A REPORT ON MICROECONOMIC ANALYSIS OF
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PROF. SUBHALAXMI MOHAPATRA
GROUP NO – 5 MILLAN SAHOO (43) MD. SAFIQUE (45) NATANSH PAREEK (48) NIDHI MAHESHWARI (50) NIKITA PHUTELA (51)
OVERVIEW Coca-Cola is a carbonated soft drink sold in stores, restaurants, and vending machines internationally. The Coca-Cola Company claims that the beverage is sold in more than 200 countries. It is referred to simply as Coke, originally intended as a patent medicine when it was invented in the late 19th century by John Pemberton, Coca-Cola was bought out by businessman Asa Griggs Candler, whose marketing tactics led Coke to its dominance of the world soft-drink market throughout the 20th century. “The Coca-Cola Company entered India through its wholly owned subsidiary, Coca-Cola India Private Limited and re-launched Coca-Cola in 1993 after the opening up of the Indian economy to foreign investments in 1991. Since then its operations have grown rapidly through a model that supports bottling operations, both company owned as well as locally owned and includes over 7,000 Indian distributors and more than 1.3 million retailers. Today, our brands are the leading brands in most beverage segments. The Coca-Cola Company’s brands in India include Coca-Cola, Fanta Orange, Fanta Apple, Limca, Sprite, Thums Up, Burn, Kinley, Maaza, Maaza Milky Delite, Minute Maid Pulpy Orange, Minute Maid Nimbu Fresh and Nestea Iced tea, the Georgia Gold range of teas and coffees and Vitingo (a beverage fortified with micro-nutrients). In India, the Coca-Cola system comprises of a wholly owned subsidiary of The Coca-Cola Company namely Coca-Cola India Pvt. Ltd. which manufactures and sells concentrate and beverage bases and powdered beverage mixes, a Company-owned bottling entity, namely, Hindustan Coca-Cola Beverages Pvt Ltd; thirteen authorized bottling partners of The Coca-Cola Company, who are authorized to prepare, package, sell and distribute beverages under certain specified trademarks of The Coca-Cola Company; and an extensive distribution system comprising of our customers, distributors and retailers. Coca-Cola India Private Limited sells concentrate and beverage bases to authorized bottlers who are authorized to use these to produce our portfolio of beverages. These authorized bottlers independently develop local markets and distribute beverages to grocers, small retailers, supermarkets, restaurants and numerous other businesses. In turn, these customers make our beverages available to consumers across India.”1 DEMAND: Demand for a commodity refers to the quantity of the commodity which an individual household is willing to purchase per unit of time at a particular price.2 LAW OF DEMAND: The inverse relationship between the price of the commodity and the quantity demanded per time period is referred to as the “law of demand”.3
FACTORS AFFECTING DEMAND OF COCA-COLA:
Price of the product: If the price of Coca-cola will increase, other things remaining constant, the demand of customers will decrease and vice-versa. Price of substitute goods: Demand of Coca-cola is affected by price of other aerated goods. If the price of Coca-cola rises drastically from Rs.12 to Rs.20, price of other substitutes remaining constant, people will reduce their demand for Coca-cola and their demand for other aerated drinks will increase and viceversa. Income of customer: Coca-cola being a normal good, the demand for Coca-cola will increase with the increase in the income of the customer and price of Coca-cola remaining constant. Customer’s taste and preference: If customers have a very strong preference for Coca-cola, their demand for it will remain unaffected even with a rise in the price of Coca-cola. Consumer’s expectations: If consumers expect a rise in price of Coca-cola in short run, they will demand more of it before the rise so that they can store it. Similarly, if consumers expect the price of Coca-cola to fall in short run they will demand less of it in present. Demographic population of the country: Demographic population of the country refers to the distribution of population in terms of age. If the population of the country is more of middle-aged people, youth and kids then the demand for Coca-cola will increase and vice-versa. Time: Time is an important factor that affects the demand of Coca-cola. For example, the demand for Coca-cola will increase during festive seasons and summers.
SUPPLY: Supply is the willingness and ability of producers to make a specific quantity of output available to consumers at a particular price over a given period of time. LAW OF SUPPLY: When there is a rise in price of the commodity, quantity supplied increases and when there is a fall in price, quantity supplied decreases. So there is a direct relation between the price of the commodity and the quantity supplied.
FACTORS AFFECTING SUPPLY OF COCA-COLA:
Price of Coca-cola: If the price of Coca-cola increases then the producers will be willing to produce more of it and vice-versa. State of technology: With the help of improvement in technology, the cost of production of coca-cola will reduce and thus produce would like to supply more of it at the same price. Number of customers: If the number of customers for coca-cola is large then the company will supply more of it and vice-versa. Price of inputs: If the price of raw materials will reduce, the producers will produce more of it and thus the supply will increase. And if the cost of raw materials will increase then the produce will reduce the supply of coca-cola. Seller’s expectations: If the producer expects the demand for coca-cola to fall in near period, he will reduce the supply of it and vice-versa.
