. Despite the high level of competition, Coca-Cola has been successful in providing high quality products in the global market (American Beverage Association, 2005). This has been accomplished through its strategy based on local manufacturing and marketing which enables it to adequately meet customer needs. Furthermore, the Coca-Cola Company has been able to provide truly refreshing products to its consumers which are not comparable to any other in the market through its secret formula. These products are provided in prices which are reasonable in comparison to those of its competitors and which are affordable to all classes of people. As such, consumers are able to enjoy Coca-Cola products at all times of the day which has been a secret behind its success. Products As stated above, the company produces over 400 brands of nonalcoholic beverages which include carbonated and non carbonated beverages. The Brands are categorized into more than 3000 beverage products. The chart below shows the combination of the different classes of beverages produced by Coca-Cola. Traditionally, Coca-Cola’s growth has been supported by the carbonated soft drinks segment which has been contributing 77% of its profits. However, with increasing health concerns related to carbonated soft drinks, the company has increased its focus on non-carbonated soft drinks. The company has therefore been devoting its resources to water only in the markets it foresee growth. This strategy has been successfully applied in Mexico, Japan, Russia and India. As a result, its water brands of Dasani, Ciel and Bonaqua have done very well in the market since 2009 when over 570 million cases were sold. The Coca-Cola Company has also made considerable progress in its coffees and tea segment. For instance, the company is the leader in the total tea segment in Japan and the second in the non-alcoholic ready to drink segment. The Fanta and Sprite soft drinks have also been successful along with the Coca Cola brand. The company has also developed new packaging sizes in order differing customer needs. This way, the company has succeeded in making the Coca-Cola products favorite among consumers (Yoffie and Slind, 2006). The company has also launched its global sports drink segment and has invested in new products, positioning, packaging and marketing. For instance, its market for PowerAde and Aquarius sports drinks grew by 13% in 2010 which was more than double the growth rate of the global sports drink category. As a result of Coca-Cola’s commitment to packaging innovation, the company launched Fountain in the United States which is a more flexible and reliable beverage dispensing system. The dispensing system provides high quality beverage and is easy to upgrade technology. This way, Coca-Cola has been able to better serve its customers and hence maintain its reputation as the greatest provider of non-alcoholic beverages in the world. Main customers As stated above, Coca-Cola has operations in over 200 countries where it supplies its wide range of products. Customers for its products range from big sales stores to local kiosks. In other words, Coca-Cola’s marketing strategy has been so successful such that you can find Coca-Cola products almost everywhere in the world. For instance, the company sold 26.7 billion unit cases in 2011 distributed as follows across Coca-Cola operations; -The North America operation- 22% -The Latin America operation -29% -the Europe operation -15% -The pacific operation -18% and -Eurasia and Africa operation -16% As can be seen from the above figures, the largest numbers of Coca-Cola customers come from the Americas and Europe. This could be attributed to higher amount of purchasing power in this regions compared to other regions of the world. It should however be noted that the company's sales in other regions have also continued to increase owing to successful marketing campaigns by Coca-Cola. Coca-Cola’s customers are not necessarily classified according to age or gender. This is because appeal to Coca-Cola’s products is mainly dependent on specific customer needs. For instance, the water products of Coca-Cola may refresh anyone who is thirsty while the sports segment is intended for production of products that will attract sports men and women. In most markets however, the carbonated products of Coca-Cola are found favorite during accessions even after meals. This shows how Coca cola has succeeded in making their products a favorite for everyone (Pitts and Lei, 2008). Since Coca-Cola’s products are fairly priced, its customers range from all income brackets, any ages and are meant for everyone. Of late however, owing to issues being raised about health and wellness as far as carbonated soft drinks are concerned increasing, Coca-Cola has started producing health and wellness beverages that are also meant for people of all ages and income levels. Coca-Cola’s main competitors and market share The chart below shows United States’ non-alcoholic beverage market share by volume. The Coca-Cola Company has a global market share of over 40% of carbonated soft drinks industry as well as over 80% in other markets it operates in. The company has a sustainable competitive advantage over its rivals due to its global bottling system that is even more than the predominance of its coke brand. as such, the company has been able to use this