Management Economics: Analysis of Coca Cola Company

This report provides an overview of Coca Cola Company, its products and services, and analyzes the demand and market equilibrium factors that impact its business operations in the beverage sector. It also discusses the price elasticity of demand for soft drinks and provides key suggestions on effective pricing policies for Coca Cola.

Management Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Overview of Coca Cola Company with its products/services description.........................1
2. Demand and market equilibrium including the factors that impact on the products or
services of Coca Cola in beverage sector...............................................................................2
3. Price elasticity of demand of soft drinks with key suggestions on effective pricing policy
for Coca Cola..........................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Economics management refers to a process of managing finance, resource, income &
expenditure at both small and large level. It helps a firm in treating business enterprise
effectively, so that higher level of profitability can be earned (Thusyanthy, 2018). The present
report is going to various evaluate key concepts of economics, that helps a firm in taking
managerial decisions to run business effectively. It includes demand & supply, cost analysis,
price elasticity and more, by taking soft drinks as an example to analyse impact of government
policy on its business operations. For this purpose, case analysis is done on Coca Cola, which is
well-known company in beverage sector and operates its business at worldwide level. As this
firm also deals in retailing, manufacturing and marketing of non-alcoholic beverages. Therefore,
critical analysis on its economic data that guides to policy making within organisation, national
and international context can easily be done.
MAIN BODY
1. Overview of Coca Cola Company with its products/services description
Food & beverage industry plays an important role in economy and society development,
which combines national reach with the local importance, having diverse range of skills with
effective reliance on migrant workers. This sector also has a hugely diverse, in terms of both
company size as well as subsectors within it, that ranging from the processing of non-alcoholic to
the manufacture of alcoholic drinks (Ciafone, 2019). In context with Coca Cola, it constantly
concerns on innovating its business operations, with willingness to work with subsectors like
retailers, distributors and suppliers, via no. of pre-competitive initiatives. It is one of the
American multinational company, which is headquartered in Georgia and invented by John Stith
Pemberton in 1886. This firm offers a wide range of more than 500 brands that are distributed
over 200 countries, where soft drink like Diet coke, Fanta, Sprite and more, is one of its best
manufacturing products (Zhang, 2019). Coca-Cola in most of the nations, is considered as best-
selling soft drink and recognize as one of the global brand in year 2010. Having wide expansion
of business at global scale, the competitive advantage of this firm can also be measured in terms
of its workforce, which is incorporated with more than 62,600 employees of diverse background
(Jones and Comfort, 2018).
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In UK, location of Coca Cola is headquartered in London, Coca-Cola Great Britain is
one of local subsidiary of the Coca-Cola Company, where it is responsible for marketing as
well as overall management of its brand (Boumediene and El Houda, 2018). This firm has a large
minority shareholding and it continues to dominate drinks market of UK at large level, where it
accounts for sales of near about £1.3bn, i.e. up 13% of soft-drink market. Fanta, Dr Pepper, Diet
Coke, Schweppes and Sprite, are included in Top Ten carbonated brands of the world, with
almost £495m in terms of sales and revenue. Other key brands of Coca Cola include Buxton and
Monster mineral water, which contributes to more than £1.7bn (UK Food and Beverage Industry
Outlook, 2020). Along with this, food-service outlets of respective firm including quick-serve
restaurants also accounted to £1.5bn, which is equivalent to 45% of market share.
2. Demand and market equilibrium including the factors that impact on the products or services
of Coca Cola in beverage sector
Coca Cola also known as Diet Coke is one of the popular carbonated soft drink, which is
available mostly in each stores, vending machines, restaurants over 200 countries. This has made
Coca Cola Company as one of the widely sold brand in commercial sector, as well as gain
competency over its major rival i.e. Pepsi (LÊ ĐĂNG, 2019). However, it has been targeted by
various brands that offer healthy drink, because its soft drink products contain high amount of
carbonated water, which create life-threatening effects. But still, demand of Coca Cola product is
high in market, due to ethical way of operating business, which is widely accepted in UK and
other international market as dominant soft drink than other brands (Zheng, Huang and Ross,
2019).. Growth of business of Coca Cola can be measured in terms of its income statement, as
shown in below table –
Income Statement of Coca Cola
COCA-COLA CO (KO) Cash Flow Flag INCOME STATEMENT
Fiscal year ends in December. USD in millions
except per share data.
