The Effects of Microeconomics on the Coca-Cola Company
Introduction to Coca-Cola
Stakeholders must understand a firm’s business environment. Critical decision-making processes depend on reliable, up-to-date, and relevant information. The concept stands out in vital undertakings, such as policy formulation. In presenting an evaluative case to effectively convey the importance of various aspects of operational structure integrity, this paper will analyze the Coca-Cola Company. The company has an extensive reach across the globe. The Coca-Cola Company produces, sells, retails, and markets its non-alcoholic beverages across the world. The most popular product from its extensive line of products is the soft drink, Coca-Cola. The company has a corporate division that is headquartered in Atlanta, Georgia, that was founded in 1982. It is also comprised of around 300 or more bottling partners across the globe. The products produced include energy and sports drinks, bottled water, and soft drinks (Bedford, 2020).
The Coca-Cola brand is listed as one of the most recognizable and valuable brands across the world. The company has a strong performance financially in its industry. As of 2019, the company’s net operating revenue was about 37,266 million U.S. dollars, as evident in figure 1. The operating income in the same year was about 8,626 million U.S. dollars. These figures represent an average trend by the company in the past several years. It must be noted that in the period between 2012 and 2018, the net operating revenue has been declining in a steady curve – a decrease of about a third in that period. Also, about 32% of the company’s revenue in 2019 was from North America. The company owns numerous brands, which include Aquarius, Minute Maid, and Sprite. In brand value, Coca-Cola stood at almost 70 billion dollars in 2019. With these statistics, the Coca-Cola Company stood out as the most valuable soft drink across the globe (Bedford, 2020).
Figure 1: This figure illustrates the global revenue and financial results of the Coca-Cola company from 2009 to 2019 (In Million U.S. dollars)
Overall, the company is increasingly successful. Key indicators such as brand value and market domination present the fact that the company is undertaking keen operational measures for effective results. Some of the brand success factors that are evident with the Coca-Cola company are a great brand experience across the globe. The company also has one critical element that is consistent and clear positioning (Hollis, 2020). The company is increasingly innovative and dynamic; this sense of dynamism is vital in ensuring brand success. The reach across the globe, coupled with an exciting product, has led to the development of a sense of authenticity – consumers are often drawn into brands and companies that evidence strong heritages. Finally, the company has and robust corporate structure and culture – a critical aspect for long-term success.
Market Structure
In the non-alcoholic beverage industry in which the Coca-Cola company participates, there exists an Oligopoly. An oligopoly is a market structure where there exists a state of competition that is limited. The market share is divided among a small number of sellers and producers – an industry that comprises of a few firms. The idea here is that the firms are few enough for there to exist a state of conscious interdependence among firms. The various firms are actively aware of their prospects in the future, the fact that these prospects depend not only on internal policies but also on external rival systems and strategies. Understanding the concept of the industry is critical. The industry is where there exist firms that deal in products that are close substitutes. There exists a positive and high demand cross elasticity. Demand elasticity defines the degree or extent of demand responsiveness – the acknowledgment of this concept is critical in understanding and predicting market state in different situations.
In the carbonated soft drink industry, the leading players are the Coca-Cola Company, PepsiCo Incorporated, and Dr. Pepper Snapple. For a long time, the Coca-Cola Company and PepsiCo have been the top rivals in competing for market share – and notably, Coca-Cola has, on numerous occasions, out-performed PepsiCo. These two firms sell homogenous products. A high or low price strategy is one of the critical strategies in an oligopoly market structure – which often features cutthroat competition. From the analysis of the past strategies, the companies have often employed a low price strategy. The strategy enhances its market profits. Considering the high barriers of entry into this market, and the cutthroat competition in this market, there exists an almost cartel-like interdependence – it works for the two firms in enhancing and safeguarding economic profitability and viability of the industry.
The industry, like other industries, faces numerous challenges. The external factors creating challenges include external regulation, such as government policies. Also, the current state of affairs with the COVID19 pandemic has created unprecedented challenges. The company has identified one critical challenge that is posed by the pandemic internally and externally – the unpredictability of the progress of the pandemic (Pollack & Shanker, 2020). The issue with this aspect is that currently, demand has plummeted and is down by about twenty-five percent. The industry is taking the brunt of sales declines considering factors such as social distancing, as about half of the company’s revenue is gained from based social activities such as entertainment centers and stadiums, among others.
Demand Curve
Various factors affect the demand for Coca-Cola. Notably, the price of the relative product is one aspect. Complimentary and substitute products will affect the demand for Coca-Cola. Other vital aspects such as consumer income, preferences and tastes, policies instituted by the government, time, population demographics, and more will greatly affect the demand. Numerous factors will determine movement along the demand curve or even a shift. Since the Coca-Cola company operates in an Oligopoly, the demand curve is kinked. The kinked demand curve is due to the variation in elasticity for lower and higher prices. The effects for both the actions of decreasing and increasing price have different effects on the demand for the firms – prices are rigid (Pettinger, 2020). In this industry, due to the cutthroat competition, the firms have no incentive to cut or raise prices.
