Running head: THE COCA COLA COMPANY

The Coca-Cola Company

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THE COCA COLA COMPANY

The Coca-Cola Company

Introduction
The Coca-Cola Company is the largest beverage company in the world. Like other firms,
the organization is affected by microeconomic factors that impact its performance and
sustainability. The purpose of this study is to analyze and evaluate the fundamental
microeconomic principles that influence the companys decisions regarding production
processes, marketing of its products, dealing with competition, and maintaining its corporate
image in the market. For this reason, the type of data to be evaluated includes trends in demand,
pricing decisions, and consumer response to price changes. Besides, an analysis of the overall
market, the market share of the company, barriers to entry, and market structure will assist in
formulating the most appropriate recommendations for the firm concerning future production
strategies as well as sustainability of its success in the marketplace.
Company History
The Coca-Cola Company was founded in the US, and its head office is located in Atlanta,
Georgia. In 1886, a pharmacist known as John Pemberton founded the Coca-Cola soft drink by
mixing the ingredients, namely, soda water, coca leaves, cinnamon, lime, and shrub weeds from
Brazil. Originally, the drink was sold in Jacobs Pharmacy in Atlanta as a soda fountain drink for
five cents a glass. The actual companys trademark, Coca-Cola, was proposed by Pembertons
bookkeeper and partner, Robinson Frank. He suggested that a name with two Cs would be
perfect for advertising purposes, thereby writing down the now-famous logo in his handwriting.
In the meantime, the recipe used by Pemberton was bought by an Atlanta businessman and
pharmacist, as a Chandler for $2300 on April 14, 1891. By 1892, Chandlers merchandising
expertise had improved the Coca-Cola sales almost tenfold. Later on, he partnered with his

THE COCA COLA COMPANY

brother John S. Chandler and Frank Robinson, and two other allies to form the Coca-Cola
Company. In 1919, Ernest Woodruff purchased the firm for $25 million and later turned it over to
his son Robert Woodruff in 1923. Currently, the corporation has grown to be one of the most
well-known firms in the world, and its brand is among the top five worlds most recognized
symbols (Wilhelmina, Stephens, & Cooper, 2007).
Today, the company owns, licenses, and markets over 500 nonalcoholic beverages.
Mostly, these products are sparkling beverages, but it also deals with a variety of still drinks such
as waters, juices, and juice drinks, ready-to-drink coffees and teas, as well as sports and energy
drinks. The firm owns and markets top five brands of non-alcoholic sparkling beverages in the
world, namely, Coca-Cola, Diet Coke, Fanta, and Sprite. The company also works with the
largest beverage distribution system in the world in more than 200 countries. The core
distributors include company-owned or controlled distribution and bottling operations and
independent partners, wholesalers, distributors, and retailers. As such, the company drinks
account for 1.9 billion of about 57 billion beverages consumed in the world every day. The goal
of the company is to use its assets to become more competitive and speed up growth in a way
that adds value to the shareholders. These resources include brands, unique distribution system,
financial strength, global fame, and the strong management and associates commitment and
talent (United States Securities and Exchange Commission, 2014).
Supply and Demand Conditions
From the annual companys report for the last five years, the revenue figures have been
fluctuating. Since 2010 through to 2014, the amounts were as follows:

THE COCA COLA COMPANY

Table 1
Coca-Cola
Company
Revenue
Subhea
d
Row1
Row2
Row3
Row4

Year
2014
2013
2012
2011

Row5

2010

Revenu
e
$45,998
$46,854
$48,017
$46,542
$35,119.
00

Figure 1. Coca-Cola Company Revenue Curve

(KO Coca-Cola Co XNYS: KO Stock Quote Price News, 2016).

This data shows that from 2010 to 2012, the demand for the companys products was
rising as indicated by the increase in sales revenue. On the other hand, the demand started falling
in 2013 and 2014. From the companys report, various factors have led to the decline in demand
for its products. First and foremost, the health issues associated with the consumption of such
products have raised concern among consumers, government agencies, and public health
professionals.

