This report delves into choosing a publicly-traded company and analyzing the microeconomics of the company. More specifically, the supply and demand of the company will be analyzed. For this research, Coca Cola will be selected for the analysis. The paper will first provide a brief description of the Coca Cola Company. The paper will then delve into discussing the products offered by Coca-Cola. This is followed by an analysis of some of the factors that impact the demand for the main products offered by the company. The report will also cover Coca-Cola’s production costs as well as assess the factors that impact the costs of production of the company’s main products. Other topics that will be covered in this report include Coca Cola’s market structure, level of market concentration and barriers to entry, Coca Cola’s business strategy, and the impacts of Coca Cola’s market structure on the company’s business strategy and the company’s performance in the beverage and bottling industry.
Brief Description of Coca Cola
Coco cola, which is a public traded company, is regarded as a leading beverage manufacturing (non-alcoholic) and bottling company. The company was founded in 1886 and has its headquarters in Atlanta, US (Forbes, 2019). It is vital to note that Coca Cola is an extremely effective company as it offers a wide range of consumer drinks and merchandise. Coca Cola is famous for providing Coca-Cola, which is a beverage product that comes in different bottle sizes. However, the company offers numerous other brands such as Fanta, Sprite, and Minute Maid.
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Currently, the company has retail and distribution stores in many countries across the globe. The current CEO of Coca Cola Company is James Quincy (Forbes, 2019). The company currently employs 62,600 employees and generated an annual revenue of $31.7 B in the last fiscal year (Forbes, 2019).
Main Products Offered by Coca-Cola
As a beverage manufacturing and bottling company, Coca-Cola manufactures and supplies beverage products, syrups, and mineral water. More specifically, the company manufactures and supplies Coca-Cola, Fanta, Sprite, and Minute Maid. Other products offered by the company include Limca, Thums Up, Maaza, and Viting, which is a beverage fortified with micronutrients (Coca-Cola, N.d). The company then sells these products numerous other businesses. After that, the products are made available to consumers.
Coca-Cola Demand
Demand for a Coca-Cola product, let us say a 2L bottle of Coca-Coca, refers to the quantity of 2L bottle of Coca-Cola consumers are willing to purchase at a particular price. Figure 1, which is shown below illustrates the relationship between price and quantity.
Figure 1: Law of Demand. Source: Chappelow (2019a).
Coca-Coca comes in different bottles (300 milliliters, 500 milliliters, 1 liter, 2 liters, and other bottle sizes). When it comes to the demand for Coca-Cola, numerous factors affect the demand for this product. Some of the factors that affect the demand for Coca-Cola include “price of Coca-Cola, price of other beverage drinks, salary of consumer, taste and preference, consumer expectations, demographics, and time” (Chappelow, 2019a).
With regard to the price of Coca-Cola, if the price of the beverage commodity increases, let us say the price of 500 ml of Coca-Cola increases the demand for Coca-Cola will decrease and vice versa. However, it is vital to note that this is only true if other factors remain constant. With regard to the price of other aerated drinks, if the price of other goods remain constant and that of Coca-Cola increases, people will not be willing to buy Coca-Cola at a higher price and vice versa. Therefore, the demand for this product will decrease.
Demand for Coca-Cola also depends on consumer taste and preference as the two are directly related. More to this is that if consumers, retailer, or other suppliers or businesses expect the price of Coca-Cola products to increase in the near future, they will purchase more of these products before the price is increased so that they can store it and vice versa. With regard to the demographic population of the country, the demand for Coca-Cola tends to be high in regions characterized by middle-aged people, youths, and kids. Lastly, time is also a factor. For instance, during the festive seasons, the demand tends to be high.
Types of Costs involved in the Production of Coca-Cola and the Factors that Impact the Costs of Production
Coca-Cola faces many costs when producing Coca-Cola. Some of these costs include labor costs, costs of purchasing raw materials, and packaging costs. Other costs that are incurred once Coca-Cola has been produced include transportation and delivery cost. It is vital to note that raw materials are the main cost of producing Coca Cola. The primary raw material used in the production of Coca-Cola is sugar, which is mainly obtained from high fructose corn syrup, sucrose, and sugarcane. Other raw materials include materials that are used to bottle the products. The availability of these raw materials, which in turn depends on the weather, determines the cost of production. If these materials are readily available, the cost of production is low and vice versa. Other factors that affect the cost of production include the availability of labor and the state of technology. The cost of producing Coca-Cola tends to be lower if there is the availability of cheap labor as well as with improvement in technology.
Coca-Cola Supply
Supply refers to the quantity of goods producers can make available to the consumers at a particular price over a given period of time. Figure 2 illustrates the law of supply.