2015-
12
2016-
12
2017-
12
2018-
12
2019-
12 TTM
Revenue 44294 41863 35410 31856 37266 34326
Cost of revenue 17482 16465 13256 11770 14619 13717
Gross profit 26812 25398 22154 20086 22647 20609
Operating expenses
Sales, General and administrative 16427 15262 12496 10307 12103 10971
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Restructuring, merger and acquisition 1088 598 405
Other operating expenses 1657 1510 -857 -600 -394 167
Total operating expenses 18084 16772 12727 10305 12114 11138
Operating income 8728 8626 9427 9781 10533 9471
Interest Expense 856 733 841 919 946 932
Other income (expense) 1733 243 -1844 -512 1199 2180
Income before taxes 9605 8136 6742 8350 10786 10719
Provision for income taxes 2239 1586 5560 1623 1801 1511
Net income from continuing operations 7366 6550 1182 6727 8985 9208
Net income from discontinuing ops 101 -251
Other -15 -23 -35 -42 -65 -19
Net income 7351 6527 1248 6434 8920 9189
Net income available to common shareholders 7351 6527 1248 6434 8920 9189
Earnings per share
Basic 1.69 1.51 0.29 1.51 2.09 2.15
Diluted 1.67 1.49 0.29 1.5 2.07 2.12
Weighted average shares outstanding
Basic 4352 4317 4272 4259 4276 4287
Diluted 4405 4367 4324 4299 4314 4322
EBITDA 12431 10656 8843 10355 13097 13162
Supply and demand considers as most fundamental economic concepts that helps in analysing
the market position of a company most easily (Reisi, Gabriel and Fahimnia, 2019). Demand
defines quantity of a product, which customers are willing to pay at certain price, while supply
refers to quantity supplied at market on desired price rates. In context with Coca Cola, its
products as comparison to Pepsi and other international or local brands, is always higher in
demand. But still there are number of factors present, that impact on demand of its soft drinks in
UK and other market, as shown below –
Price of substitutes – It refers to most crucial factor that highly impact on demand of a
particular product in a certain market. In soft drink market, presence of items like Pepsi, Thumps
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up, Sprite and more, are some substitute aerated goods of Coca Cola. Therefore, any change in
price of these have affect the pricing policies of Coca Cola also, where it decreases price of Diet
Coke and other aerated drinks to retail loyal customers and maintain its sales (Kumar and Ray,
2018). The impact of changes in price can be depicted by below demand curve, where increase in
price shift the same towards downside. Therefore, to remain demand curve in upside, it is better
to keep price of Coke and other soft drinks at competitive rates.
Price of complements – This factor also impacts on demanded quantity of a product,
where changes in complementary goods either increases or decreases the same. In context with
soft drink market, the complementary items include fast foods, where to offer items like burger,
pizza and more, restaurants like to offer the same in combo with aerated drinks (Adekoya and
Jimoh, 2019). Therefore, Coca Cola has made good relationship with fast food companies like
McDonalds, Burger King and more, to increase up its sales volume, with a tiny change in its
price.
