Coca-Cola Analysis

December 5, 2017 Teaching

This is an essay to discuss the economics phenomenon with a particular product in the beverage area. Trying to analyze the relationships among the price, demand and supply and other factors in the beverage industry, such as substitute and complement products, market competitors and input prices or costs, etc. Introduction Coke refers to Coca-cola which is a dominant product of the Coca-Cola Company. There are six parts in this essay to display the market structure, factors affecting price, demand and supply, substitute and complement products, elasticity, market competitors and some factors of production of the Coke. Market structures

Definition A classification system for the key characteristics of a market, including the number of firms, the similarity of the products they sell, and the ease of entry in to and exit from the market. Classification It refers to the characteristics of a market that define its structure include the number of firms in that market, the degree to which the products they sell are similar and the ease of entry into, and exit from, the market. Market structure includes, Perfect competition, Monopolistic competition, Oligopoly, Monopoly, etc. Case: Coca-cola—-Coke Coca-Cola Amatil (CCA) has been located in Northmead for more than 30 years.

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CCA is the largest bottler of non-alcoholic ready to-drink beverages in the Asia-Pacific region and one of the top five Coca-Cola bottlers in the world. CCA operates in six countries – Australia, New Zealand, Fiji, South Korea, Indonesia and PNG. Coke is one of the Key brands which occupied a big market share (58%). Major competitors are Pepsi, Schweppes, etc. Analysis of the Coke market structures As The four-firm concentration rate of the products Coke are more than 50% in Australia, the four firms refer to Coca-cola, Pepsi, Schweppes and Home brand. Which is mean, Coke is in the Oligopoly market structure.

Economists define an oligopoly as follows: oligopoly is a market structure characterized by few sellers, either a homogeneous or a differentiated product and barriers to market entry. Pricing power and policies depending on the Oligopoly The market power that oligopolies derive from significant barriers to entry means that, like the monopolist, they can earn economic profits in the long run. However, the price-output decision of an oligopolies is not simply a matter of charging the price where MR=MC. Making price and output decisions in an oligopoly depends on the anticipated reactions of the opposing player.

Coca-cola is a dominant firm in this area, which means it can set the price for the carbonated beverages industry and the other firms follow. Following this tactic, Coke is simply matching the price of perhaps, but not necessarily, the biggest firm. Factors affecting price, demand and supply There are many different possible reactions that Coke in an oligopoly can make to the price, non-price and out put changes of Pepsi, etc. Four well-known oligopoly models: 1. non-price competition This model of behaviour explains why advertising expenditures are often large. It also explains why the R&D function is so important to oligopolies.

For instance, much effort is put into developing new products and improving existing products. e. g The Australian business delivered a significant improvement in second half trading with revenue growth of 8. 9% driven by the combination of volume growth of 2. 6% and revenue per case improvement of 6. 2%. The highlight for the year has been the success of new products led by Coca-Cola Zero. Since the launch in January, Coke Zero has received outstanding consumer acceptance and very high levels of repeat purchase. As a result, CCA’s market share of the cola category has grown from 75% to 77%.

Coca-Cola Zero sales are already achieving more than 75% of Diet Coke monthly volumes, which is well ahead of expectations and for 2006 Coke trademark revenue grew by a record 9%. Over the past 12 months there has been a significant shift in consumption from sugar cola to non-sugar cola. The non-sugar cola category grew by 36% in 2006 and the category now represents 34% of total cola volumes, up from around 20% in 2000. 2. the kinked demand curve The kinked demand curve explains the behaviour of firms. It is a demand curve faced by oligopolies who assumes that rivals will match a price decrease but ignore a price increase.

The price of the Coke is always similarity with the Pepsi and it is obvious that when the Coke makes promotion, others easy followed. 3. price leadership As mentioned before, Coca-cola is a dominant firm in this area, which means it can set the price for the carbonated beverages industry and the other firms follow. It is a pricing strategy as well. 4. the cartel It refers to a group of firms formally agreeing to control the price and the output of a product. Take the Coke and Pepsi as an example, if they become a cartel, that is mean they formally agreeing to control the price and the output of the carbonated beverage coke.