THE COCA COLA COMPANY

Besides, dietary guidelines and health advocates suggest that consumption of sugarsweetened beverages is one of the main causes of increased rate of obesity and discourage people
on the consumption of such commodities. Thus, such issues lead to increased taxation on these
products by government entities aiming at reducing their consumption or raising some revenue.
To add, government regulations regarding marketing, packaging, labeling, and sale of the
company beverages have been formulated in the US and other nations in an effort to generate
income. The worst of all is the negative publicity emanating from threatened or actual legal
actions against the enterprise and the whole industry. These factors have led to increase in prices
due to high taxation as well as a shift in customer preferences as a result of the harmful
information. Thus, the overall outcome is a decrease in demand for the company products and
also for the whole industry (United States Securities and Exchange Commission, 2014).
Furthermore, other factors have affected the companys supply level as well as that of the
entire industry. Particularly, the world is experiencing water scarcity and poor quality of the
water sources. Given that water is the main component of all of the company products, its
increased scarcity and poor quality affect the production of the farmed ingredients the business
and the industry rely on in their manufacturing process. Mostly, water is under unprecedented
risks from overexploitation, pollution, poor management, and rising demand due to increased
food requirements and effects of climate change. Due to such factors, Coca-Cola Company and
the industry as a whole face the risk of higher production costs that affect their manufacturing
capacity, thereby reducing their supply in the market as well as profitability and net operating
revenues.
Currently, the Coca-Cola Company faces considerable competition from other
international beverage manufacturers that operate locally and in multiple regions worldwide

THE COCA COLA COMPANY

offering substitute commodities. Meanwhile, the largest competitor for these products in the US
and other parts of the world is the PepsiCo Company. Others include DPSG, Nestle, Mondelez,
Groupe Danone, Unilever, Kraft, and Suntory. For this reason, the company needs to formulate
appropriate strategies to ensure that their strength and capabilities in the market continue to
maintain their brand loyalty and market share.
More so, the company pricing decisions are influenced by various factors such as
economic conditions in the US and other parts of the world. Particularly, unfavorable conditions
like recessions and economic slowdown negatively affect the level of prices. Besides, other
factors include increased requirements for additional product labeling, high taxation rates, and
additional shipping costs. All these factors raise the cost of production and distribution which, in
turn, increases the price of the commodity (United States Securities and Exchange Commission,
2014).
Price Elasticity of Demand
Mostly, the company applies various pricing strategies that affect the price elasticity of
demand (PED) for its products. Consumers always react when the price of a commodity changes
such that increase in price will decrease the demand depending on the level of the PED. In this
regard, to determine the price elasticity of demand for Coca-Cola products, the percentage
change in quantity demanded is divided by the percentage change in price over a particular
period. Mostly, the PED lies between -1 and infinity. A zero result implies that the PED is
perfectly inelastic, but when it lies between -1<PED>0, it is said to be negatively inelastic. A
PED equals to -1 has unit elasticity but if it ranges from negative infinity to -1, it is relatively
elastic. PED is perfectly elastic if it the ratio is negative infinity meaning that the product highly
sensitive to changes in price (Soutas-Little, 2012).

THE COCA COLA COMPANY

Various factors affect consumers responsiveness to changes in price for the company
products. First, the availability of substitutes determines the consumers behavior such that if
more alternatives are available, elasticity is higher as customers can quickly switch from one
commodity to another in response to price changes. Besides, consumers reaction is limited by
the high transaction costs involved during product substitution mostly in cases where demand is
relatively inelastic. Another factor is the percentage of income inferring that if a commodity
represents a high ratio of the income, the demand for such a good is more elastic (PED).
Commonly, the Coca-Cola Company products have many substitutes in the market
meaning that the price elasticity of demand is high. For this reason, the companys pricing
decisions have to consider the prices of competing commodities. This implies that the
corporation is unable to increase the prices at will regardless of changes in production costs. As
such, the firms revenue is negatively affected if the price rises. Thus, if the production costs
continue to rise with no increase in price, the growth of the company revenue will be impacted
negatively.
Costs of Production
All manufacturing companies face various costs of production, and the Coca-Cola
Company is not exception. The firm incurs costs such as labor, raw materials, labeling,
packaging, shipment, distribution, research and development. Other related expenses include
taxation fees paid to the government in different countries where the company operates. Mostly,
the prices of raw and packaging materials vary over time depending on market conditions.
Besides, the expenses of the companys bottling partners regarding ingredients and other raw
materials keep on changing which affects the companys operating costs, thereby reducing their
profitability. These values also influence the affordability of the business goods in some markets,