Figure 2: Law of Supply. Source: Chappelow (2019b).
There are numerous factors that affect the supply of Coca-Cola. Some of these factors include Coca-Cola price, the state of technology, the number of customers, the price of inputs, and the seller's expectation Chappelow (2019b). Producers tend to increase the supply of the commodity if its price increases and vice versa. More to this is that as the technology continues to imprve, the cost of producing Coca-Cola will decrease. In turn, producers will be willing to supply more of the product and thus the supply will increase.
With regard to the number of customers, producers tend to increase the supply as the number of customers increase and vice versa. In relation to the price of inputs, the supply of Coca-Cola will increase if the price of inputs is reduced Chappelow (2019b). This is because the producers will be able to produce more of the product. With regard to the seller's expectations, producers tend to decrease the supply of Coca-Cola if they expect the demand for the product to decrease in the near future.
Market structure in the Non-alcoholic Beverage Industry
The market structure in the soft drinks industry is described as an oligopoly. Two dominating firms primarily control the market. Coca-Cola and Pepsi are the two dominant companies in the soft drink industry. The companies hold the largest market share in the non-alcoholic beverage industry. The companies control about 60 percent of the global non-alcoholic beverage industry (Maverick, 2018). It is estimated that Coca-Cola enjoys about 40 percent of this market share, with Pepsi settling for the rest of 20 percent (Maverick, 2018). The other companies in the non-alcoholic beverages industry share amongst themselves the remaining 40 percent of the market share. The individual percentage share for the rest of the companies in the non-alcoholic beverage industry is quite minute. Over the years, other companies have been eating into Coca-Cola’s and Pepsi’s market share through their production of healthy and low sugar drinks.
Another reason for the categorization of the non-alcoholic beverage industry is the existent barriers to entry into the market. The barriers include the substantial capital investment required and high operating costs, amongst other factors. The other characteristic fitting the description of the non-alcoholic beverage industry in the world is the price rigidity present among the different companies in the industry. Since only two companies are dominant in the industry, companies do not engage in price differentiation (Kumar, n.d.) . A decrease in pricing by one company would be met by even a sharper drop by the other company resulting in no benefit to either company. An increase in pricing by one company would be addressed by the retention of initial pricing by the other. Thus, the companies set their pricing differently without competing on this basis. The dominant companies engage in non-price differentiation. In the case of Coca-Cola and Pepsi, the companies compete on advertising in what is called the “cola wars” ( Koschmann and Sheth, 2016) . Competition on advertising forms the other characteristic which defines an oligopolistic market. Product differentiation, whereby the companies produce almost identical products, is the other reason for the categorization of the industry as an oligopoly.
Market concentration and Barriers to Entry in Non-alcoholic Beverage Industry
The market concentration in the non-alcoholic beverage industry is mostly dominated by two companies, which account for 60 percent of the market share (Maverick, 2018). The dominating companies, Coca- Cola, and Pepsi share the larger of the market share with other smaller companies sharing the rest 40 percent of the market share (Maverick, 2018). The oligopolistic nature of the market poses entry challenges to other companies that may want to penetrate the market. The small companies lack the financial muscle to build their brand to a large scale, as is the case with Coca-Cola and Pepsi, which are the leading global companies in the industry.
Different barriers to entry into the non-alcoholic beverage industry exist. Top among these barriers is the high capital investment required. Production of soft drinks for a vast market requires a lot of capital, such as production plant capital and advertising costs. The industry also has high production costs involved, which serves to lockout companies from investing in this industry. Another barrier to entry in this industry is the existence of strong brands such as Coca-Cola and Pepsi (Al Tunaji, 2019). The two companies have a brand footprint that extends to different countries across the globe. Customers exhibit brand loyalty to their products. Brand creation and growth, to such an extent, requires several years. A large amount of capital investment to the tune of billions of dollars is also required. The existence of patents and licenses in the industry is another barrier to entry for several companies. Companies in the beverage industry have patented their production formulas (Al Tunaji, 2019). Thus, entry companies in this industry cannot replicate their recipes without acquiring the necessary rights. The need to acquire the required licenses for production discourages companies from joining the beverage industry.
The need to create strong distribution networks that can serve a global market is the other barrier to entry to this industry. Coca-Cola and Pepsi have already established strong distribution networks by selling their products to franchisees in different countries for distribution (Al Tunaji, 2019). The creation of strong distribution networks requires a lot of capital investment and interrelations, which most companies lack. The economy of scale enjoyed by the dominating companies in the non-alcoholic beverage industry is a barrier to entry for companies seeking smaller production. Production at large quantities, as is the case for Coca-Cola, results in economies of scale with little production cost per product (Jurevicius, 2019) . New companies often start with small production, which results in high production costs per product. The production cost is quite high. Thus the companies cannot compete favorably with larger companies.