advantage to leverage its distribution to other beverage segments such as non carbonated soft drinks segment. Despite the fact that there are many small beverage companies in the U.S.A, the Coca cola Company has two main competitors. These include Cadbury Schweppes (CSG) and PepsiCo (PEP). However, the small beverage companies that compete locally as well as non carbonated soft drink brands marketers have a significant market share in their respective sectors. This totals to about 8% of the entire market. The small competitors of Coca-Cola include Red Bull GmbH's Red bull energy drink, the Hansen Natural (HANS)'s Monster energy drink and Vultaggio and sons' Arizona iced tea as well as Ferolito. Pepsi This is the second biggest company in the U.S domestic non alcoholic beverage industry. Some of its most notable brands include Pepsi, Tropicana, mountain dew, aquafina, Lipton and Gatorade. The company has also been the traditional rival to Coca-Cola for a long time. However, Coca-Cola’s performance performs much better in the international scene compared to Pepsi (Brandkeys.com, 2006). However, there are challenges associated with both companies performance both at the local front and international front. For instance, Coca-Cola’s bigger presence in the international scene exposes to a lot of international economic forces especially in the developing countries. Although the developing countries have been the force behind Coca-Cola’s strong growth, economic forces in these markets could slow down the growth. Furthermore, coke stands to lose in revenue abroad if the dollar strengthens. On the other hand, Pepsi which heavily dependent on the local U.S market is more susceptible to a weak US economy. Dr. Pepper Snapple Group The company is a producer of both confectionery goods and beverages although it has sold some of its trademarks in some world regions to Coca-Cola and Pepsi. Some of the company's trade marks include Canada dry, 7Up, Dr. Pepper, Hawaiian Punch and Snapple. On the global front, Pepsi is still Coca-Cola’s main competitor. Coca-Cola obtains around 80% of its earnings from international sources while it holds over 50% of the international market share for the non alcoholic beverages. Pepsi on the other hand only generates 42% of its net income from international sources. However, although Dr.Pepper Snapple group also operates internationally, it only generates 10% of its income from international sources. Coca-Cola competitive environment As has been established above, the entire non-alcoholic beverage market is controlled by three main companies which control more than 90% with the other smaller firms controlling just 8% of the entire market. These companies include Coca-Cola, Pepsi and Cadbury Schweppes limited. Furthermore, all these companies produce similar products which are close substitutes although barriers to entry do exist. As such, Coca-Cola Company operates within an oligopoly. Together with Pepsi and Cadbury, the companies control the majority of production of the non alcoholic beverages not only in the USA but also in the rest of the world with Coca-Cola for instance operating in over 200 countries of the world where its products hold the majority of the local market share. This implies that for Coca-Cola to succeed in its operations as the global market leader, it has to have put in place a very strong strategy (Jared, 2010). Part of the Coca-Cola’s strategy therefore entails ensuring that its customer’s needs are met by ensuring local production. However, as their products are almost identical, it is marketing that makes the difference for Coca-Cola. Coca-Cola invests billions of dollars in its marketing campaigns across the globe in a bid to ensure it retains its market position. Furthermore, as the market leader, Coca-Cola has to closely follow the activities of its closest rival-Pepsi in terms of strategy changes, production, pricing and marketing if it has to maintain its position. This is because the activities of the non alcoholic beverage markets are controlled by these two main companies and hence a change in the tactics of Pepsi will definitely impact on Coca-Cola. Coca-Cola substitutes Substitutes are those goods that can replace each other in use as a result of changes in conditions. For instance, if the price of a good increases, people will purchase more of its substitute. Coca-Cola’s substitutes are those not produced in the soft drink industry. Coca-Cola has a real threat of substitutes from such products as sports drinks, bottled water, coffee and tea. As health concerns continue to be raised over carbonated soft drinks, bottled water and sport drinks continue to gain more popularity. For instance, consumers who consume Coca-Cola’s carbonated soft drinks may substitute them for coffee or tea in a bid to keep the caffeine and lose carbonation and sugar. Many blends of teas and coffee are now more popular with a number of stores such as star bucks who offer different flavors to consumers. As such, it is easy for people to substitute Coca-Cola’s soft drinks with these products hence heightening the threat of substitutes. However, in order to overcome this threat, Coca-Cola has diverse product range including sport drinks, coffee and tea segments. Coca-Cola products and Customer average income The demand for Coca-Cola products is highly affected by consumers' level