Cartels are illegal in Australia and in most other developed countries. To sum up, Coke in the oligopoly market structure, because of the barriers for new competitions entry into, it can charge higher prices and earn economic profits in the long run. Substitute Products Coke owned by Coca Cola Amatil (CCA) is one of Australia’s largest food and beverage (soft drinks and juices, as well as alcoholic drinks) brand. In Australian market, the largest competitors in the beverage industry are CCA and Schweppes who hold 84% share of the market.

Otherwise, PepsiCo, Golden Circle, Kirks are also the strong competitors in the market. ‘A substitute is a good that can be used in place of another good’ (McTaggart et al. 2003). It is the alternative products available for customers in the same industry. Coke has a number of substitute products from the internal of CCA and external competitors. The substitute products from internal of the company include coke zero, diet coke, and lift and so on. The substitute products from competitors include Pepsi, Sunkist from PepsiCo, Pasito from Kirks.

These products have very small differences on its flavour, price, and performance. They can satisfy customer’s need similarly. When people cannot buy coke in case, they can purchase other products mentioned above for substitute. The substitute product is very important for a product. One of the Porter’s five forces analysis mentioned that the threat of substitute products or services. The substitute products are attractive alternative because the similar price and flavour, when the substitute products lower switching cost, the customers will easily shift to the substitutions.

Also the similar price, quality and performance of the products will promote customer’ comparison when they are purchasing. On the other hand, the substitute products may affect the quantity of demand of a product. Based on the law of demand, when the price of a good rises, other things remaining the same, and its relative price its opportunity cost rises. Although each good is unique, it has substitutes, other goods that can be used in its place. As the opportunity cost of a good rises, people buy less of that good and more of its substitutes (McTaggart et al. 2003).

For example, when the price of Pepsi, a substitute for coke increases, the quantity of coke demanded will be increased. Complement Products ‘A complement is a good used in conjunction with another good’ (McTaggart et al. 2003). Normally, the complement product has less value when consumed alone than combined with other products. Some examples of complements are hamburgers and chips, running shoes and jogging pants. Coke also has its complements: fast foods and snacks, as well as all natural and healthy drinks, and alcoholic drinks. In Australia market, fast food and soft drinks are complementary with each other.

Fast food industry in Australia is strongly influenced by the changing of lifestyles and dining styles during the last 30 years. With the increase amount of working women and working parents, the time for people spending on shopping for food and cooking at home is decreased. Also, people prefer to dine out more often at coffee shops and inexpensive places other than dining out as a special event. These changes create the opportunities for Australia food industry as well as the beverage industry. Drinks can be found in all of the fast food stores like KFC, McDonald, Pizza hut, fish chips, and cafe and so on.

People buying fast food in these food stores always purchases drinks as the complement. The increase of quantity of fast food demanded will also increase the quantity of drinks demanded as they are complementary. On the other hand, the quantity of a product that consumers plan to buy doesn’t depend only on its price. It also depends in part on the price of related products: complement products. Based on the law of demand, if the price of a complement product falls, the quantity of the conjunct product will be increased. When the price of one of these complements increases, people will buy fewer the products.

For example, when the price of chips, the complements with coke increases, and the quantity of coke demanded will be decreased. Market competitors, size and growth The major market competitor of Coca-Cola is Pepsi. There are many smaller beverage companies domestically competing coca cola for example Red Bull GmbH’s Red Bull energy drink, Monster energy drink, produced by Hansen Natural (HANS), and Ferolito, Vultaggio & Son’s Arizona iced tea. Coca-Cola is hold 43% of market share in volume of its sales in year 2003 amongst the beverage industry. [pic]

Non-alcoholic beverage market share, by volume in 2003 In the fiscal year ended December 2006, the company made the revenue of $24,088 an increase of 4. 3% over 2005. It went up in sales from approximately 20. 6 billion unit cases of the company’s Products in 2005 to approximately 21. 4 billion unit cases in 2006, the increase in the Price and Product mix have boosted the revenue growth. The company sales and unit case volume grew 4% in 2006 when compared to 2005. The operating profit of the company was $6,308 million during fiscal year 2006, an increase of 3. 7% over 2005.