RAW MATERIALS USED IN MANFACTURING OF COCA-COLA: Fluid extract of Coca: 3 drams USP Citric acid: 3 oz Caffeine: 1 oz Sugar: 30 (unclear quantity) Water: 2.5 gal Lime juice: 2 pints, 1 quart Vanilla: 1 oz Caramel: 1.5 oz or more for color
The secret 7X flavor (use 2 oz of flavor to 5 gals syrup): Alcohol: 8 oz Orange oil: 20 drops Lemon oil: 30 drops Nutmeg oil: 10 drops Coriander: 5 drops Neroli: 10 drops Cinnamon: 10 drops
ELASTICITY ELASTICITY OF DEMAND: Elasticity of demand refers to rate of change in quantity demanded with a change in price of the commodity. FACTORS DETERMINING ELASTICITY OF DEMAND OF COCA-COLA ARE:
Availability of substitute: Coca-cola has many substitutes which means if there is a change in price of coca-cola people shift to other aerated drinks, for example, Pepsi, Mirinda, etc. This means the elasticity of Coca-cola is high. Time: The demand for Coca-cola is always related to time factor. This implies that elasticity of demand varies with the length of time period. In case of long run the elasticity of demand is elastic (because the period is long enough for people to shift their taste and preferences) and in short run the demand remains inelastic. Income level: The demand for Coca-cola is elastic for middle income group people. The middle income group is sensitive to the change in price. Therefore, if there is an increase in the price of Coca-cola, the demand in the middle income group will decrease. Percentage of income spent on goods: Coca-cola is that product which is meant for the youngsters. In the long run the demand is relatively elastic because even in the long run if there is an increase in the price of Coca-cola even the hard core Coca-cola drinkers will shift their preference because of the constraint in their pocket but in short run the demand remains inelastic.
ELASTICITY OF SUPPLY: Elasticity of supply refers to the percentage change in quantity supplied of the commodity to percentage change in price of the commodity. FACTORS DETERMINING ELASTICITY OF SUPPLY OF COCA-COLA ARE:
Time factor: There are three supply periods based on time factor – the momentary period, the short period and the long period. In the momentary period the supply is fixed, that is , elasticity of Coca-cola is zero. In the short run the company can increase its variable factors and increase the supply, which means the relatively elastic. In long run, all factors of production can be increased so supply becomes more elastic. Ability to store the product: The more convenient it is to store the product; the more elastic is the supply of the product. As Coca-cola can be stored for a longer period of time, its elasticity is more.
MARKET STRUCTURE Since Coca Cola exist in a duopoly type oligopoly market changes in current market trend can be managed between the market leaders as to ensure market success. With Coca Cola being the most widely sold and distributed carbonated drink throughout the world, sales and marketing trends of the product can be analyzed and operations can be reformatted to meet the current trends. Since 2008, Coca Cola has increased their worldwide unit case volume by five percent for the year which has led to continue growth in unit case volume for products sold around the world. The increase of case volume sold has impacted global gains in volume and value share towards the overall growth that is in line with the firm’s long-term revenue and profit goals. With the current economic environment the trend with consumers consuming carbonated beverages has increased which has led to financial success of the company. IMPACT OF NEW COMPANIES ENTERING THE MARKET: “By 2012, it's estimated that an average 84.5 liters of soft drinks will be consumed per person per year globally, with consumption rates in the global health and wellness drinks market rising rapidly. (Bharat Book Bureau, 2007 )”4 To compete against Coca Cola and Pepsi Company in the duopoly market structure, any new company entering the market will have to excel in products that are healthier then soft drinks and reports overall wellness with consumer consumption. For Coca-Cola to maintain market share against new competitors entering the market the company must ensure products such as drinks like Vitamin water meets the requirement of consumer with taste and health to compete in a more heath driven society.
Each firm is a large enough part of the market that the behavior of one firm has a large impact on the demand curve of the others. The result is that the firms do not have stable demand curves. If Coke changes its price, Pepsi’s demand curve shifts. As a result the method of finding the profit maximizing output by comparing the firm’s costs to the firm’s demand curve is complicated or unworkable. Coke can decide on its best price and output, but then Pepsi will react and change its price or output. That will shift Coke’s demand curve, changing its best strategy and so one and so on.
The ordinary model of the firm is less applicable, because the demand curve of one firm depends on the behavior of other firms. If Coke introduces a price cut, the Pepsi will lose large numbers of customers. The price of a substitute will have changed. If Pepsi raises its price, Coke’s demand curve shifts out. Coke won’t mind, but Pepsi will very likely find the quantity it sells falls very sharply. If Pepsi lowers its price, it will likely win many customers from Coke and have a very large increase in total revenue. Coke’s demand curve will shift in sharply and Coke will be very unhappy.