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Consumer Income –
Consumer Income – People’ income also affects volume of demanded quantity of
goods, where having good level on income they like to consume more desirable products. In
context with aerated drinks like Coca Cola, companies like to set their pricing policies as per
level on income of its targeted audience (Zheng, Huang and Ross, 2019). But as this firm has
operated its business in more than 200 nations including both developed and under-developed,
therefore, it helps in reaching towards large audience more easily. So, as per economic
conditions of such countries, Coca Cola offers its soft drinks as per purchasing power and level
of people’s income. In this regard, it has been evaluated that if population has good income then
it increases demand of soft drinks and vice versa, in following way –
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Consumer taste & preferences – This factor also influences demand of Coca Cola at a
great extent, where targeted audience who prefer to drink strong flavoured drinks, increases
demand of its items. Therefore, whether price increases or decreases, people who like the taste of
Diet Coke and other Coca Cola items, do not get influence easily (Kumar and Ray, 2018). While
if consumers do not prefer much the taste of same, then any changes in price would directly
impact on demand. But the main key factor that changes consumer tastes and their preferences in
aerates drinks is negative impact of carbonate drinks on health of them. Therefore, in UK, due to
increasing number of people who are on high risk of obesity and other health issues, result in
decreasing the sales volume of soft drinks in the marketplace.
Government policies and interventions – Concerning on negative consequences of
aerated drinks particularly the carbonated drinks on health and well-being state of population,
government and healthcare associations of UK have run a number of programs, to make people
aware of the same (Reisi, Gabriel and Fahimnia, 2019). They encourage public more to consume
healthy drinks instead of Coke and other aerated products, to reduce chance of obesity and
increase weight issues. So, this factor highly influences the targeted audience of Coca Cola in
UK and other nations, that leads to decreases demand of its products from last few years, as
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shown in above mentioned income statement table (LÊ ĐĂNG, 2019). In this regard, to gain
support of government in running its business successfully, currently after outbreak of Novel
Coronavirus, Coca Cola after focusing on safety and wellbeing of its audience and communities,
have given its commitment to contribute over $120m internationally, for providing relief efforts
to the affected people (COVID-19 AND COCA-COLA: SUPPORTING FARESHARE TO GET
FOOD AND DRINKS TO THOSE IN NEED, 2020).
3. Price elasticity of demand of soft drinks with key suggestions on effective pricing policy for
Coca Cola
In modern microeconomics, the term price elasticity helps in measuring the correlation
between demand and price variation. If market is elastic, then there will be a tiny change in price
outcomes, with a large variation in sales volume. While if market is inelastic, then large change
will be seen in price results with a little change in sales volume (Boumediene and El Houda,
2018). Therefore, pricing strategy of any product will be different and depends more on elastic or
inelastic of market. Price elasticity of demand can be defined as a measure of how responsive
demand is towards change in price of a good or service. It can be calculated as percentage of
change in demanded quantity divided by percentage change in price. Elasticity of demand for
branded products like Diet Coke refers to be greater than other soft drinks in UK and other
global market. The reason behind great price elasticity of Coca Cola is its worldwide strong
presence, as well as its highly reputed brand value at international level (Jones and Comfort,
2018). Demand is "more elastic" if consumers are more responsive to price changes. In general,
demand seems to more elastic when there is a huge presence of more substitutes exist for
customers and allows them to switch as per changes in price. Therefore, it has been analysed that
if market is narrowly defined then there is a more elastic demand. In context with market for
Coca-Cola’s products, it is also more narrowly defined due to wide presence of many
alternatives like Pepsi, Thumps up, Sprite and more. Therefore, if price of its soft drink products
increases of Coca Cola, then consumers tend to purchase from other alternatives or different
types of soft drinks (Zhang, 2019). But as compared with these soft drinks in general, there is not
many substitutes of Diet Coke because it contains carbonate water which is mostly liked by
many consumers, so they don't get option to easily switch to other alternative while responding
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towards price increase. Henceforth, market for soft drink products offered by Coca-Cola refers to
be more elastic than others.