In fiscal year 2006, the net profit was $5,080 million an over in 2005 it increased with 4. 3%. Growth:- Coca-Cola has struggled for years to capture a share of the increasingly lucrative energy drink sector and credit the early success of this new product to the improved taste, innovative prelaunch activity in early 1950’s,then it went into the introduction of new brands following Fanta, Sprite, Minute Maid, Fresca and TaB in 1960s. In 1980s it brought diet Coke and Cherry Coke and PowerAde and Dasini in 1990. In the 21st century the Coca-Cola bottling system came into picture in local communities of Australia.

In the Australian carbonated soft drink (CSD) market, CCL operates in a duopoly with Cadbury Schweppes. Coca-Cola Amatil has continued to invest through the cycle of the year 2009 with the growth of between 0. 5 and 1. 0% on FY08 which is driven by strong earnings growth, efficiency gains from capital investment, recovery of cost of goods increases, and Strong cost control. Input prices or cost of factors of production For coca-cola the factors of production can be broken down into two broad categories: capital and land and human resources, which is labor and entrepreneurial ability.

Capital includes machinery, tools, buildings, transportation and distribution facilities, and also inventories of unfinished goods. They are used to produce other goods to facilitate the production of consumable goods indirectly. Land is the fundamental natural resource that is used in the production including water, oil, gas and mineral deposits which is of course rapidly becoming scarce. Coca-Cola’s capital employment did not change from December 2008, which decreased by $63. 3 million to $3,248. 1 million, due to a great working capital management. The increase of $42. million in property, plant and equipment (PPE) related to cold drink equipment, expenditure on various manufacturing efficiency projects in Australia. Group ROCE increased from 22. 4% for 2008 to 24. 0% for 2009 due to its strong growth in earnings and efficient utilization of CCA’s asset base, including the realization of further efficiency gains from Project Zero, CCA’s major infrastructure program |$A Million |2009 |2008 |change | |Working Capital |910. |934. 4 |-24. 2 | |Property, Plant and equipment |1,475. 20 |1,414. 90 |42. 3 | |IBAs and Intangible Assets |1,480. 80 |1,453. 50 |27. 3 | |Deffered Tax liabilities |-157. 4 |-138. 7 |-18. 7 | |Derivatives-non debt |-32. 5 |25. 7 |-58. 2 | |Other net assets/liabilites |-410. 2 |-378. |-31. 8 | |Capital Employed |3,248. 10 |3,311. 40 |63. 3 | |Return on average capital employed(ROCE)% |24. 00% |22. 40% |1. 6pts | In order to manage the labor cost CCA utilized the use of workforce management which implies the giving the workforce the tools that helped them to control labor costs, minimize the compliance risk and increase the workforce productivity. Kronos Australia Pty Limited is the leading provider of workforce management solutions in Australia.

It aims at maintaining highly efficient relationship between the work forces. Coca-Cola adopted the retail franchise called as a producer license distributor to sell a given product to the retailers. It grants franchises to bottlers which then service the retailers. They have chosen it because it helped to boost the production and the distribution services in order to develop and control the marketing strategies. During the 1920s and 1930s Coca-Cola began its international expansion led by Robert W. Woodruff who was the CEO and chairman of the board. Conclusion

Coca-Cola operating in a duopoly market structure is now leading price decisions of the carbonated beverages industry. It leads majority of the market share as it bought up new brands as a source to maintain the consistent growth of the company in the long run by managing it working capital and the management of the workforce. Coca-Cola Amatil in Australia relies heavily in their employment relations expertise. Coca-Cola ensures satisfaction in the work place for both employee and employer. Coca-Cola has now become the “world’s leading manufacturer, marketer, and distributor of non-alcoholic beverage concentrates.

References Allan Layton, Tim Robinson “Economics for Today”;, 3rd ed. , Prentice Hall, Harlow. http://ccamatil. com/InvestorRelations/AnnualReports/2006/2006%20Annual%20Report. pdf http://ccamatil. com/Search/Pages/results. aspx? k=coke%20sales%20in%20Australia%20vs%20pepsi http://tutor2u. net/economics/revision-notes/a2-micro-market-structures-summary. html http://www. agsm. edu. au/bobm/teaching/ECL/lect03. pdf http://www. coca-cola. com. au/ McTaggart, D, Findlay, C & Parkin, M 2003, Microeconomics, 4th edition, Pearson Education, Australia.

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