Coca-Cola’s Business Strategy
Coca-Cola has mainly built its business strategy around differentiation. The company seeks to differentiate its product in the market. Their products have a unique taste, quality, ingredients, packaging, and distribution channels (Al Tunaiji, 2019). The company's unique products appeal to most consumers creating brand loyalty. This has helped build the company's brand. It also has an exclusive distribution strategy with its products available in over 200 countries, which ensures the global reach of its products (Al Tunaiji, 2019). The company's aggressive and expensive marketing strategy ensures the global presence of its products. These factors, alongside the company's logo, enhance recognition of the products by customers. The company benefits by charging premium prices on its products, which customers are willing to pay.
Coca Cola in 2017 sought to overhaul its business strategy. The company set to run its business in a way that ensured that it concentrated on consumer needs, offering them choice and convenience (Coca-Cola Company, 2017). The company’s business model is to focus on what the consumers want rather than what the company wants to sell. With the increased health awareness on the dangers of intake of drinks with high sugar content, consumers have been yearning for low sugar content or no-sugar drinks. To meet the needs of these consumers and maintain its dominance in the beverage industry, Coca Cola seeks to reduce the amount of sugars in its drinks and produce no sugar drinks too. The no-sugar drinks are produced without altering the Coca Cola drinks taste that consumers have been accustomed to.
The company seeks to make its brand consumer-focused. To achieve this goal, the company produces more beverage products to offer their consumers choice. The company intends to produce more natural drinks that provide health benefits such as hydration and nutrition (Coca-Cola Company, 2017). To offer their consumers convenience, the company produces drinks packed in smaller packages. The smaller packaging is convenient as it helps consumers to control their added sugar intake. In the pursuit to be more consumer-focused, the company intentioned to make calorie information on their beverages easy to find to help their consumers make informed decisions on the products they want to consume. The company also seeks to make its products, including the different packing and low and no-sugar drinks available in more locations. Availability in various places in the world helps to grow its brand, thus ensure business growth.
Influence of Market Structure on Coca-Cola’s Business Strategy and Performance
The existence of an oligopoly market structure in the non-alcoholic beverage industry helps to shape Coca-Cola’s business strategy. The production of sugary soft drinks had previously dominated the industry. Over the years, sensitization on the health dangers of consumption of such beverages, such as obesity, hypertension, and diabetes has led to a shift in the industry. Consumers yearn for soft drinks with lower sugar content. Other companies have filled this gap through the production of healthier drinks. Other companies’ growth in this industry has reduced Coca-Cola's market share over the years (Maverick, 2018). In response to the changing trends in the industry which seek to disrupt the market structure, Coca-Cola started production of low-sugar and no-sugar drinks (The Coca-Cola Company, 2017). The move was intended to ensure the company maintains its dominance in the industry. The production of almost identical products characterizes oligopolistic markets. As part of its business strategy, Coca-Cola enhances product differentiation of its products. Its drinks have a unique taste that consumers are accustomed to. Even in the production of low and no-sugar drinks, Coca-Cola seeks to maintain its unique tastes.
The oligopolistic market structure helps to ensure Coca-Cola maintains its dominance in the industry. With quite a huge market share, Coca-Cola is able to post huge annual earnings year over year. The company registered $33.558 billion annual revenues for the year ended in 2019 (Macrotrends, 2020). The earnings were 0.67 percent increase as compared with 2018 earnings. The company’s response to the changing trends in the industry helped boost its earnings. Its no sugar drink, Coca-Cola Zero Sugar, contributed to its double-digit volume growth (Winck, 2019). The global unit case volume for coke in 2019 grew by 3 percent (Winck, 2019). The company’s production of canned coffee drinks and Coca-Cola energy drink also contributed to the earnings (Winck, 2019).
Conclusion
Coca-Cola has established itself as a market leader in the non-alcoholic beverages industry ever since its establishment in 1886. The company’s differentiation of its products has helped build a strong global brand to which consumers pledge their loyalty. The company’s aggressive marketing involving celebrity endorsements has ensured it grows and maintains its global footprint. Coca-Cola has built its brand by labeling their products as "fun and pleasant." Coca-Cola's production of healthier drinks such as the no-sugar drinks has helped meet consumers' needs. At the same time, it has countered competition that was being posed by other smaller companies. The move once again puts the company ahead of its competitors. There is a need for versatility in Coca-Cola's business. Perhaps it is time the company diversified into food and snacks franchising. In the future, Coca-Cola's industry leadership and dominance will depend on the company's responsiveness to consumer needs and other changing trends. Innovation will be useful in responding to changing trends.
References
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