P Coke
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Quantity Coke
MAIN POINTS:
Oligopolistic behavior is complex – and lots of fun.
Each firm behavior regarding price, quantity, advertising, or product development influences the other firm’s profitability.
As a result, firms cannot make a decision without influencing the demand curve of its rivals. As a result, the rivals most desirable choice changes. They will respond, perhaps retaliate is a better word.
A firm must consider the reaction of its rivals when it chooses its behaviors.
PRICING STRATEGY To first determine its price, we believe Coca-Cola used a cost-based pricing system for its Original Coke. They first designed the product, the original coke, determined the costs for the product (product costs, capital costs, and operational costs), set a price based on the cost of Coke, and finally convinced the consumers of the soda's value. From there, we think that Coke chose to use market-penetration pricing for its price. Here, they set low initial prices in order to attract a large number of buyers quickly, to gain a large market share.
COCA-COLA USES THE FOLLOWING PRICING STRATEGIES FOR ORIGINAL COKE:
“Coca-Cola uses the psychological pricing strategy for their Original Coke. For instance, the price of a 2-liter bottle of Original Coke was 49. They set the price to end in a 9, because this makes customers think the price is less than 50, to appeal to the customer. Coke also uses the promotional pricing strategy. In store that sells Coca-Cola, prices are often temporarily priced below the list price to increase short-run sales. It gives the product a sense of urgency and customers purchase the product because of the lower price. Coke uses the segmented pricing strategy for its Original Coke. For instance, Coca-Cola offers litre bottles, 6-pack cans, 6-pack bottles, and 12-pack cans of the same product, all for separate prices. By their product in different sizes and at different costs, they get to increase their revenue, because there is not much difference in the costs required to produce the products. Coke also uses the international pricing strategy. For instance, the price of a 2-liter bottle of Coke in the United States is different from the price of the same product in China. This has to do with the difference in economic conditions, competitive situations, and laws.”4
We think Coca-Cola's pricing strategy is working well. Based on financial reports, Coca-Cola has increased profits and income, which means that customers are purchasing more of the products, and because of this, seem to be generally satisfied with the pricing. If they were not satisfied, they would choose another brand over Coca-Cola.
MARKETING STRATEGY The Coca-Cola Company has been operating for over a century and is highly successful. It is currently in the renewal level of the post-maturity stage in the product life cycle. 1) Target Market “The company's beverages are generally for all consumers. However, there are some brands, which target specific consumers. The type of market approach refers to market segmentation. The Coca-Cola Company when advertising has a primary target market of those who are 13-24, and a secondary market of 10-39. 2) Objectives/Goals Coca-Cola main objectives are to supply everyone their favorite drink and to satisfy the consumer needs and wants. Coca-Cola second main objectives are to provide profit to the shareholders and increase the market share. 3) Strategies The Coca-Cola Company packages its beverages into plastic bottles of sizes 2 liters, 1.25 liters, 600mL and 300mL. These are also available in aluminum cans of 375mL. Coca-Cola is the most well known trademark, recognized by 94 per cent of the world's population. The business is very successful and holds a very good reputation. The Coca-Cola Company uses marketing strategies to differentiate its product from its competitors to gain a competitive advantage. These are listed in the table below. Extension/product differentiation in 2002, the Coca-Cola Company extended the products of Coke and developed the new products Coke with lemon and Vanilla Coke. This extension: Responded to consumer demands. Generated sales and profit. Innovation In 2001, Coca-Cola had innovated and developed the introduction of purchasing the company's products from vending machines via SMS messaging. In 2002, the company innovated and came up with a new packaging idea, the Fridge Pack. The Fridge Pack consists of cans packed 2-by-6. This innovation has increased consumer awareness and preference and increased rate of consumption and profitability.”5
4) Promotional Strategies: “Eye Catching position: Salesman of the coca-cola company positions their freezers and their products in eye catching positions. Normally, they keep their freezers near the entrance of the stores. Sales Promotion: Company also does sponsorships with different colleges, schools, cafes and sponsors their sports events and other extra-curricular activities for getting market share. Facilitating the Product by Infrastructure: For providing their product in good manner company has provided infrastructure which includes, vizi cooler, freezers, display racks, free empty bottles and shells for bottles. 5) Advertisements: Coca-cola company uses different mediums
Print media Pos material T.V. commercials Billboards and hoardings Social media and internet”6
BIBLIOGRAPHY: 123456-
http://www.coca-colaindia.com/ourcompany/company_history.html Managerial Economics, Dr, Atmanand, Amexcel Publishers Private Limited Managerial Economics, Dr, Atmanand, Amexcel Publishers Private Limited http://cocacolasoriginalcoke.blogspot.in/2009/04/coca-colas-pricing-and-distribution.html http://www.bookrags.com/essay-2003/6/14/53228/5227 http://www.scribd.com