In an oligopoly such as in the carbonated soft drink industry, although there exists a certain degree of price differentiation, the impacts of changes in price are different from a normal demand curve. An increase in price is expected to create a drop in demand due to the existence of close substitutes. However, a decrease in price will have different effects. In the short term, there might be an increase in demand. Still, due to competitor responses, adjustment to match the lower price, there will be a minimal benefit in demand increase—a situation that would lead to lower revenue – a negative outcome. Calculating the demand elasticity for the Coca-Cola Company requires the formula; percentage change in demanded quantity divided by percentage change in price. For this purpose, the figure and values that will be applied will be strictly estimates for demonstration.
Figure 2: This figure illustrates a kinked demand curve that is characteristic of an oligopoly market structure using estimate values for a Coca-Cola soft drink.
For example, as demonstrated in figure 2, if the quantity demanded a 1.25L bottle of coke at 1 $ is 100, and 40 at 1.50 $, the elasticity in demand can be calculated through the formula above. The figures above give a percentage demand difference of 42.857 percent and a percentage price difference of 20 percent – using the formula above, the demand elasticity is 2.1428, which is higher than one. The demand from these figures is, therefore, elastic.
Actual History and Growth potential
The Coca-Cola Company has beginnings in Atlanta, Georgia. John S. Pemberton made the first Soda in 1886. Initially, about nine drinks were sold per day – a minute comparison to today’s scale of operations. Various milestones were achieved when it was incepted. In 1887, the first coupon purchases of Coca-Cola happened. Further, the company moved to its headquarters – where they have gradually moved to larger headquarters over time. In 1909, the publication of the Coca-Cola bottlers magazine began. 1930 saw the incorporation of the Coca-Cola export corporation. 1936 further saw a celebration of the company’s 50th Anniversary. Currently, the company is a giant in its industry – having operated for more than 130 years. The products are sold in more than 200 countries with customer service of more than 1.9 billion individuals.
Company stock and Public Trading
Coca-Cola has the highest sales in the beverage industry. The company has a relatively strong and robust business model. The company’s dividend history evidences this as it has a strong performance record. For example, the company has had 54 years of consecutive increases in dividend payments – a trend that continues. The kind of growth that the company presents is recession resistant, a robust business model, and this exhibits the company’s competitive edge and structural advantages.
Currently, the COVID19 pandemic has led to revenue downturns that have presented a critical challenge in stock performance. The 2020 first quarter has seen a nearly 40 percent drop in stock – the highest drop from 2008. In contrast, back then, it took 14 months to achieve a similar revenue drop, which has now taken less than five weeks – a critical occurrence (Farley, 2020).
Senior management and Policy practice
The management has undertaken effective microeconomic measures and policies that have ensured that the company stays the top of the industry with excellent performance. Some of the identifiable factors that the management has effectively implemented include fundamental labor decisions. Also, they have made critical productivity decisions that have ensured that the company is constantly growing and effectively handling fundamental business operations such as supply chain management and optimization. Also, the company has identified niche products such as its popular soft drink, Coca-Cola. The identification of these products drives critical demand and supply decisions for the company.
Conclusion
In conclusion, the Coca-Cola Company, through an evaluative analysis, has presented vital microeconomics principles and theories – these have worked to effectively explain its performance and consequent market dominance in the carbonated soft drink industry. The firm shows evidence of exponential growth throughout its long history. Its business model stands out as a robust facilitator of its success. Understanding the market structure, it operates in reveals various elements that provide clarity on fundamental and effective management practices – an evident driver of the company’s success.
References
Bedford, E. (2020). Soft drink market shares in the U.S. 2018 | Statista. Retrieved 14 May 2020, from https://www.statista.com/statistics/225464/market-share-of-leading-soft-drink-companies-in-the-us-since-2004/
Farley, A. (2020). Tough Times Ahead for Coca-Cola Stock. Retrieved 14 May 2020, from https://www.investopedia.com/tough-times-ahead-for-coca-cola-stock-4842622
Hollis, N. (2020). Five Brand Success Factors. Retrieved 14 May 2020, from http://www.millwardbrown.com/subsites/global-brand-online/brand-success/five-brand-success-factors
Pettinger, T. (2020). Kinked demand curve – Economics Help. Retrieved 14 May 2020, from https://www.economicshelp.org/blog/glossary/kinked-demand-curve/
Pollack, A., & Shanker, D. (2020). Bloomberg – Are you a robot? Retrieved 14 May 2020, from https://www.bloomberg.com/news/articles/2020-04-21/coke-says-covid-19-impact-on-second-quarter-to-be-material