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which reduces the sales volume, thus affecting the level of profits. Additionally, the company
incurs costs associated with energy and fuels due to the number of trucks and motor vehicles
used for distribution. The firm also uses much electric power, natural gas and other sources of
energy during its daily operations of the production plants. The prices of these energy sources
have been fluctuating over the years and, in most cases, they have been increasing. Thus, the
overall operating cost of the company has been increasing which have negatively affected their
profitability (United States Securities and Exchange Commission, 2014).
Furthermore, the production costs are divided into fixed and variable costs. As such, the
fixed costs do not vary with output whereas the variable costs do. For this reason, the companys
fixed costs such as manufacturing plants, rents, depreciation of motor vehicle and machinery as
well as insurance expenses do not affect the level of output. On the other hand, the variable costs
that include raw materials, salaries and wages, and fuel expenses have a direct relationship to
production. When these variables increase, the level of output will also increase and vice versa.
Overall Market Structure
Essentially, the market shares of top competitors are widespread in many regions of the
US and the world at large. But, the Coca-Cola Company is the leading firm in this industry with
a percentage of 42.3% in the US carbonated soft drink industry market whose total size is
estimated at 8.24 billion. For the last few years, the industry market size has been shrinking, and
the trend is expected to continue in future. The market share of the close competitors in this
industry is 27.5% for PepsiCo and 17.1% for Dr. Pepper Snapple in the US. In this regard, the
decline in the market share is brought about by the increasing negative health impact associated
with these drinks. On the other hand, this effect is countered by increased growth in the emerging

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markets as well as mergers and acquisitions (Pepsi, Coke, Dr Pepper and the At-Home
Carbonation Market, 2015).
Figure 2. Leading Company Market Share in the CSD Industry

The market structure for this industry is characterized by few large firms with
differentiated products implying that it is an oligopoly structure. For this reason, the firm's
behavior is independent, but the actions of one company can affect the demand for its products as
well as those of other businesses. Furthermore, this market structure experiences barriers to
entry. More so, the structural barriers include large economies of scale and great set-up costs
since production requires large scale. Strategic barriers include predatory acquisitions and
switching costs whereby a large firm may buy shares or control over other brands. In this regard,
a consumers choice to switch to a different commodity is restricted by the high charges
involved. These expenses may include installation of new equipment and lack of services during
this period. Other barriers include strong brands in the market, high advertising value and loyalty
schemes that enable companies to retain customer loyalty. Hence, the firm faces a small threat

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10

concerning future market share since very few firms will enter and prosper in the market
(Matraves, 2010).
Recommendation
Therefore, from this analysis, my recommendation to the company is that they should
focus their production on more healthy drinks and beverages and also concentrate their attention
on new emerging and highly developing economies. This will enable the firm to increase its
daily sales in new markets in order to compensate for the falling demand in established markets.
On the other hand, manufacturing healthier energy drinks will enable the organization to replace
the commodities whose demand is falling due to health awareness associated with CSD in more
developed economies. Essentially, since Coca-Cola Company is the leading producer of soft
drinks and has created strong customer loyalty, the introduction of their commodities to newly
developing economies as well as increasing their supply of healthier drinks to already established
markets will not be a challenge. Besides, they should also engage in consumer awareness trying
to advise their clients regarding the health status of their products to curb the negative health
awareness circulating in the market.

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11

References
KO Coca-Cola Co XNYS:KO Stock Quote Price News. (2016, February 26). Retrieved February
27, 2016.
Matraves, Catherine. (2010). Market integration and market structure in the European soft
drinks industry: always Coca-Cola? WZB Berlin.
Pepsi, Coke, Dr Pepper and the At-Home Carbonation Market: Let the Games Begin! Trefis.
(2015, September 16). Retrieved February 27, 2016, from games-begin/2015-09-16
Soutas-Little, R. W. (2012). Elasticity. Dover Publications.
United States, Securities and Exchange Commission. (2014). Annual report pursuant to section
13 or 15(d) of the Securities Exchange Act of 1934: The Coca-Cola Company.
Washington D.C: United States Securities and Exchange Commission.
Wilhelmina. F., Dr, Stephens. R., Dr, & Cooper. L., Dr. (2007). Coca-Cola Case Study: An
Ethics Incident (1st ed., Vol. 1, Publication). Macon State College: The Archive of
Marketing Education.