of income. The global level of household incomes did not rise significantly between 2000 and 2010. In fact the US house hold incomes were lower in 2010 than in 2000. However, despite this, Coca-Cola continued to increase its sales mainly due to diversification to production of non carbonated soft drinks and aggressive advertisement campaigns. Elasticity of demand Demand for products is directly dependent on its price within the market. An increase in product prices generally leads to decreased demand. The degree of change in demand of a product relative to price changes is its elasticity of demand. A highly elastic product is one whose demand is highly responsive to price changes. This however depends on whether the product is a necessity good or a luxury one (Knight, 2008). Generally, luxury goods are highly elastic as consumers tend to buy less with price increases. The Coca-Cola Company deals with products that are not essential for the consumer's daily survival. This means that price changes may have a great impact on the demand of Coca-Cola products since customers may choose to forgo the products for their substitutes. It is for this reason that Coca-Cola prices remain relatively low in a bid to keep their demand high. Coca-Cola also invests a lot in marketing which helps to portray the Coca-Cola brands as superior brands. Furthermore, most of Coca-Cola’s substitutes are of low quality and therefore customers have remained loyal to Coca-Cola products. It is for this reason that Coca-Cola continue to grow even during the recent global financial crisis and its sales figures continued to rise. Production and costs The Coca-Cola Company incurs two types of costs in its production/operations. Fixed costs are those costs that do not vary with production and include salaries rent accountancy fees and other similar costs. Such costs therefore do not affect production decisions. Variable costs include those costs that vary with production. Such costs include cost of inputs. However, as Coca-Cola continue to establish more and more operations abroad, its cost structure continues to vary and increase. In fact, Coca-Cola’s profitability is affected by its high level of both fixed and variable costs. Although Coca-Cola’s fixed costs form the greatest portion of its overall production costs, variable costs also form a significant portion of the cost structure mainly due to raw material requirements as well as marketing, research and design costs. However, in a bid to increase profitability, Coca-Cola’s optimal size would be a big company. This is because its margins will increase as production increases. Coca-Cola’s macroeconomic environment Political environment Coca-Cola Company operates in 200 countries which are relatively stable although Coca-Cola’s operations may be affected by the countries’ relationship with USA which is the parent country. It is also worth noting that Coca-Cola operates within the food industry under FDA (Cocacola, 2012). As such, the federal government has a role in regulating Coca-Cola’s manufacturing operations. Therefore, Coca-Cola has to meet government standards in a bid to avoid potential fines. Factors that may significantly change Coca-Cola’s operations in various countries include; -Changes in legal regulations, accounting standards and tax requirements as well as changes in environmental laws both nationally and internationally. - Significant changes in the non alcoholic beverage environment. These may include competitive product pricing pressures as well as actions by competitors that may affect Coca-Cola’s global market share. -Changes in political conditions such as civil unrest, transitions as well as restrictions that affect transfer of capital in the international markets. Note that political and legal changes have affected Coca-Cola operations in the past. For instance some Arab nations boycotted Coca-Cola products owing to political dispute as well as Coca-Cola’s decision to maintain distributors in Israel. Economic environment The United States level of inflation has been low for a long time. The average rate of US inflation between 1914 to 2010 has been 3.38%. It was even lower as at March 2012 at 2.7%.This level of inflation is conducive for business operation since it results in low cost of funds. On the other hand, the rate of unemployment in the US has been decreasing from 10.9% two years ago to 8.1% currently thanks to president Obama's $700 billion bailout aimed at stimulating economic growth and creating 4.1 million jobs. Similarly, the US economic policies have ensured that the level of interests remain relatively low. As at January 2012, the interest rate was 0.25%. The government has also ratified a strategy of keeping the interest rate close to zero in order to stimulate market expansion and hence job creation. This provides Coca-Cola with an ideal opportunity for growth at home. However, considering that Coca-Cola derives more than 70% of its revenue abroad, the economic conditions in its foreign markets can greatly affect its performance. The effects of exchange rates Considering the fact that Coca-Cola is an international market player, the relative strength of the dollar greatly affects its performance. This is because a weak foreign currency implies fewer dollars for the company back at home thus implying lower earnings (Food Beverage Report, 