Concerning on health and severe impact of carbonated soft drinks on it, people are mostly
avoided to drink the same. They prefer to buy alternatives which are healthy and put less impact
on their health and well-being state (Ciafone, 2019). Therefore, to dominate market in soft drink
sector for longer period, it is essential for Coca Cola to implement effective pricing policies. For
this purpose, its management need to evaluate impact of any changes in price of its soft drink
first, as explained by below graph –
As per this graph, it has evaluated that in soft drink market, a small change in price
increases highly in demanded quantity. Therefore, best pricing strategy for Coca Cola is to
decrease the price of Diet Coke and other soft drink items, to increase its sales volume and earn
more profitability. This would can be demonstrated by given figure, which illustrates how small
changes in price, increases sales volume of same (Thusyanthy, 2018). On the other hand, in order
to become more expensive and develop reputation as luxury brand in beverage industry like
alcoholic firms, if Coca-Cola increase price of its products, then consumers will prefer to buy
alternative ones like Pepsi at some extent. This will result in collapsing the demand for Coca-
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Cola also, therefore, concerning on this negative consequences and price elasticity for its soft
drinks, it will be better for this firm to offer the same on less price.
CONCLUSION
From all over discussion, it has been summarised that to analyse market position and factor
that impact on demand and supply of a particular product in an era, it is essential to apply
theories and key concepts of managerial economics. It helps in analysing elasticity or non-
elasticity of company’s products with suggestions, that helps in running a business successfully.
Along with this, through this report which has done on soft drink market, it has been analysed
that due to unique and strong taste of carbonated drinks, demand of Coca Cola products is still
high in marketplace.
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REFERENCES
Books and Journals
Adekoya, O. D. and Jimoh, I., 2019. Scholars Journal of Economics, Business and Management.
Boumediene, O. and El Houda, Y. N., 2018. Corporate Social Responsibility in Food and
Beverage Industry: An Analysis Study of Soft Drinks Sector in Algeria. European
Scientific Journal, ESJ. 14(1). p.190.
Ciafone, A., 2019. Counter-cola: a multinational history of the global corporation. University of
California Press.
Jones, P. and Comfort, D., 2018. The Coca Cola Brand and Sustainability. Indonesian Journal of
Applied Business and Economic Research. 1(1). pp.34-46.
Kumar, N. and Ray, S., 2018. Attitude towards soft drinks and its consumption pattern: a study
of Gen Y consumers of India. British Food Journal.
LÊ ĐĂNG, L.Ă.N.G., 2019. Impacts of Advertising and Sales Promotion on Brand Equity of
Soft Drinks. Journal of Economic Development, pp.131-145.
Reisi, M., Gabriel, S. A. and Fahimnia, B., 2019. Supply chain competition on shelf space and
pricing for soft drinks: A bilevel optimization approach. International journal of
production economics. 211. pp.237-250.
Thusyanthy, V., 2018. Health Consciousness and Brand Equity in the Carbonated Soft Drink
Industry in Sri Lanka. International Journal of Business and Management, 13(3).
Zhang, Z., 2019. Risk Analysis of Two Leader Drink Company: PepsiCo and Coca-Cola. Asian
Business Research, 4(3), p.42.
Zheng, H., Huang, L. and Ross Jr, W., 2019. Reducing Obesity by Taxing Soft Drinks: Tax
Salience and Firms’ Strategic Responses. Journal of Public Policy & Marketing. 38(3).
pp.297-315.
Online
UK Food and Beverage Industry Outlook. 2020. [Online] Available Through: <
https://www.aviko.co.uk/news/uk-food-and-beverage-industry >.
COVID-19 AND COCA-COLA: SUPPORTING FARESHARE TO GET FOOD AND DRINKS TO
THOSE IN NEED. 2020. [Online] Available Through: <
https://www.coca-cola.co.uk/our-business/company-statements/covid-19-and-coca-
cola--what-we-re-doing-in-the-uk-and-beyond#:~:text=Here%20in%20Great
%20Britain%2C%20together,Nightingale%20Hospitals%20across%20the
%20country.>.
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