The Coca-Cola Company is the largest beverage company providing its customers with more than 500 different brands. It is the market leader in marketing and distribution of non-alcoholic beverages. Consumers, in more than 200 countries, enjoy the variety of drinks at a rate of 1.8 billion servings per day. It is listed in the New York stock exchange. Coca-Cola is considered a blue chip company due to its stable earnings over the years. Since the invention of Coca-Cola in 1886 by a pharmacist, the company was a monopoly until the invention of Pepsi by Caleb Bradham in 1893 and Dr. Pepper Snapple Group. The emergence of other soft drinks changed Coca Cola’s market share resulting into an oligopoly, which refers to few sellers dominating in the industry. The companies are now keen on the action of others. This has brought with it price wars in the beverage industry due to the cutthroat competition.
Coca-Cola operates in an oligopoly setting where product differentiation and interdependence of firms is noticeable. Coca-Cola aims at maximizing its profits. This is achieved where marginal revenue and marginal costs are equal. A kinked demand curve explains the short run of production activity. It is likely that competing firms match in price decrease than in price increase. A small price increase results into a large decrease in the quantity demanded. In cases where Coca-Cola increased its prices because of the bottlers’ and intermediary costs, the quantity demanded has decreased in favor of Pepsi. In the long run, coca cola will make supernormal profits due to barriers of entry that exist in oligopoly market. Sales will grow to $53349 million in 2014 from $48129 million in 2012. The net income will also shift from $ 9177 million in 2012 to $10693 million, in 2014.
With the arrival of New York based Pepsi, Atlanta based Coke and the U.K based Cadbury Schweppes the three giants are constantly fighting for a bigger share of the soft drink market. Numerous factors have spurred competition specifically between Pepsi and Coca-Cola. In the 1980s and 1990s, Pepsi designed TV commercials showing that Pepsi Max tastes better than Diet Coke. This triggered blatant competition between the two with Pepsi surrendering the war. However, Pepsi is now the largest single selling soft drink in India due to the advertising strategies the company employs. The drink has gained preference among young people as it uses celebrities in advertisements. Pepsi ventured the Indian market in 1989 and offered an iconic portfolio of soft drinks Pepsi, 7UP, Miranda, Mountain Dew and hydrating beverages such as isotonic sports drinks. It also offers 100% fruit juice brand such as Tropicana.
Coca-Cola only needs to juggle its brands around the world to ensure Pepsi does not gain a larger market share. With realization of this fact, Coca-Cola practices product positioning. Thumps up constitute 40% of the company’s turnover and records highest sales in western and southern India. Coca-Cola, on the other hand, accounts for a 23% share and is strong brand in Northern and Eastern India. This strategy is efficient since compared to Pepsi Coca-Cola has 2 Cola brands. Moreover, Thumps Up is compared to Pepsi’s association with youth and adventure because of its strong taste associated with adventure. Coca colas 2011 financial statements show a return of equity of 27.10 %, which is higher, than 18.57 % of the industry. Return on equity indicates a company’s ability to generate profits from shareholders investments. The company is able to get ahead of its competitors because of the brand name. A 2011 revenue measure shows that Coca-Cola recorded $ 8.6 billion in net income compared to Pepsi net income of $ 6.4 billion. Coca-Cola produces over 500 brands compared to 22 brands of Pepsi. This makes Coca-Cola a leader based on its brand production. The number of employees is a measure of how the industry is evolving. Coca-Cola has fewer employees than Pepsi with 146,200 employees to Pepsi’s 297,000.
Coca-Cola Financial Statistics
Current Stock Value (KO) NYSE
Average stock value over past 10 years
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Coca-Cola Company Statistics
Number of worldwide Coke employees
Percent of the world’s population that recognize the Coca-Cola logo
Total number of Coca-Cola products
Number of coke bottles sold each day
Number of coke bottles sold its first year
Number of worldwide Coke bottling companies
Current value of a single share of Coke that was purchased in 1919
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Number of Coca-Cola brand drinks that are consumed each second
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Latin America / South America
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The availability and the visibility of the brand is now a key concern in the industry. With marketers realizing that purchase of a particular brand is mainly due to the impulse than purpose. Customers will always go for a product which is available at an outlet. Visibility entails showing off the product in the attractive way. Pepsi achieves this goal by use of signboards, calendars and stands displaying other flavors at various outlets. On the other hand, Coca-Cola’s red color captures consumers’ attention. Cooling is also a crucial aspect in the soft drinks’ world. The customers will go for a drink that is chilled. Range of products available in outlets gives the potential customer a range of flavors to choose from. For instance, Coca-Cola Company provides Indian customers with different brands, such as Coca-Cola, Sprite, Fanta, Maaza, Thumps up, Bisleri Club Soda, Diet Coke and Dasani (Meghan Deichert, 2006).
Pepsi’s invention of Better-For-You Products comes at a time when consumption of Coke is declining in America due to health concerns. Coming up with Tropicana, which is a fruit-based drink and food products such as Lays potato chips that have 25% less sodium is a significant step towards gaining market in the U.S. Coca-Cola’s consistent strategies win wars in the soft drink industry.
While the competition between Coca-Cola and Pepsi is more popular, Dr. Pepper Snapple Group is fast establishing and consolidating its market base. In this oligopoly market, economies of scale define the level of competition. It is a challenge for new companies to join the market due to patents, the level of technology involved and high level of operations set by the existing large companies. Pricing of products is by the industry, which makes competition based on price difficult.
Pepsi is Coca Cola’s main competitor. The rivalry between the two companies made the Cola Wars. They use intensive marketing campaigns to sell their product to the public. A survey by Beverage Digest shows that Coca-Cola had a higher market share at 42.7 percent to the Pepsi’s 30.8 per cent in 2008 (Wendy Nicholson, 2010). As is the case in every oligopoly, actions by one business entity affect other businesses. With their products being perfect substitutes, pricing decisions put in place by Pepsi affect pricing decisions of Coca-Cola. In 2009, Pepsi reduced its prices and embarked on offering different discounts to its customers. This led to an increase in revenue as consumers were receptive of the price changes despite the economy being in a recession (Kapoor, 2010). Coca Cola had to review their pricing system. Changes in pricing decisions by Pepsi Co lead to a counter move by Coca-Cola. A straight-line indifference curve with an equal slope explains this relationship. In an oligopoly market, no specific business is large enough to dictate prices (Hirschey, 2000).
Source: Statistic brain. Dr. Pepper Snapple group’s (DPS) consistent growth in sales and market share makes it an influential competitor in the Beverage Industry. In their 2010 financial year, they recorded a net income of $ 528 million. Though it is behind Coca-Cola and Pepsi, respectively in the market share, its pricing decisions may have significant influence on the market. These companies’ products mostly are substitutes. A change in pricing strategies by DPS e.g. lowering prices can lead to an increase in sales for DPS. However, with Coca-Cola holding a significant market share, DPS mostly will tend to align its pricing models to those of Coca-Cola.
Coca-Cola should adopt discriminatory pricing. By considering consumers buying habits, the company should charge varying prices during cold and hot days. Empirical studies show that the demand function when hot: QH= 300- 2P Demand function when cold Q C= 180-2p. Where p= price and Q= quantity demanded. The under lying assumption being that the probability of occurrence of hot and cold days is equal and, the company is risk neutral. With a $0.2 marginal cost per can, segregating the market will result to higher profits regardless of the weather condition. High prices during hot seasons results in high profits. Low prices in cold temperatures induce customers to buy more generating high profits that are in agreement with the law of demand.