2006). Thus, a strong dollar is likely to have a negative impact on Coca-Cola earnings. However, due to broad exposure to foreign currencies, it actively hedges a large portion of them in a bid to avoid wide fluctuations in earnings due to changes in exchange rates. The future outlook of Coca-Cola Although Coca-Cola is a market leader, its future operations may be affected by a number of factors in terms of market growth and performance. However, since the company has been successful in delivering value to its customers through provision of high quality and affordable beverages and has a great capacity for research and design, the company's future might be bright if it implements some changes in strategy (Walsh,2011).The following factors have some impact on Coca-Cola’s future operations a) The threat of new entrants-low New entrants are not likely to offer enough competitive pressure to Coca-Cola. In addition, the huge capital outlay is a barrier to entry. The market also seems to be saturated. This implies that Coca-Cola’s future may not be affected by new entrants. b) The threat of substitutes-very strong The threat of substitutes to Coca-Cola’s future is very strong. This means that Coca-Cola has to heavily invest in research and innovation if it is to remain relevant in the future. In addition, increasing concerns on health and wellness means that Coca-Cola has to diversify from carbonated beverages to health and wellness beverages in order to avert the threat of substitutes. c) Buyers bargaining power-strong The buyers bargaining power is strong especially given the fact that customers are shifting to health and wellness products. Coca-Cola therefore needs to adapt to these consumer needs. d) Competitive rivalry-high Coca-Cola faces intensive competition from Pepsi and Cadbury Schweppes. Coca-Cola therefore has to come up with strategies that will help it remain at the top of the market. Owing to the above threats, Coca-Cola’s future will only be bright if it heavily invests in other segments other than the carbonated drinks segment. Coca-Cola will have to diversify to sports drinks, teas and coffee in order to remain relevant in the market. It must also heavily invest in marketing campaigns in a bid to convince customers about the safety of its products. Conclusion Since its inception in 1886, Cocacola has grown to become a global market leader in provision of both carbonated and non carbonated soft drinks. Some of the keys to its success have been its global presence where its products are sold in more than 200 hundred countries implying a strong customer base of over 20 million people. The company has also invested heavily in marketing and differentiation hence resulting to increased revenues at all times (The Coca-Cola Company, 2011). The Coca-Cola brand name is therefore a well recognized and cherished brand name across the world. Its strong retail and distribution network has also been a key to its success over the years. Although Coca-Cola faces a strong threat from competitive rivalry in the future as well as the threat of substitutes, the company has diversified in its production activities thus alleviating this threat. However, as people become more and more aware of health and wellness affairs, it seems that Coca-Cola’s revenues from carbonated beverage segment will continue to shrink. This implies that Coca-Cola’s future efforts should be geared towards expanding its other segments of non carbonated health beverages such as sports drinks, teas and coffee so as to remain relevant in the global soft drink market. Coca-Cola should also invest heavily in research and development considering that it operates in an oligopoly market where it is a market leader. This means that the activities of its competitors such as Pepsi can greatly affect its market share. As such, there is need for the company to intensify its research and design as well as marketing efforts if it is to remain the market leader References: Melissa, S2005,The hard truth about soft drinks, Natural foods Merchandiser, vol. 26, no.3,pp76-78. American Beverage Association, 2005, Soft drink facts, Viewed September 13, 2012 from http://www.ameribev.org/variety/facts.asp. Yoffie, B& Slind, M2006, Cola war continues: Coke and Pepsi in 2006, Harvard business review, Vol.9, pp.50-57. Pitts, R& Lei, D2008, Strategic management: Building and sustaining competitive advantage, New York, Free press. Brandkeys.com, 2006, Brand royalty, viewed September 13 2012 from http://.brandkeys.com/news/press/102504Brandweek.loyalty.pdf. Jared, W2010, Strategic management concepts and cases, Oxford, Oxford University press. Knight, J2008, Exploring corporate strategy, London, Rutledge. Cocacola, 2012, the Coca-Cola Company, viewed on September 13 2012 from www.thecoca-colacompany.com. Food Beverage Report, 2006, Beverages ride the tide, viewed on September 13 2012, from www.atagnito.com. Walsh, J2011, Coca-cola, viewed on September 13 2012 from http://www.ft.com/cms/s/0/aad28ad0-2417-11e0-a89a-00144feab49a.html#axzz251rVSa The Coca-Cola Company, 2011, 2011 annual report, viewed on September 13 2012 from http://www.cocacola.com. Appendix Figure a showing changes in US household incomes over time. Figure c showing how interest rates in the US have varied over time. Figure d showing historical inflation rates Figure e showing US unemployment rates Read More